The gold bull is in a deep correction phase, the first in the 1999 to 2013 bull to date. The Aussie dollar has remained stubbornly high as our extensive research predicted this indicated many months back. This is exacerbating woes for many local miners. The dead cat bounce in the gold stocks is pathetic on the ASX, even worse than gold indicating further falls to come.
Things are getting further and further out of hand in the global financial system as gold commentators have been warning for over 12 years. There is also bull dust of all descriptions flying in all sorts of directions in the media at present. Chinese GDP growth has suddenly become another reason to sell gold yet it is still astounding when you look at the value of the expansion. Only a few years back in 2007 the total Chinese GDP was US$3.4T. To put a scale to this a 10% growth rate would have amounted to $340B only six years ago right before the GCF event.
The IMF estimate for 2012 Chinese GDP is $8.23T so the “disappointing” 7.7% annual rate for the last quarter is now equivalent to $633B. This is a staggering increase at nearly double the gross 2007 figure at the current rate of growth. The gross value of growth is falling however and this is a valid concern however you need to keep this in context. Do economists and the media honestly expect China to grow the world’s second largest single economy at a constant percentage rate on an ever increasing scale? This is a ludicrous idea in a finite world. Demographic and economic factors aside the demand for metals is still increasing over the longer term in China.
Of course there is considerable concern about structural imbalances in the Chinese economy and how this affects their consumption of certain metals and so there should be. The world has been increasing supply, clamouring to meet the expected demand so it is all a matter of balance. The Chinese are also pro-active in developing Africa and elsewhere also for their future needs. Their demand for metals will change as their economy evolves, and at times falters, however I would not expect gold to lose its appeal in Chinese culture or from the perspective of their geopolitical agenda.
Make no mistake the Chinese government will continue to lift their gold reserves throughout this gold bear phase. The Chinese themselves are unlikely to lose their appetite for gold at lower prices either. Buyers are price sensitive in India and everywhere else, physical demand will rise significantly however in the short term not as fast as liquidation so rather than providing an immediate floor this will merely soak up supply more gradually.
At GoldOz we have questioned the ability of the Chinese economy to grow at recent rates given austerity in Europe which is after all their largest market. There is also another issue with how countries calculate GDP which is another topic I have covered for clients to assist their understanding of what we are dealing with here on the macro scene and the Australian economy. Policy has been disadvantageous in the face of changing economic headwinds for the past few years and yet this is only now hitting the headlines here.
The Chinese are a one Way Street when it comes to gold supply – barely any gold leaves their shores and therefore their increased production does not add to new gold supply except in China. The near term fall in gold is certainly real however and the price is screaming this fact at all of us.
Australia’s premier ASX gold producer (not largest) is highly profitable even at US$900 gold and they are expanding as they gear up to pay a maiden dividend, yet the share price is falling along with the sector. This is because computers are used to run algorithms which are based on the gold price and the related value of companies; and so market capitalization needs to be reset on each move on gold. This is not criticism they have to model this somehow and yet savvy investors will be able to pre-empt and use this to their own advantage as we find the bottom of this market.
The modelling is never going to be complex enough to allow for the multitude of variables in any single given company. Believe it or not the odd gold stock will be paying a dividend and these earnings will force yield seeking investors to take a look. That is especially when gold bases and starts to move back up as earnings will again increase. Disaster is opportunity if you know how to play the game. Remember liquidity drives prices and sentiment drives liquidity. Sentiment is influenced by price, then the brokers and media.
I have been deliberately off the radar for many months in the public arena. I have been in close contact with clients however as I run a member only service and so felt it is was not appropriate to broadcast my views or research very often. If I really needed to promote I would have. Many people I respect were setting themselves up for a fall of late and now I see they are copping some isolated blame for the market action. Investors are hurting and this is bad. I greatly respect many of the gold commentators so this is not a criticism. Just to provide perspective on my record on this; I write a newsletter and run an educational portfolio that sold half the position in September and October last year. In hindsight I should have exited completely.
Apart from a few isolated and incorrect purchases earlier this year and one recently I have been searching for a re-entry point to deploy those funds, and had not found one. I cover top down analysis and teach these systems and discuss them in detail for members. Despite believing that the bottom may have been in back in July last year (which I called as early as March 2012) my systems kept me relatively safe. It was ‘a’ bottom not ‘the’ bottom yet it created solid profits. After October I was looking for a correction and at that time I did not know the magnitude of what was to come.
The only fault of most commentators was to get too married to their fundamental thesis and they failed to listen to the warnings in the market. I do not believe they were not sincere for one moment. Their big picture analysis is correct and their cycle analysis worked firstly to predict the long gold rally. It also worked within the trend of the gold bull up until the last two weeks. The problem was however that we were overdue for a real shake out as I will discuss.
