By Neil Charnock


A piece of news I expected is now out – an Obama plan to spend more money on stimulus.  I have stated this would happen in the past weeks.  Will it get passed or not is the question?  There will be a battle and the proposals may get changed around however there is one thing for certain the Government will spend.  I discussed this with a colleague a few weeks back and we agreed there was no way any government in an election mode would withdraw stimulus.

The USA will not be the last as governments struggle to increase employment, growth and popularity during the course of this year.

This fact alone will give some hope to markets and fund activity will also spur a new wave of buying.  This article was largely written yesterday and posted for my Gold Members early this morning so the charts later in this article on the Australian gold shares are timed well.  As I finish off this article now the XGD is up 3.75% today in Australia well above the 1.85% rise in the XAO.

Markets have been driven lower lately largely on Fed mopping up of liquidity, tight credit plus short term news items over the past few weeks. China is a run away train once again and they had to step on the brakes. Increased reserve requirements and a cooing is good for long term growth and sustainability however it was seen as bearish at this time.  I am pleased to see the restraint and always interested to see the reaction in the media and the markets.

The Fed had to mop up after backing inter-bank lending in the heat of the 2008 crisis however it my hope and belief that they will do this in stages. They have no choice but to mop up and probably no choice but to stage this process.

The banks in the US have to split, demerge into smaller separate corporate entities to limit the repercussions of future failures.  What does that say? Once again some short term uncertainty and confusion plus the timing problem and it becomes a negative.  Longer term this story will morph into a done deal and the cards will fall where they can be properly assessed.  This is a step that is needed in the banking system and will eventually become seen as a positive.

So they demerge and the money still gets invested by the new entities and the show goes on in the finance area at least.  Money will be generated in the process for those involved. Mr. Bernanke was reelected as expected removing this perceived negative in the markets but last week it was a negative.

The Dow hit heavy resistance at tops back in March 2002, February 2004, January to March 2005 and a low in July 2008.  So it topped for now at 10,700 and then fell over 6%, these are scary numbers – the 10,000 level looms below. Between here and 9650 there are numerous long and short term support levels and these should hold if my current theory is correct.

The Australian stock market (XAO) had fallen by over 7.8% to 4600 reaching some strong support in the 4400 to 4600 range as of yesterday.

The real reasons for the next major fall in the markets are still some way off and this is all related to the debt cycle but these will emerge more strongly this year as sovereign credit down grades force rates higher. The Greek Government is now borrowing at 14% at present and this is the future for Japan, the USA and some other nations.  It may be some time off and many will be wondering what I am smoking to suggest such a thing however I am quietly confident about this theory.

The problem is that if or when rates go up anywhere near this amount asset prices will have to fall.  Loans will default and properties will change hands.  New losses will have to be written off in the banking sector and business will have to down size its debt or face the consequences. Equity analysts will increasingly have to factor debt with a greater weighting as we move forward.

Current Direction

There is still ample liquidity on the sidelines and in the system despite the tight credit conditions.  The liquidity has been created in the last two years and much of it is currently being hoarded by the banks.

I was told last night that the US Banks are carving up the spoils of the banks that are declared insolvent each Friday so the solvent ones are sitting on capital to qualify for the feast – and therefore they are not lending.

Funds that closed their books early for the year in November and December last year would have been the buyers over the past few weeks. Somebody had to buy all that paper (shares) didn’t they?  These funds turned bearish after selling down to maximise their cash ratios late last year and will soon come out with some positive comments on a fresh round of statistics.

This is a curious thing to watch.  Not only do we see a change in sentiment amongst investors including funds, from greed to fear we also see a corresponding swing in sentiment in the media from bearish to bullish. Bullish in this investment climate can mean news that is not as bad as what was expected and this can lead to a reduction in stress and fear resulting in buying activity.

