Early Birds Reaping Rewards- ASX Gold & Silver Rally

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



Significant opportunity knocks for all investors in a market like this one, I have been saying for some time that global capital will head this way… read on if you like making money and or protecting your capital. Giant institutions (global and local) and banks are investing in the ASX resource and precious metals complex “Down Under” which is a very positive sign.

For several weeks I have taken a view that this gold / silver correction would not run too deep and that opportunity was knocking. I received and seen much comment that conveyed grave concern for the gold and silver bull. This is normal and healthy during a correction of this nature; we have seen five corrections of this nature to date in this bull market. The only difference this time is the scale. Because we are in phase two of this bull now the scale has increased considerably. Parabolas are built this way, from a gentle slope to a steeper and steeper gradient before turning to a near vertical spike. It is not just my view… the gold and silver graphs have commenced a steeper gradient which combines increased volatility with larger increases in price. So the recent 20% price plunge looked worse that it really was in the larger scheme of things.

In a sense I felt it was a valuable service to soothe raw investor nerves for a few weeks recently however now conditions have reversed. Gold and silver investors have resurfaced… a very savvy breed of individual thinker. Your ranks now seem set to swell with new comers to the scene this time. This is a typical trend development not hype. We are still a long way off hype conditions (phase three) yet this is still a significant opportunity in my opinion.


Global gold, silver & conditions


A measurable divergence between gold price and RSI, confirmed by the share behavior in October, “pin-pointed” the change to favorable (for price rises) conditions which again signaled (confirmed) the continuation of this magnificent bull market. Silver again led the way and now the gold silver ratio has dropped to under 46, it continues to fall, again extremely positive. The key silver writers have outlined the supply to price distortions in the silver market and this reality is only beginning to manifest into the chart of this super useful and rare metal. It is hard to image that silver is rare when the cost is only $14 per oz. Try roughly $450,000 per tonne and it looks a little different. As time passes and deficits continue I expect investment demand and new applications to cause serious shortages as hoarding begins. It will not take much either… the market is so small, supply is soooo tight it is creating an investment climate we can only dream of.

The biggest news this last two weeks has been well covered by many talented writers, the demise of the USD and the danger / opportunity this opens up for US investors. Savvy US investors who purchased my research and or just invested in ASX gold and base metals miners have reaped excellent returns in Australia this last month. If they were to bring their capital home many would be looking at 25% range profits in the large cap shares and an additional exchange rate benefit increasing capital growth significantly. It may be unwise to bring home this capital just yet however.

I covered a scenario some time back about the USD falling against the AUD and ASX gold stocks in a strong rally and this is it. This has come to pass; the probability of a continuation of this situation is evident now. I am now waiting for gold to rise with a more static AUD: USD ratio as the whole gold / currency link breaks down once again like it did last August for several months. This will set the ASX gold and base metal stocks into a near-term mini parabolic rally if this occurs.

Investors are now beginning to wake up that the Aussie price of gold is over $800 and companies are waking up “price wise”. The general realization is that high prices are likely to stay at least in the short term; many are forming a positive medium term outlook. Feast your eyes on the graph below for a minute, the consolidation did not run as deep in AUD$ as it did in USD$. Note the greater price rise in AUD and compare the more shallow correction.





In fact where the USD POG dropped roughly 20% it only dropped 15% here in AUD terms. Now we appear set for more upside. POG in Australia seems set to test AUD$900, we have to wait and see how conditions progress to see if we can pass the magic AUD$1000 mark but either way I am in for this rally. I will be watching for negative sell divergences as an early warning sign at end January and hope to see it run into May 07.

If chart patterns continue we may see a very large range in the gold and silver price for a further 6-7 months as this price area consolidated as major support. Under this scenario we would see another test of the US$700 area in gold and $15+ for silver and then a more shallow dip into the middle of 2007. This would set the scene for fire works through the latter second half of 2007 and up to about May 2008 with potentially another 70% rally from roughly the US$620 area of the chart to US$1050 POG.

There is still a chance that the chart pattern will change course. Patterns may be quite different now not just in scale as compared to phase one. Major consolidations may be faster and this scenario would point to a 70% price break out from the base of this correction to the $950 area. I am using simple extrapolation of mathematical scale as a basis for these potential outcomes.


Now base metals:


Just how deep does price go for this group of metals. I find it very useful to view the Kitco base metals site and keep an eye on LME stocks in relation to price long term. Short term charts distort the long term view and one must step back and look at supply and price in different time frames to gain greater insight. I wish to draw attention to five year stock and price levels of copper this week.

Copper is so important as a measure of economic activity, compare the short term 6 month chart on the left with the big picture. On the left is looks like stocks have “gone through the roof” however on the left we see the long term truth. Fact is that the larger global demand that has caused the current copper stock erosion now requires higher stock level to provide a buffer for supply. This is not what we see below. Stocks are rising however margin of supply is not great, a major disruption to one of our leading global copper mines, or a restocking in one economy or another would soon bring price out of their current correction.





Price wise look again at different time scales, I have chosen the same time scales as above to provide editorial honesty and lack of distortion of the statistics to amplify my point. Is this a grinding series of tops as it appears on the left or is this a healthy consolidation at a new inflation adjusted price level? Is this a new demand adjusted reality where supply has been caught off guard?




Now a broad look at stock levels compared to normal conditions of a few years ago. Anybody interested in a zinc-lead-silver mine??? Australia hosts some world class deposits, pay our share market a visit and see some of our significant success stories over this time scale.





Investor education:


The picture in Australian mining stocks over the last 6 weeks… the large miners took off first along with larger developers and leading explorers. I am talking averages here.

My research gives much away if you look carefully; by indicating size of reserves, interest in key commodities such as gold, silver, zinc, nickel and uranium… and most importantly for smaller companies it identifies cash holdings and burn rates of capital so investors have a fair idea if the company needs to dilute or borrow in the near term. The research lists now comprise 262 stocks, organized into six categories, 68 pages of actual company data in very convenient form for the busy investor.

I released an Excel Spread Sheet product last week on the leading (precious metals) resource stocks on the ASX because they require more detail to understand growth and potential. Comparison is easy with this product because it is all lined up neatly in columns. What I did not tell investors was that this new product (Excel SS) comes with 12 additional updates all for AUD$50 in total over a six month period and now I want to make a special offer for the next 10 days or so… buy the $50 product and I will include the AUD$20 Mining Research Lists for free. Call it a Christmas offer which I am personally sending to all clients this week and extending to new ones as well.

I am going on leave over Christmas and will only come back to prepare and distribute an update so I will not repeat this offer again past this next week or two so get in fast if you are interested. Go to www.goldoz.com.au and find the Gold Oz Store page, it is still a small undeveloped site however there are two working buttons to use for purchase of these useful investment tools.

Choose your stocks carefully and there are excellent opportunities here “Down Under” at present.


Good trading / investing.
Regards,
Neil Charnock



Neil Charnock is not, and does not claim to be an investment advisor. 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.