-- Published: Monday, 13 January 2014 | Print | Disqus
By Neil Charnock
To state the obvious, gold and the Australian gold stocks had a terrible year in 2013. The long term trend is still up however this large correction still has to reverse before we can confirm this or look to capitalize on it once again. Gold is not something to barrack for so I assume you are here to make money and or protect your wealth. Gold investors can see the threat of the sovereign debt levels, disequilibrium in markets and excessive money printing.
So how many of you listened to promoters after April 2013 telling you gold was headed higher in 2013? We not only backed off telling clients “all bets are off” we also backed away from promotion. GoldOz battened down the hatches in 2013 and did not “talk our book”. We stopped promoting and concentrated on assisting Members as is our task.
Secular (multi-decade) trends are subject to large corrections which challenge participants. The scale of the corrections is in proportion to the length of the overall trends. I was trading the XAO back in the late 80’s when I watched a parabola form into September 1987, at 2312 the index topped. The futures market traded at a 100 point premium that day and yet the index plunged to 1150 only a few months later. The infamous Black Monday 500 point plunge of 19th October 1987 was just a part of that fall.
That XAO low at 1150 was vastly higher than the 452 low I had witnessed through 1982. There were large long pull backs in 1992 and so on however the secular trend continued all the way to October 2007. Of course the ten year up-trends during the post war period can be viewed as individual units and should be for investment purposes. I also caution viewing the ultra-long term trend of the stock market as a uniform market. It is not uniform at all.
The reason for this is the rebalancing process where companies that suffer a share price decline are dropped out of the index to be replaced by companies which have grown a market capitalization that qualifies them for inclusion. The index in 1960 was not a composite of the same companies that made up the index in 1965, 1970 and especially in 2014. This is why I advocate shorter investment horizons; companies have their time, they come and go. Only the elite few can run and grow for decades. Even the blue chips (as they are known) can become stale chips so beware.
Mining companies are even more complex. A car manufacturer can always source raw materials and components from somewhere to build their product whereas a miner will eventually deplete their deposit. Very large deposits can be a long term company maker yet within the mine life of even the largest deposit there will be a commodity price cycle. Under and oversupply of the commodity offset by the business cycle deeply affect project viability and margins. Mine life or life of mine (LOM) is a very important factor when you are selecting a quality mining stock. Robust margins also enable the elite miners to survive the price cycles. A quality ground position can also set up a miner with a project pipeline akin to a very large deposit however the accounting will be different so watch those profits. I digress, back to the markets in general and present time.
Secular trends also come to an end eventually. What is the case for gold at present then? End of the trend or a large breather in a massive secular trend? As we move into 2014 it is important to look in both directions of time. I mean forwards and backwards to take an honest look at your performance. Did you call 2013 correctly? Then what chance of calling 2014 correctly? If 2013 was uncomfortable then what strategy did you employ that let you down?
It was actually early in 2013 when I warned clients that if US$1540 was broken on the gold chart then “all bets were off”. Until that time the rally off the lows in 1999 / 2001 was still intact. The failure did happen in April as you know but most gold analysts remained optimistic at that time, so did gold enthusiasts and some mining executives I was in contact with at the time. My view was not popular however it was correct, which is obviously far more important.
Some highly respected analysts still keep stating that the gold stocks are cheap to which I say …so what. Over extended time periods of recommendation can cause a great deal of stress for many investors who take a position and then stress as the share price falls. They would be in danger of giving up near the lows. This is the main danger I see in continually making such claims too early.
Investors and analysts cannot be correct on every call which is why you employ risk mitigation strategies. The analysts that continually state “gold stocks are cheap it is time to buy” are right about the “cheap” component and like a broken clock they will eventually be on the money. Is that good enough? We all make mistakes, it is all about the way we manage this factor. Insisting on a view, once proven incorrect even for the “time being” is not a successful strategy as many investors unfortunately discovered.
I expected the gold stocks to stay cheap through 2013 and they did. We modelled gold on that break below 1540 and kept it for clients only as we should have. This downturn is not like 2008 therefore the strategy has to be different this time. The gold bull is not over in my opinion and according to my research, however, debate rages on. Yet there is a strategy that will earn you loads of money this year if you pay attention. This is why I am back out publicly writing once again.
Investment is a serious business and conditions do change for gold like any other asset class taking the stocks on a wild ride with it. Human emotion does enter investment decisions to the detriment of profit and capital preservation. It should not, however 2013 saw this at the extreme in the negative sense. No study of the market or coverage by a decent analyst can ignore this as I can assure you the large traders do use it against you. This can be exploited this year to greater benefit than most people realize as I shall explain.
The Australian gold stocks are super cheap because their margins have been compromised. With gold trending down during this mid cycle correction the sentiment on this commodity is terrible. The thinner and sometimes non-existent margins between the All In Sustaining Cost of the miners and the sales price is in jeopardy if gold continues downward. Investors have exited the sector and will stay away until these stormy waters have passed. Contrarian investors are sneaking back, an observation I have made due to the changing share register notices. The low lying fruit is bountiful right now and the risk reward ratio has drastically improved provided you select the right stocks.
