Leverage from Gold, Silver and Uranium

By Neil Charnock
www.goldoz.com.au
info@goldoz.com.au



Back at the start of January I was examining the subjects of “value and potential” for 2007, I released an article containing the following statement…

Precious metals are not a hot market either which bodes well for them through 2007; the current fractal pattern indicates more sideways action until the second half of the year. We are very close to the 300day moving average once again; it is currently just under $600 per ounce so we are near the bottom of this trading range. Gold has just completed the 50dma crossover above the 200dma which is a significant technical event called a “golden cross”.

Well how did I go with that call, gold at $600 just above the 300dma in the bottom of the trading range? Gold is up over 8% in the last three weeks and more importantly it has broken out of a triangle pattern with down slope resistance, broken out to the upside. There is also a nice rounded pattern in the base of the high consolidation pattern, since the May 06 top, which looks like a “mini” inverse head and shoulders.

The ASX miners… the terms “churning and volatility” come to mind, something is certainly afoot, something is brewing and highest probability, given current conditions, is that this is a prelude to a major PM stock rally Down Under. My current thesis is that the smart and very big money is playing this one, they are patient (see my last Kitco article “Money Flow – Road Map to Profits”). They are happy to sit and “soak up” market share. Perhaps this is a subtle global flow, one that can help offset past mistakes (“short” mistakes – hint) that those in the “know” within the gold community are well aware of.

A reader questioned how I knew that the capital flows into gold at present are from the smart money crowd, as stated in my last Kitco article. I should have explained further as this is a very important point. It is a process of elimination and contrarian thinking. Mainstream investors still have faith in the Wall Street paradigm, mainstream stocks have been strong so there has been nothing to shake them – therefore they have not been the buyers. The other crowd; oh lets call “us” the gold community for want of a better term have lost interest in droves, only the hard core contrarians are still in there. Many gold investors that bought at higher levels through the sharp gold rally to US$730 were washed out early and the more stubborn (enlightened?) PM share holders dug in explaining the fundamentals have not changed and they are right too, they have not. PM’s and PM shares have tracked sideways during a long consolidation at these higher levels so fresh interest has not surfaced, many longer term PM investors have sold out to chase “hotter” sectors dumping their PM stocks. The only buyers left to soak up the bulk of this intervening market share over the past few months are the big players; I rest my case, simple deduction.

My current take on things is still… that we see a flat top triangle form to just past the middle of this year and then watch out… we go off to the races from about August / September. This will include profitable rallies to US$730 or there “abouts” during this time and ever more shallow corrections. For now we need to break some resistance however we are most likely headed to about $730 by May. This is pure conjecture and not to be used as a trading bias, it is healthy to wait for the market to show the way so that our “need to be right” does not stand in the way of pure analysis and wise decisions. For now I see that US$600, as a bottom, was confirmed and we are currently headed higher although not in a straight line (short dip currently needed). Silver has broken out too, the metals now lead the way… the silver to gold ratio is still below 50 and falling again… a positive indicator that tells us the bull is alive and kicking. Here is a chart of gold in Australian dollars courtesy of Kitco; I want you to take a fresh look at the prices in blue down the left hand side.







In Australia we have only seen a rally in the POG since H2 2005 so this is a very young rally with great leverage to be enjoyed from base levels. This sentence is probably the most important one in this whole essay and I urge investors the world over to take a close look at this market for their own sake. I realize Australia is often viewed as a bit of a “backwater” however stable government, low sovereign risk and the above sentence make for a compelling argument. The global PM company register is pretty thin so what do you think will happen when stage two gathers momentum with the POG and POS heading north in all currencies? Monster money flows will seek out these companies because of our stability and because PM’s are fungible (same element anywhere, no difference between US gold and Aussie gold).

Gold miners in Australia who get paid in AUD for gold as above and who remain un-hedged (or lightly hedged) are doing OK thank you very much. This new price level is sufficient for companies here to have absorbed higher energy / labor costs and switched to lower grade ore so that their resources stretch while they find more. This might not be great for short term profits however it is good for the long term health of these companies and good luck to them, for they have endured the bad years now behind us. Mining is a tough business and share values do not depend on earnings to the same degree as other stocks so a little grade dilution is smart business. With gold and silver headed to who knows what price levels this survival practice will pale into insignificance for the investing public as they look back from the fullness of time.

Many resource companies are playing the global grab for reserves in the ground as mentioned below because it makes better sense to buy some companies than to be risking company / shareholders exploration capital. My research is turning up companies that are finding gold here for as little as $6 per oz exploration spend and if you have the time to put into research that I devote every week… then you don’t do much else. There are so many companies to follow that it becomes a chore to sort them all. It is very important as an investor to have this broad knowledge however as this provides a base which allows capital to be invested in the “gainers” on a consistent basis.


Other commodities:


Copper shows a nice turn pattern at the base of an exaggerated correction following a projected supply crisis which caused an exaggerated price spike. I will stick my neck out and say again that the commodity cycle is not finished and add only one proviso… provided there is no global economic collapse (this would only be good for PM’s). Given the global Central Banking ability to create currency out of thin air at the “crank of the press” I do not see that happening any time soon.