Australian Gold Shares

The Reserve Bank just decided to hold rates at 3.75% here in Australia today which is great for our gold sector.  The AUD gold price is up $10 to $1252 on a 1c drop in the AUD.  My view yesterday on where our gold sector is set out below – this is an update paragraph to bring this article into current time.

Even if you are not a trader it is useful to utilise short term trading sell points to lighten or exit portfolio positions in anticipation of lower prices.   I have practiced a strategy of selling short term (intermediate tops) and holding that cash to pick up the same parcel and additional shares in key stocks with the proceeds of the sale.

A simple example of this; imagine selling off a stock you have been holding and buying them back at half price.  You would theoretically be able to buy back twice the number of shares and this also creates fantastic leverage in your investment account.

A report was posted in the Gold Members area on the Australian gold sector XGD on the 21st of January warning that the support level shown must hold – implying that bets are off for now if we penetrate below.  Here is the chart shown at that time.

This support level created a very short term bounce however it did not hold and this should have triggered an exit or partial exit decision for gold stock investors that agreed with this analysis.  We always suggest that investors seek the advice of professional investment advisers and base their decision on their own decisions which is the only way to learn to be successful in the markets.

Since then the picture has weakened further due to all sorts of news as covered above.  This is also pushing up the USD which is benefiting from a distressed Euro also pushing gold lower in the short term.  That reversed slightly last night however the yellow metal of kings outperformed by a wide margin.

I followed up with an additional article for the general public Monday last week that showed this chart below and longer term support levels. Note the bottom red line support level I drew in on the chart below – this held and we bounced from here today 2nd February 2010 which is a positive for the Australian gold stocks here at this point.

We successfully faced a test of the lower supports shown at around 5100 on the XGD so I went looking at the daily charts of the major components of this index namely Newcrest Mining (ASX-NCM) and Lihir Gold (ASX-LGL).

NCM just registered an RSI reading of 24.03 which was deeply oversold on the daily chart.  LGL just posted an RSI reading of 21.018 which was lower than the turning point and low of 20th August 2009 when it reached a low of 23.228 at a close of $2.44.  This may be pointing to the turning point for this index at this time in the short term however we must get confirmation in the market to adopt this as part of any trading or investment strategy.

Thanks to a rapidly falling AUD the gold price here has held at over AUD$1200 which is a highly profitable level for gold producers.  This seems to have nothing to do with the considerations of investors and funds that needed cash fast and I have seen some highly irrational selling of late.  This again highlights the fact that investors will ignore the fundamentals of a stock in the face of tightened liquidity.

The banks are not lending for new projects at present.  I have been warning that if companies are on the “b” list they will not be successful in rolling over their loans.  Distressed asset sales will gradually increase over the coming years and these types of pull backs in the stock market will be exacerbated by this phenomena.

Last week I saw a stock that announced confirmation of the most significant gas find in NSW in over 100 years get sold off.  Another stock that I had featured in a Due Diligence Report was sold back even on news of a significant new proposed project and partnership. This again lays down further potential with another foundation going into place to support future growth in that company.

Logic flies out the door when cash is needed because the distressed investor will sell onto any bid.  This is often compounded by the inexperienced because they incorrectly assume there is a valid reason for the stock to sell off. Other investors sell when the “pain” becomes too great and manage to pick the bottom with the wrong strategy. This total effect creates opportunity for the astute investor who buys the fear and sells excitement.

Let me state this for the record again; the fundamentals for the gold producers that have a strong balance sheet have not changed.  This is the time to take more notice of this sector not less as such our current news upgrade and resultant assessments should be of great interest.

GoldOz Gold Membership is on sale with a discount and bonus time due to the release of our latest special Due Diligence Report.  This is only valid until mid February when prices will return to normal ahead of more improvements at GoldOz.  Many thanks for all the feedback on the UCG report we are working towards some special gold reports and news / file updates now. Public release of the next Due Diligence report will be delayed an additional two weeks

Good trading / investing.


Neil Charnock


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 + investment tools 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.

[ad#WSCS TDG Ad]