In Newsletter 72 (March 15th 2013) I stated:
When you spend enough time in the markets you realize that [their] emotions are the worst enemy of investors and traders alike. Well opinions are probably the next worst influence to bring people undone. This is why my emphasis is on technicals however I do believe the big picture is also extremely important as a back drop. This generally provides the longer trend.
In Newsletter 71 (11th March 2013) I stated:
Should the XGD pierce the 50 day moving average I will review the situation. I believe we could top this week and head down for the following few weeks into early April. The final level will depend on the size of this rally. Be careful a repeat of the February 11th fall is possible into that time frame.
At times and certainly at some short term bottoms I have been over optimistic on the chances of a turn around. I was also guilty of hoping things would not unwind however I have been constantly warning that things could really unwind and that was because we were just above critical supports. As a trader you have to be cautious in such circumstances and so I was pointing out that volumes and price action were not supporting a bottom.
The final analysis on this is that the Funds I run did not deploy that capital and they still have not because the reversal signals had not and still have not been confirmed. We may have to base lower and then find the signals at the end of the base formation. The lack of bounce and the continued heavy selling indicates this is so.
A few of the miners here are low cost so their business model is secure so there is life and potential for investing and trading in these few stocks when the dust settles. Savvy investors are watching in anticipation at the bargains that will eventuate. Unlike 2008 the bids are not being pulled as fast and therefore you have to consider who is buying this very large volume?
I have also been pointing to one contrary (to gold analysts) analyst and discussing his views – one Martin Armstrong who deserves great credit for courage and analysis. I have looked at some other detractors on gold before and dismissed them but not Martin. So we have been looking at his supports and comments for comparison and very glad I did not dismiss him.
So here we are at last, standing in the stark light of reality. Gold is in a major and much needed correction; now proven. Up until now the ‘corrections’ have been consolidations. Before you think I have joined the “other side” may I point out there is only one side and that is “you and our mutual survival” here. Gold it not dead and the gold bull is not over longer term even MA agrees with this and states it on the public record. For now however we are correcting and things are not good in the world of gold. This does not mean we walk away however as gold is a much needed hedge at minimum.
Just lately I see a significant lift in visits to my web site whereas you might expect people would run in the opposite direction from anything to do with gold. This is not the case here or in China, India and the rest of Asia where buyers are lining up to buy physical. The drop in prices has also enticed all sorts of turmoil and stories and new “analysis” (loosely used) such as the gold / CPI ratio.
What a load of hog wash, it is as bad as the “gold bubble” argument when in fact gold was not that far ahead of the real cost of production. That can hardly be called a bubble. Like a broken clock certain main stream commentators on our media would occasionally proclaim “look gold, it’s a bubble” and all because the price had gone up.
Gold started to rally in 1999 – 2001 off a double bottom which in my view was contrived below US$400 because of paper shorting, selling of gold at uneconomic levels that had not yet been mined. True or not that was still a fact and facts are what we have to deal with in markets.
I have been warning my clients that the supports in gold could fail and providing research on lower cost producers and the Aussie dollar. Last year I made use of my contacts from the bond markets to validate certain research on the RBA and economic analysis by the authorities here in Australia because it really does not add up. People are being duped, slowly simmered in a pot of warm water just like the frog story.
The employment numbers do not add up. The expected surplus was always a joke. The MRRT here was badly timed and will be repealed just like the carbon tax which was merely political not practical despite all the hype. It was inflationary as the entire cost to carbon emitters was passed on via higher prices. Therefore no improvement to the environment except at best to limit power usage due to the excessive cost rises. Miners do not have the ability to reduce power in most cases. This has been bad for business at the worst possible time just as I complained and explained over the last two years. This has ramifications for offshore investors and local investors alike.
The RBA here is not pre-emptive; they will only react after the event. They have always reacted too late and moved too far. There is no point appropriating blame the research warned offshore investors that the AUD would remain higher than it should be and it has caused great structural harm to the local economy.
This article is provided to update you on the Australian perspective during this crisis, as has always been my purpose. Firstly to gold which was not in a bubble yet it was overdue for a correction and yes some promoters get over enthusiastic about the king of metals. I do not believe that the ratio of gold to money in circulation or the POG correlation with the Dow is relevant in these times, merely interesting and perhaps a guide to some degree. The applicability is limited; this is my point look at where we are right now. I am more about practicalities in surviving these difficult times.
With that in mind I was not offended when I spotted Martin Armstrong warning about gold this year and so held back as I agreed with much of his analysis. He was not saying what gold bugs wanted to hear and was attacked for telling it the way he saw it. Well my hat is off to him for his brilliant research and systems yet again. Credit where credit is due for reading the market correctly MA.
At GoldOz we discuss markets and systems to profitably trade the gold stocks and managed to protect our capital in a model portfolio up until recently. It is not decimated and will recover. I do not consider myself a perma-bull just an analyst with broad based knowledge of mining and markets. Wishing investors at all levels a steady head and safe passage through this gut wrenching correction.
Good trading / investing.
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Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services. The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.