I have stated before also that the massive liquidity now sloshing around has to go somewhere and this is distorting many markets, this is real whether new capital is created or not which it most certainly will be. Fact is that I have stated (bravely it would seem) that commodities were not dead for months now. We have seen continued rises in lead, nickel (see chart below it has broken to the upside from a flat top right angled triangle), aluminum and zinc (since I began to predict further rises, now price is now testing break out point see chart below also). More accurately I have actually been pointing out that even if commodity prices do not rise the bull in ASX commodity stocks is not over as conditions are profitable, precedent is that we go higher in a bumpy ride. Should we continue to see strong commodities compared to their own stellar performances we will see a violent ASX resource rally.







(Again, thanks to Kitco for the above charts)

Energy comment:


Now even oil has bottomed at the US$50 level and has turned up, the ASX oil index (XEJ) has consolidated at new highs this past 16 months. The Australian XJE has just completed a flat top triangle and broken to the upside, some oil stocks here have completed base formations and look set to recover or resume price appreciation. Uranium; well current analysis shows we have a supply problem which can only be resolved with economic conditions that allow for the mining of lower grades… in other words higher prices are required for miners to supply volumes sufficient to meet current and projected demand.

Uranium is HOT. Momentum is intoxicating, exciting and profitable. I have just compiled the most up to date and thorough report on ASX uranium stocks and Australia has approximately 40% of known global reserves. I cannot find any up to date comparison on ASX listed uranium plays on the web (details below) and political conditions are changing here, something uranium investors need to know about. There are a lot of very strong charts among these stocks.


Australia:


Looking at the charts of some of the larger ASX stocks down under you would swear the fundamentals have changed, they have gone flat and in some cases undergone healthy corrections, even some of our largest higher quality companies. Not much fun for traders unless you have derivative expertise and have been shorting some of the recent high flyers. Most of the larger cap gainers lately in our market have either been take over targets, the deeply over sold or a few of the major new project developers that are making progress. For investors who do not understand the powerful forces which underlie the commodity bull, at least those that have not been washed out already, you are having a rough time. However for those who do… this appears to be a great time to learn how to reverse a truck… back it up and load it up to the hilt. Careful selection now will yield spectacular gains.

There is a very strong case that the current pessimism has led to one of the greatest investment opportunities of the PM rally to date. The long consolidation in gold and silver appears very near to completion, some say we are seeing the beginnings of the next rally right now. I believe this is so for the wider PM complex however I currently wait for confirmation. For those who can buy for the mid to long-term and just sit and hold this may be the ideal time to obtain that high leverage entry point. For those who do their homework properly there are several exciting opportunities right now at all market capitalization / liquidity levels.

The biggest news item on the “Resource Bourse” (as one leading broker calls it) this week has been our leading large cap growth company buying yet another take over target. As one very astute reader put it “This brings gold back to the limelight at least for me… Here look Barrack ,de-hedged gold for billions of dollars after buying Placer Dome ,same happened with Goldfields recently de-hedged for 1,2 billion dollars, so what these captains of the gold industry are telling us , gold is going to take off and buy as much gold as there is in the ground , un-hedged “

It has been interesting to behold some smaller new producers undergo teething problems as they seek to ramp up their initial production. A couple of these companies have been crushed and now represent extreme value over the medium-term. At one of our larger deposits in Victoria a mine start-up was halted and investors have taken a very nasty hit. Others are soaking up this same stock at bargain basement prices for the long haul and they are practically stealing gold in the ground provided production / grade control issues can be rectified. This is a big reminder of the risks inherent in mining and investment in this field so utilise sound money management techniques (a subject for another essay).

Many of the smaller companies are increasingly buoyant / volatile or strong and this is one give away signal that good times for the PM investment community lay ahead. The surprising strength of the smaller growth stocks is where the bulk of the leveraged profits are at this time however it is much harder for big player to accumulate market share due to lack of liquidity in these stocks.

I have observed some patterns over the years which give away some of the sharpest moves in these small cap stocks before they start and I am currently searching for a way to provide this kind of guidance for investors as a commercial service.

Last year we released an in depth report on a small cap gold play as a bonus with our AUD$30 (current price, it has been improved and updated) gold stocks report (over 250 companies) and it was then in the 4-4.5c range. It has had some peaks and troughs since but it now trades at low 6’s (in 4 months) which is a healthy profit in most investor’s terms at an annual rate of well over 100%. We are providing the uranium report with the in depth report and the updated gold lists for AUD$30 now at www.goldoz.com.au if anybody is interested. Sincere apologies for the site crash last week, server to be upgraded very soon.

Good trading / investing.
Regards,
Neil Charnock



PS We provide information services that cover this kind of invaluable data for busy investors; a new version containing an innovative rating system on our market leaders as researched by our expert panel is now available. We also cover ASX developers, explorers and producers in a time saving, convenient and comprehensive product which is under constant development. As a special offer we will offer this for immediate delivery with a follow up delivery of an upgraded version with bonus uranium report available now, all for AUD$30. We have a site under construction at www.goldoz.com.au and our panel now includes a highly experienced international trader with high profile.



Neil Charnock is not a registered investment advisor. He is a 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 my current opinion only, further more conditions may cause my 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.