-- Posted Monday, 24 August 2009 | | Source: GoldSeek.com
By Neil Charnock
Share price action has been patchy but exciting in many cases over the last few months. We called a correction at GoldOz and were right for the overall majority of the gold equities sector. However this has been a bit of a “drop bear” rather than a “bear market” type of correction – why? Numerous hot “multi-baggers” in our short list on the Gold Members pages have performed strongly as their share prices doubled, tripled and quadrupled or better.
Off shore investors may have missed the joke here – Drop Bears are an Aussie joke intended to scare attractive women into our arms during picnics and camping trips or to trick unwitting tourists – a quirky Australian humour / teasing sort of joke. They don’t exist of course – the Drop Bear correction has been like that too because of the strong performers. Significantly these share price movements are a strong indicator of future action. Gold stocks are still being accumulated Down Under!
Over the medium term gold stocks have been a great place to park investment funds during this long gold price consolidation. Investment flows into Australia have been strong for the gold sector and as a commentator with a public profile I have been approached on several occasions by brokers seeking gold mines to buy for wealthy offshore investors. The savvy money is getting set but I am far too busy to sell mines unfortunately. This is another new and strong pointer to future share excitement.
Physical gold is also gearing up for a rally as it completes a long consolidation phase yet again – a pattern repeated several times in the past 7 years. A high base has been formed and I am now franticly working to get the word out and to get the stocks we cover at GoldOz listed with their offshore codes on our investment tools as many are traded on the TSX, AIM and other markets. This will assist our offshore Gold Members at GoldOz.
Our gold companies are active across the globe because this is a multinational business. Gold is as important as it has ever been it is just that most of the investing public and investment advisors don’t know it at present. When gold breaks US$1,000 they will start to question their current theory that gold is expensive now. How wrong could they possibly be?
I believe the gold sector is still highly undervalued given the current gold price. Current share price behavior tells me things will heat up considerably in the coming weeks as gold breaks out and upwards. Seasonal timing also confirms my sense of dwindling time for investors to get set ahead of an exciting rally. Any dramatic global economic shock remains a risk for higher risk investment classes like equities however so don’t put all your eggs in one basket.
Getting out at the right time is just as important as getting in at the right time. Market timing is essential, taking profits is essential for successful market traders. I publicly suggested in September last year that a low had to be close and followed up with similar comment in October and November as most gold stocks made their lows on the Australian market. This was the ideal entry point however it is certainly not too late.
Of course at that time investor nerves were frazzled and risk seemed high at that time so pulling the trigger was not for the feint hearted. It looked like the end of the world for equities and our precious metals sector had been hammered as hard as the rest of the market.
Economic Gloom and Doom
Numbers being released out of the US are not that pretty despite some frantic talk and a recovery bounce in the global equity markets. The debt market is a major headache for us all including global businesses and banks. Unfortunately this recent economic activity is an improvement compared to the economic collapse and vicious contraction of the last quarter of 2008 and first quarter of 2009. Massive stimulus packages have worked to some extent for now but don’t get too carried away – the edge of the woods is still far away.
Thud I say as I pound the table with both fists – we still have massive deficit problems and growth will not come up to the expectations of the “all is better now” analysts. Debt markets and lousy consumer spending are going to stifle growth. The banking system must continue to rebuild balance sheets and factor risk in an extremely difficult climate.
Risk must encompass negatives like the unemployment cycle which is just getting fired up and the fact that we have not seen the bottom of the real estate cycle as yet. Mortgage resets, falling real estate prices, bankruptcies and other negatives will impact on the banks, businesses, consumers - and we are highly likely to see further corporate failure.
A double dip recession is more than just a danger in my book it is more like a probability with a highly likely tag. Any further weakness or disaster has the potential to panic markets again because the memory and scars are too fresh - they will expect a rerun of the recent activity.
Make no mistake the credit crunch is like a smoldering bush fire and the embers are everywhere, those trees still standing in the main are weakened and tinder dry even if they have a few tentative green shoots. Any ill wind will whip up the flames and fear on mass all too quickly.
Emerging markets are less of a problem as they had genuine demand not overspending as their financial models. Japan and Europe are still a major problem; emerging markets will not offset this negative on the global economy. China is driving growth via stimulus and job creation – and stock piling base metals which is scary for this sector. This is why we have backed off the diverse miners more and focused on the pure gold stocks – our niche anyway.
This China aspect has interesting implications for silver because over 70% of supply comes as a by-product of base metal production. We see all precious metal investment markets driven by speculative demand and since there will be less silver produced from base metal production due to diminished demand, or at minimum constrained increases in supply the price will be forced up dramatically. Pure silver stocks of a decent scale are virtually non-existent on the ASX however I am a physical silver investor.
Finally at the end of the day we see that this entire Government spending and fiscal stimulus is inflationary down the track once this deflationary phase is over and prices bottom. It will take years for consumer growth to catch up with all this excess production capacity and the game must go on so more stimulus action will be needed. Tighten monetary policy too soon to reign in those deficits and you get serious problems – it would crush anything but robust growth.
Why are Gold Stocks Different?
Inflation will remain a fear or at least a concern for astute investors because only inflation can handle the accumulated deficits in future years when things get back on track. Inflation is likely in real terms as currencies devalue – all countries need to increase exports however all this achieves in the end is competitive devaluation of currencies in relation to gold and commodities – inflation.
These scenarios and events will keep pressure on gold, precious metals and gold stocks. Fear is the wild card and is a real possibility due to the reasons I list above. Something I have not listed above could come out of the blue and cause havoc – the unknown unknown factor.
I have written previous articles on the topic of the disconnection by gold stocks from the rest of the equities since the start of November 2008 – as shown on the chart below. I have provided this chart again for comparison purposes – my thanks to BigCharts.
On June 9th this year we posted a comment for our Members and Gold Members at GoldOz – “Double top appears to be in now and correction underway”. We were talking about the XGD which is the weighted ASX gold stocks index as marked in blue below. It is made up of several producers and a few large developers. Please note the second peak in early June which we alerted our Members about at that time.
XGD / XAO comparison chart -12 months
