Gold has roared an assertive “here I am” as a wider group of investors realized the problems in the financial system were worse than they previously thought. It is hard to let go of a concept when you are taught something and believe it for a long period of time. This is especially hard when your model fits the world nicely over this time span. I have not written this article to be condescending I sincerely understand how hard it is to let go of a newly broken concept that has worked in the past. I believe this is the hurdle that is gradually breaking down and changing sentiment in the precious metals sector. Gold stocks are now freshly coiled and raring to go up.
I have watched the journey from 2001 and have read comments over the years that speculated about what price level would finally ignite strong interest from the general public. It was going to be the old yearly closing price record and then the 1980 high, then $1000. The key is not actually a number it is sentiment and for gold this takes the form of fear. Things have had to get so bad that the old belief systems had to be challenged in the minds of people who have made money by investing in other asset classes in the past. They had to reach a tipping point where gold answered their concerns. More and more investors are reaching the conclusion that they need gold and silver in their portfolios.
As gold commentators we are no longer reporting on the tell-tale signs and cracks in the landscape, or looking for potholes in the road ahead because we are all staring at the event now. We are no longer trying to explain that this will happen because it is happening, so the educational focus of my service also has to change with current circumstances. My time will be better spent talking about portfolio strategy and gold stocks now to maximize profits.
Some basics about relative share prices might be a good place to start. Gold was A$518 in August 2001 just after the bottom of the gold bear. The XGD at the time was so unloved that some gold stocks were selling for less (smaller market cap) than the cash they held in the bank as deposits. It languished in apathy at around 1000 points at the time. The sentiment was as low as you could ever see because gold was seen as dead and buried.
By August 2005 we saw A$575 gold as the AUD had rallied from US52.5c to US75.5c. Gold was trading at US$434. Cost of production had risen and margins were thin, however even some meagre interest in gold stocks had driven the XGD to a more realistic level of 2700. Sentiment was changing rapidly in August 2005, in a similar manner to right now. Gold was set to rally and the market knew gold stocks were undervalued here in Australia and North America. Here is where we were then, in the red circle. Gold had hardly moved but it was at the beginning of a significant rise.
Now fast forward to August 2007 and gold had risen to US$673 (A$821) and the AUD had risen to US81.2c. The XGD had risen to 4870 and was set to run hard to 6900 in November that year as gold rallied to the old 1980 record of US$850. The XGD made two further peaks at the same level in January and then March 2008 as gold ran to US$933 and US$1,033. The gold stocks were selling off, failing to push the XGD up through 6900 because the early buyers were taking profits. To keep this in perspective we just tested that old 6900 level as new support a few weeks back. Cost of production had been rising sharply at the time however sentiment was high on gold stocks.
Then came the rest of 2008 and you can see that “horrible correction” in gold if you look hard enough. The huge crash in the monthly RSI gives that move away as gold plummeted to US$681 in the October of 2008. November 2008 saw a reversal and recovery to US$816 per ounce and the AUD was US65.4c giving a local gold price of $1,247. The XGD had recovered slightly from panic lows up to an extremely cheap 3678.
Equities recovered as the world financial debt bubble was brought back from the brink for another round of pump priming and it was severe. Mega trillions were added to the system as new debt, to bail out banks and buy all sorts of distressed assets. This emergency action did avert a deep dive into the abyss there is no doubt about that. However the problem was not solved so we were destined to continue down the current course.
The XGD never really recovered from this time when compared to gold. August 2009 saw the XGD at 4940, August 2010 saw 6900 again and August 2011 has now registered 7700 as it comes to a close. Gold has moved from A$1127 in August 2009 to A$1400 in August 2010 and is now at A$1676 after this recent correction. You would think I would create a relative index to analyse this and I have. However there are more important matters than straight mathematics and scientific ratios at work here and to print them would not clarify the picture, quite the opposite. Things have changed significantly.
Cash costs were rising into late 2007 however this abated to some extent in the 2008 meltdown. Costs have continued to rise however gold has risen far more quickly. Despite massive reinvestment and ore feed utilizing lower grade ore to maximise mine life and all related mining issues we are now seeing robust margins from even the higher cost producers. If we are back at August 2005 in relative terms then the following rally will be explosive. My deeper research points out that there is a high probability that we are, time will tell very soon but all the signs are there again.
I have not seen excellent sentiment and gold stock behaviour like this since mid-2005. As gold rises in all currencies, faster than their fluctuations against each other, more and more investors are drawn to gold. The Greek 10 Years bonds have blown out to 17.54%, the spread is 8.82% worse than a year ago. How does anybody finance themselves at that rate and remain solvent? Portugal is at 11.9% for their 10year bonds, fortunately Italy and Spain have settled down thanks to intervention – for now. I have been following this aspect of the global economy in my Newsletters from the start, and in articles like this for even longer.
This crisis has not been resolved and growth is weak on the global front. Even weak growth is being celebrated in the markets by equity investors. The growth is not keeping pace with inflation and not enough to create jobs growth. The Fed speech was excellent, didn’t spend a cent and at the same time gave the impression they could be relied on. Middle of the road what a high wire act that is in this market climate, I take my hat off to them.
I have undertaken a significant study of gold in my latest Newsletter (for subscribers only) that examines seasonal influences on the XGD throughout the gold bull to date. I can state here that the last 6 August’s have been at the beginning of a strong rise over the following 6 months. Even in 2008 after stocks crashed into those November lows we saw a higher level than August of 2008 by February 2009. The key to making money from this rise has been in stock selection and portfolio management.
In my latest Newsletter I also examine some deeper charting concepts. They have helped me to maintain our Educational Portfolio in profit, even in the bottom days of recent corrections despite starting it in February of this year. We are now up around 20% to date in the past few months; therefore our leverage will be fantastic on any significant rise in the XGD.
We have just a few remaining days before our Membership costs rises a little back up to normal levels and we have introduced a sample area for new Members to get a taste of our Educational Portfolio and Newsletters (5 recent issues) for just A$25 if you have interest. This is very cheap research and quite extensive. This is perfect for self-managed Super fund operators as it focuses on education. It shows weightings and stock choices that have been winners lately, and are expected to perform well in the coming share run. This is not the time to be out of gold stocks the fun is just beginning again.
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.