By Neil Charnock



This so called recovery is problematic and now it is slowly entering a new dangerous phase.  Bank losses have now been eclipsed as the major issue as sovereign debt emerges in a more sinister manner.  This is only part of the problem and it will be overcome in the short term leading to resumed market growth.  The real problem is the debt cycle and the emerging sovereign default concerns are showing us the future.

I read that the corporate spread between corporate interest rates and sovereign interest rates has widened significantly indicating a close scrutiny on corporate risk in the current environment.  To offer a balanced view however I should mention that a J P Morgan analyst also reported that higher risk default rates have been dropping as corporate entities in this speculative grade category have been able to raise $21.6B already in 2010 “due to improved capital markets”.

The Whitehouse believes that we are not too far from a job creation phase and should stimulate further.  This also suggests we still have a “game on” situation and not another 2008 scenario on our hands here at this time.  Talk is of huge deficits not fiscal restraint so expect more money entering the system as I suggested in my opening article this year.  This is election year in many countries and mid term elections in the US so what politician will have the intestinal fortitude to remove stimulus this year?

The improved capital markets are a blessing no doubt however the choppy markets indicate remaining instability and shifting capital flows that have been creating volatility.  We may have maintained our distance from the edge of the abyss however other cracks are appearing.

This is all good for gold as fear increases gold will come back faster than everything else all over again.  Uncertainty over exchange rates and currency gyrations will drive investors back to gold in droves sooner or later this year. Gold is going to recover soon from this correction which is just another buying opportunity.  It will resume its longer term trend as these choppy markets settle.

Technical breakdowns like the current one in gold are not unheard of.  The fact is that the fundamentals for gold and the Australian gold stocks have not changed for the worse.  They have not even deteriorated lately. The fact is that the fundamentals are getting stronger due to a falling Australian dollar on the local scene and the deteriorating global debt cycle.

Gold stocks Down under have gone through significant organic growth, elimination of hedge books in many cases and a reduction in gearing making them better value than ever.  They are undervalued and approaching bottom levels to the extent that I believe we are looking at the equivalent of about September 2008 levels here.  That is to say there is some short – term down side potentially and a trading or investment strategy to suit must now be employed.

The key is to learn from what was shown in October and November of 2008 and the subsequent recovery.  The strategy that worked then will produce the optimum results in your portfolio this time around also.  Do not expect prices to reach as low as late 2008 this time around however.  I am talking in relative terms here.

Pure Folly

The global spin machine is still in overdrive and it never ceases to amaze me how the masses swallow it.  The “recovery” is so proven now that television and some print media are proclaiming we are back on track.  They now presume we can stimulate more to create more jobs growth and that we should support even inflated property prices more to protect the retail market.

Where were these guys in the tulip mania in 1637? They could have printed enough money and formed a new Department to protect tulip prices at the top too.  Excuse my sarcasm they don’t seem to get it that property is unsustainably expensive compared to wages especially at higher interest rates.  How are wage earners going to service huge mortgages at 10%+ interest rates?  The mortgages have to get considerably smaller and so do the property prices.

We are even back to the property tipsters suggesting what areas to buy your real estate here in Australia.  I am nearly falling off my chair laughing except a lot of money will be lost and this is not good at all or funny.

How can anybody still believe that we can print wealth or that the basic laws of economics have changed?  That debt is good and production of valuable end product doesn’t matter because we own a printing press.  “Yeah right” that ended really well in the 1930’s in Germany but it’s all OK now because we have “learned” and things are different this time.  Apples now fall up and we no longer get an equal and opposite reaction either when debt and stupidity collide.

The spin is working even though people distrust the media.  The message still gets in.  What sort of filtering malfunction is this?  Some poor hapless soul I spoke to on the weekend suggested to me that gold was falling because the recession was over now.  I nearly choked.  I asked him if he had seen that Greece was now forced to borrow at 14% interest.  My answer to his statement was met with a quizzical look.  But this person knows I am involved in gold and I believe he was testing a theory, sort of bouncing the spin off me looking for my reaction.

Gold is behaving wildly now and so are the gold stocks.  I am going through the quarterly news reports on the Australian gold sector getting ready to load the updates in my Members areas at GoldOz.  This is intensely rewarding and I hope my Members take full advantage of my interconnected analysis.  This is an exciting time for gold stock investors make no mistake.

This is the time to refresh your data and update your knowledge, to get up to date on this fluid and exciting market sector.  Then through a combination of fundamental research we can again seek to understand the best value presented as prices settle and get set to reverse into the next up-leg.

