By Neil Charnock
Gold reached US$1248.20 which was a new record high in USD. Silver has also followed gold up, this rally looks like the real thing. I have to stand corrected here as I was off the mark a little in some recent statements. I forecast US$1180 as an interim top and it only reached $1170 before pulling back to the $1140 level. I had also thought we would have pulled back for longer and that this rally would be a false break out. So much for short term forecasting it is extremely difficult. This short term forecast turned out wrong thanks to one trillion more reasons potentially circulating in Europe.
The European rescue package is not a done deal as there are all kinds of caveats to clear first. Markets have appeared unconvinced this will either happen or actually help at all in the longer term. Economic rules that control inflation are out the window and confidence in the Euro is hitting very low levels providing a powerful uplift to gold. There is talk of the weaker nations being evicted from the Euro and talk of the stronger ones leaving to save their own hide. None of this is good for confidence in European economic output or the currency. There is also the strong sense of futility; that they might be able to borrow however will not be able to repay the debt leaving the system even more exposed to default in future.
Gold is now the only alternative to the USD and I know which one I trust more. Of course there has to be a place for currencies in the current system so I don’t think the USD is finished at this stage. China will sell Euros as it will need less of them for exchange purposes in that depressed area. What will it buy but a mixture of other currencies and gold? The interesting thing is that we now have the USD standing as the default paper currency for international funds and banks.
Gold could be approaching overbought levels shortly and might take a brief pause or it may continue the current sharp rise higher. Nobody can tell at present because of emerging fundamental events and the accompanying spin from the authorities and vested parties. Markets do take note of even numbers and spot gold nudged very close to US$1250 yesterday which makes this a higher risk trade at present.
Is this an important test for gold? The break out is real however we probably have to test the former resistance at some point soon back at about US$1210. I now favour a choppy ride on gold for a few weeks as we sort through the profit taking and establish some price support up around these levels from US$1200 to $1300.
There is still de-leveraging in the stock markets, property, Europe and the AUD as the global credit stranglehold starts to tighten. Credit crises are a slow motion force and very powerful. They unfold slowly creating a creeping gradual negative. Banks and funds have to lighten up in order to adjust reserve ratios so bouts of selling are a certainty over the coming months. This will include stocks and potentially even gold which could be the catalyst to bring us back to test the former resistance level.
The unwinding on the AUD is also real and has been starting to unravel over the past month as previously predicted and discussed. This has been affecting our gold stocks (along with our Super Profits Resource Tax proposal) and this carry trade closure may well continue as an influence for the next several weeks or months. The resultant capital outflows are mainly affecting credit markets down here and lending has stopped almost completely but we are not alone. I am hearing the situation is very similar in the USA and Europe.
We had a positive jobs figure out today adding some speculative support for the Australian dollar however I think this support will quickly be overrun by global issues and capital flows. The outlook for China is softening and any bad news on this front will lead to an anticipated and real decline in the Australian economy. This will also make some of the assumptions made in the Australian 2010 Budget this week look very shaky.
As we specialise in the gold stocks here we have to consider any effect on this sector as our prime concern. The XGD rose another 2.2% today after rising 4.73% yesterday making it the outstanding sector this week. I prefer to show you a more balanced view than the weighted XGD so here is an unweighted chart of 20 emerging gold producing companies. This can enable you to more accurately assess how inexpensive these stocks are. The resources tax is overdone now considering we have AUD gold at $1373.
So we are in a mixed environment for investment in the gold stocks Down Under however they are cheap especially when you factor in the gold and AUD trends. The Resource Super Tax is seen as a maybe and unacceptable to the industry. The Government is now in ‘consultation’ with the industry. Investors in this sector are rightly annoyed and experienced unnecessary losses.
Our leading gold producer assessed the tax as having a 3 – 8% negative effect on their NPV depending on the detail. The good news is that this has been factored into share prices across the XGD here already. At GoldOz we forge ahead with the knowledge that gold will remain incredibly important in the months and years ahead. This means the gold stocks we cover will be essential to any portfolio too.
Here is the long term chart of the AUD gold price and I want you to compare this to the chart above to see where relative valuations are. So what can you see, and what do you think?
It all comes down to your entry point on these stocks and the foreign exchange rate at the time you bring in funds or repatriate them back to your home location.
Global economic comment
“It’s all better now”, now that we have thrown some more money at Greece and hope the problems will go away. The Central Banks are obviously worried about the financial fire spreading to the US, Japan, UK, Spain, Portugal, Italy and even China. So they have come up with another massive debt plan for Europe to fix the unwinding of the debt bubble (wow). Does that sound logical or just another measure to buy time? But now we can get back to a rally and the US is OK and we won’t see any contagion and the banks are in great shape – ha ha.
Does this sound like a load of piffle to you? I can assure you dear reader, with the greatest respect to anybody that wants to believe differently, it does to me. Somebody has to pay! The giant omission is that we don’t have any plan to repay the debt. The elephant is standing in the room and as hard as some people try to not see it the more it just stays there.
The debt can get transferred onto another part of the balance sheet as many times as you like but this one fact remains – it has to be repaid. It does not matter how you spin it either because the problem is not gone. It is not going away by adding fuel to the fire or through the use of spin any time soon. We face the largest debt bubble in known history and it has to burst and there will be dire consequences made worse by excessive stalling.
There is a glaring problem not being addressed and that is that Greece is going to take years or even decades to repair itself. This makes for an interesting example of a situation in play that many countries will have to face. Somehow we have to absorb much higher interest rates and raise additional taxes to reduce unsustainable deficits in a zero to negative growth environment. What sort of a bad joke is this?
Higher taxes and reduced spending are required to reduce deficits and this will hit growth. Higher sovereign interest rates, which are rising due to a renewed factoring of sovereign risk, will hit disposable income for Governments further which will also impact growth.
Course of action – own gold and gold stocks
This will depend on your location and currency positions. AUD’s can be safely deployed now and in the coming few months if careful selection of the stock is made (obviously). Offshore investors that want to buy excellent value in zero debt cash positive gold producers have to assess the forex situation.
Their question will be if the AUD can fall faster than the gold stocks rise and if this will reduce their returns. Perhaps the pull back to test the old resistance in the gold price will be a better opportunity for them. I still look to the July time frame (approximately) for this event.
I am working on the new version of the GoldOz Ratings Tables and this time I am including special analysis on the ASX listed gold producers and their offshore projects. This is necessary due to the proposed tax and along with additional weighting on debt due to the increasing cost of capital. This is a trend and we are adding a great deal of analysis on debt markets for readers and clients alike because of the importance in this for your financial survival.
Good trading / investing.
GoldOz has developed a basic Member area 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.