GFC1 versus GFC2
By Neil Charnock
When the Rudd Unworkable Super Tax (RUST) was first announced I stated that we may not be the only ones here in Australia to suffer from this type of tax. Governments in many countries are worried about falling revenue as economic contraction bites. Plucking the goose that lays the golden egg is now thought to be contagious according to Evy Hambro of BlackRock Investment Management Ltd.
This could mean that the selling of the Australian gold stocks was over done leaving them now heavily oversold. We have had our ‘Swan dive’ so it is already factored in for now. The dive started two weeks ahead of the announcement of the tax proposal in the media. The industry is smarting and negotiating and I support them however I can.
I have forecast that the gold stocks would be fantastic buying “at their best in May and June” this year and have not been disappointed. I am gradually loading up and have just completed an update of our Rating Tables in the Gold Members area. This is a first in terms of unique presentation for analytical clarity. We have scaled market capitalization alongside production and gross operating margin so that value can be compared in a unique way. Understanding of gold stock valuation is a complex matter we seek to educate investors about.
I have also forecast volatility for this year since my first article and am not disappointed. I stated in my opening 2010 article that I could not see past the first half of this year and I was over optimistic by a month or so. The rally that began in March 2009 is now over and the new game begins. The questions are; how do we make money and how do we protect our finances from this now.
Even on this sell off on gold the AUD gold price is currently $1435 (AUD at US83c) as I write and this is a highly profitable level for our local producers. Forced liquidity driven selling is dropping fantastic bargains into waiting hands here. Now that the AUD is dropping the offshore investment community can start to look at their spreadsheets and do their homework.
Update your Fx forecasts and gold stock analysis because this is going to be incredibly exciting. Leverage will be fantastic for investors that get set in the next one to two months. Offshore investors that get organised and transfer USD’s into AUD’s at the right time to buy this sector will be rewarded by the double whammy of price appreciation and a currency bonus when they sell.
The question is when do I pull the trigger? We have to look at the current crisis and anticipate how it will play out to answer this question. We have been talking about Greece as the start of the problem nearly all year and warning about the AUD fall.
Perhaps the forecast in this article will turn out to be near the mark as well. This market is not easy to pick however if you consider the history of sovereign defaults and debt crisis evens of the past we do have precedent. We have not seen it on a global scale before however at least some of the fundamentals will hold true this time.
Is it is different this time?
An interest rate / sovereign default crisis is a very different animal to GFC1. Credit crises are slow and cumbersome in comparison compared to what we saw in 2008 however more deadly. You can see this one coming more clearly however there is nothing that can be done to avoid it except perhaps on a personal level. There is no easy way out this time. This is the inevitable debt crisis that we had to have after building the largest global debt bubble in history.
Wild currency gyrations will accompany justified sovereign liquidity concerns and gold will rise because it is the only ‘currency’ safe from this. We have already seen the Euro fall 25% to the lowest level against the USD that we have seen in 4 years. This is all relative weakness compared to gold which happens to be at record highs even against the USD.
Stage 1 GFC2
At first we have the shock (couldn’t market participants see that coming?) of sovereign default fears and this de-leveraging period to cover debts, reserve ratios and margin loans. This is a liquidity driven sell off that will manifest in stages. Even gold is prone to selling at first however total demand will soon over run this selling against a limited supply. This period is also the opportunity of a lifetime to buy precious metals and quality gold stocks ahead of a parabolic rise.
Next step we get endless bailouts and more spin instead of fiscal responsibility as Governments still mistakenly believe they can put this debt fire out with gasoline (more debt). Sovereign bailouts will initially require printing of more and more paper money. If they tip the scales too far we lose total confidence and we get hyperinflation. If they can measure this for a time and get some sort of balance right then we get a continued rise in doubt, fear and gold along with the quantitative easing.
The slower more insidious nature of GFC2 will confound investors that are selling their gold stocks here. This time the banks will need bailing out again however it will be more orderly and indirect this time. This is a vital difference between GFC1 and GFC2.
The printing of money by Governments to cover their junk paper (T Bills) will indirectly result in the banks redeeming their sovereign bond investments back through the front door this time. Remember they (the banks) buy most of the T Bills because they are zero risk weighted assets and hence no reserve requirements. They also get a guaranteed return enabling them to build back their loan books and balance sheets. They will not get into trouble at home by buying Government paper and the Government will have to print to cover the redemptions. What a nice happy circular transaction.
The fall in markets will not be as sharp this time as a debt crisis unfolds slowly. Gold will be well bid this time. The lack of liquidity in the system will be bad for economic activity and raising rates will also hit SME’s hard once they reach critical levels. The defaults will kick in gradually. The spin will come and go as we lurch from one phase of the crisis to another. First we see Greece and contagion in Europe and next we will see it break out somewhere else. The biggest event will be the USA phase which may even come in stages too.
Distress funds are being set up to take advantage by those who can amass sufficient capital and have the know how to do so. The velocity of money in the global banking system is slowing too, a function of tightening credit.
I will keep buying quality, low geared un-hedged gold stocks and metal to the limit of my financial ability. The AUD will keep falling in stages. I have written here and elsewhere that this would happen and it is.
Falling AUD and rising gold is brilliant for earning money if you are an un-hedged Aussie producer. Debt free is a bonus. This is a time to protect your wealth, however large or small it may be. Join us at GoldOz as a Gold Member as we cover this important sector of the gold markets by providing the essential data and educational files.
Good trading / investing.
GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.
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.