Admission and Reversal

I was wrong in my opening 2010 year article, right about several things however wrong about the short term direction of the gold stocks.  However in my defence I spotted the error fast and warned my Members and the public as I quickly reversed my stance to neutral with caution and appropriate support levels.

You cannot be right all l the time and therefore the important thing is to be able to spot an error fast enough to stop it turning into a serious mistake.   All investors need to learn this in my humble opinion.  When Mr. Market tells us we are wrong we have to back down and stand corrected or lose money.

Gold stock behavior changed in early January and markets turned down initially testing support on our XGD at 5800.  I warned that “all bets are off if this goes” and it did.  Then I indicated the next level of support which did see a bounce however this did not hold either.  So far the lower supports I have suggested have held at around 5100.  The current level is around 5200 so we are not out of the woods yet.

Don’t despair we have already reached opportunistic levels and the bargains are lying all around.  I see low hanging fruit that is ripening and suggest this is the time to do your due diligence not the time to run from the sector. If you have not sold I suggest you don’t as prices in some stocks may not fall much further.  This is a risk you will have to personally assess.

To be successful in gold stock trading you have to select and buy stocks carefully when the market is fearful, hold or trade on the way up, and then finally sell when greed is in the air.   This is obvious however many investors find it hard to do.  They find it really hard to apply this theory because this requires that they move their capital against their own natural instincts.  So they find themselves selling when the pain is too great and hoping for more rises when prices top out.

Debt Cycle

Sorry guys’ debt is going to get more expensive now and this will continue as a trend.  Interest rates, gold (plus tangible assets) and energy are the up-trends along with fear, confusion and uncertainty.

Something I am not seeing out there as I read is much analysis on what will happen when these sovereign default scares spread wider a field.  What will happen when (not if) the interest rates these risky sovereign states have to pay to attract investors increases to current Greek levels or above?  Greece is not Robinson Crusoe – it is not alone.  Many other countries face similar pressures including the two largest economies on the planet Japan and the USA.  Because debt levels are so high this will spell trouble in the extreme.

When sovereign rates have to rise to attract RISK CAPITAL to buy their debt we will see interest rates at the corporate level rise even further.  As I said above this is already leading the way.  Above these corporate rates we will see even higher interest rates for the retail sector including the mortgage markets and personal debt.

The only way for investors to escape the destructive ravages of a currency in decline is to hold assets outside their own country in alternate currencies or the ultimate money which is gold.  What assets apart from gold do you hold offshore when property is in decline and bonds are falling?  Two other possible investment classes that make sense are cash or gold stocks.  There is not enough available gold out there to satisfy the coming demand so it has to spill over into gold stocks.

But let’s stop at the increasing cost of corporate debt for a minute.  How many jobs will be created in this sort of environment?  The answer is of course that jobs will be lost as corporate activity contracts.  Why do you think I have been going on about balance sheet restructuring?  The effect of this can be devastating and far ranging as jobs are lost, small businesses lose contracts or face delayed payment.  Unemployment rises and borrowers default on loans sending property prices down.

Less money remains in the general economy as the vacuum created by higher interest rates sucks the system to the core via higher interest payments.  To be clear money is essentially debt and when it is retired money is effectively removed from the system until somebody can re-borrow against the reserve allocation of the banks.  Prices of goods will also have to rise in response to lower profit margins in the corporate sector.

People are not silly however many are in the “don’t know” or half asleep category.  The facts are staring them right in the face however the growling Doberman snarling and snapping at them is just too hard to look at.  When you don’t know what you would or could do about a situation that is so terrible it becomes a survival technique to ignore it.

If this recovery gets any better nobody will have a job.  This year will see currency gyrations that will confound the “don’t know” masses.  We will see sovereign issues intensify as the cause.  We will and have already seen volatility increasing.  Gold price control is part of the spin machine as has been publicly verified by even Fed officials in the past when they stated that they hold the price of gold down to suit their ends when necessary.

I have just verified reports I have been reading on London paper gold trading (as best as I can) and believe this period of time upon us is the mother of all gold and gold share buying opportunities around the world.  Paper gold trading is like the tail on the dog and of late the tail has been wagging the dog.

Funny about the timing too as the large US banks have been told they will have to de-merge their trading arms from their banking business and they just happen to be the largest gold shorts out there.  All of a sudden paper gold heads south in a major correction and mysteriously dislocates from the physical market.  This is remarkably convenient and will allow short covering on a massive scale.  That will clear the way for gold to fly.

Good trading / investing.
Neil Charnock


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.