With prices so low the leverage on rallies is exceptional. I am not talking day trades rather well timed shorter duration investments. Correct stock selection is used to limit risk, combined with intelligent timing can produce explosive gains. We assist members in a general manner on market timing in addition to stock intelligence. Part of our service is a running commentary on this sector. By way of example here is a selection of excerpts, starting at that time the XGD was just under 2300. From the Live Area of the GoldOz Members area:
7th November 12:40pm
The initial spurt on the XGD this morning failed at the 60min 40ma. The correlation with gold gone for now as the XGD retreated almost uniformly across the sector.
This is all very short term what I have been looking for was a line up across the fractal array most importantly transcending into the daily chart. We need to see the 40dma breached to the upside and a successful retest before we can get comfortable - no matter how cheap these stocks look. I need to see the deeper GoldOz systems align with this and until it does (I will tell you when it is lining up and finally confirm when it does) I suggest you stay out of all non-core positions.
29th (November) on the close investors pushed this slightly higher taking positions on a Friday afternoon which is somewhat unusual. This may be another sign my system is on the money here. My comment on the 27th was on the money this is an excellent set up looking for confirmation.
4th December 4:40pm what an opportunity with the XGD at 1700! Who could have predicted this outcome? I am about to update the Funds and go shopping in earnest. This should offer profit opportunities in the first quarter of next year.
This is just a sample, indicative of a small portion of the coverage we offer. Once we successfully modelled the path of gold in April 2013, we researched the appropriate correlations and monitored for lows in the XGD over the balance of 2013. We also monitored the major players in the Australian gold sector and much of the important macro world events. Now that an end is in sight for this large correction in the gold market and that our model of the gold market has proven to be correct (so far) it is time to un-batten those hatches. The downside is limited according to our models however that does not indicate there is immediate upside. The opportunity lies during this consolidation phase and on the ultimate lows as the leverage potential is a once in a lifetime opportunity for gold stocks.
It is important to remember that conditions change along the trend necessitating differing strategies and risk mitigation techniques as time progresses. One reason for this is that risk versus reward is a fluid situation. This ratio changes as prices move to extremes in all time frames. That is; overbought and oversold levels develop in the intra-day charts, daily, weekly and even monthly charts.
Experienced traders and investors successfully apply this to the time horizon they have selected on each and every investment. Inexperienced investors tend to allow emotion to drive their decisions selling at lows and buying on rallies. Therefore they find themselves facing in the wrong direction as the extreme conditions develop. That gives the experienced investor the liquidity to exit with profits. With sufficient study and education you can be on the right side of this on a regular basis.
My long term view is that the slow motion global debt implosion we are witnessing will continue driving tangible assets higher over time. The nature of a debt collapse is entirely different to a stock market crash. Debt markets are not well understood by most investors who would rather concentrate on economic metrics and issues perhaps more directly specific to their portfolios. Not many investors have access to “debt” experts as they are mainly concentrated in specific departments within the banking industry, insurance and bond funds. Ignore this study at your own peril however - because money is the driver of every collapse, contraction, consolidation, and rally and bull market.
Most gold analysts and investors do know a great deal about money even if I do see some glaring mistaken assumptions. These relate to banking mostly. The key datum on this subject however is that fiat money is created via debt. It comes into existence via government bonds. We live in a world where money is debt based. While this persists we need to keep a close eye on the debt markets. I cover this in detail for clients but I am happy to state here that debt investors have been pushed out along the risk curve chasing yield during recent times which sets up dangerous conditions in 2014. Europe will be back in full spin mode this year trying to hose down gaping wounds in a repeat of 2012 conditions. The final factor to keep this market interesting will be the lack of and reducing liquidity.
The fundamentals of fiat money and risk off flows to gold made no difference in 2012 or 2013. The only thing that did work in successfully calling the gold market in 2013 was technical analysis. We had a mature parabola, support was broken post April 2013 and sentiment turned. Human emotion ensures that patterns will repeat. It ensures that certain harmonics will remain in force for individual markets including gold. This is of continual fascination to me as a trader and in my investing activities. I believe Mandelbrot and his mathematical work on chaos is some of the most important work out there. It might save you from losing your hard earned assets.
If you want to fill in some gaps on your knowledge, see how we modelled gold successfully and receive ongoing intelligence on the Australian gold stocks you are welcome to join the GoldOz membership base. We are offering a discount at present and see tremendous profit opportunities through 2014 to increase your leverage ahead of the next phase in gold’s exciting bull market.
Good trading / investing.
GoldOz offers major points of difference to many services. We offer education for all levels of investors including a Newsletter, gold stock comparison tool, an educational portfolio and a running commentary on the gold sector. We have expertise in debt markets and gold equities which gives us a strong edge as independent analysts and market commentators. GoldOz also has free access area on the history of gold, links to Australian gold stocks and miners plus many other resources.
Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has links to highly experienced experts across finance fields who assist in the analysis and research of our 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.
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-- Published: Monday, 13 January 2014 | E-Mail | Print | Source: GoldSeek.com