Follow the Investment Flows into Australia

By Neil Charnock
www.goldoz.com.au



G’day! - we have just witnessed a very interesting turn of events in the world at large and also here in Australia yet few mainstream investors would be aware of how it all fits together. The ramifications for US citizens are profound. The confirmation of the gold secular trend is significant and the effect on the global investment flows is very important.

We have witnessed some sharp volatility and it would appear we are in for a bumpy ride this year yet the global economy is still strong. The global construction boom continues. This sort of data is well covered elsewhere however I believe I can offer some valuable perspective from the Australian viewpoint to assist ASX resource investors both here and around the globe. With the USD teetering on the brink this may greatly assist our US investor friends and certainly the gold community.

I penned an article early in January and noted that the money would be made by investors who could figure out where the investment flows were going in 2007. Thank you to the various investment sites (several) that picked up that article after the exclusive period on Kitco, it got the message around.

Well we can now see an early trend emerging here and the give away is partly the cause of additional strength in the Australian dollar. I say partly because there is talk of further rate rises by our Central Bank which may actually be constrained from this due to high exchange rate concerns. Note this article has been in progress for a few days and the Reserve Bank left rates on hold today. Our farmers and exporters need to stay competitive too. A little more on the AUD further into the essay because I want to get right to the following developments...


Development No.1


A well publicized event – the new investment arm of the Chinese Government is set to diversify and therefore redirect new FX inflows into “other” higher return assets. The Chinese do not wish to continue to accumulate any more foreign reserves. This going to be interesting and bullish for Australian resources which must surely be a prime target for the resource hungry Chinese. Australia should be a prime target for some of the 20,000 million dollar per month capital flows. It also has profound implications for the US Dollar, interest rates in the US and capital flows into and out of the US.

I have spoken about investment opportunities in the Australian resource sector for a few months now and those who listened have profits from this area and the exchange rate – this is set to continue at minimum, accelerate at best. As capital flows continue to be attracted to Australian companies and resource projects they will underpin our dollar and drive the exchange rate higher against the USD. This is a trend that will continue for some time as yet… also assisted by increasing exporter hedging here in Australia.

As the Chinese have been keen buyers of US Treasuries we have to wait and see what happens next, will Japan step up to the plate or The Cayman Islands perhaps? For those that missed that “joke” last year there was heavy US Treasury buying via the Cayman Islands -no joke. The fact that the Chinese have been so open about this important development on the redirection of their positive international cash inflows is also interesting in my opinion. The direction of the flows will soon be felt and noticed so stay tuned to the commodity channel for continuation of heavy investment and potential currency volatility.

Now it would be counter productive for the Chinese investment arm to buy stockpiles of base metals as this would push up prices in an already heated market and cause “demand pull” inflation on metal prices. Companies that will soon mine or who already produce any of the metals will be of further increasing interest however and I am sure the savvy Chinese investment team will seek low sovereign risk undervalued targets as a high priority. Australia fits this bill nicely thanks very much so expect pressure on resource share prices and the AUD to continue here from this source as well as from the US capital “escape factor” outflows.


Development No.2


The Australian dollar has just passed the significant AUD / USD 80c resistance barrier, not breached since April 1997. The initial target on this break out is the old December 1996 high at 82.13c. The key 79.5c - 80c level is expected to hold as support in the event that the Australian Fed fails to deliver on the expected rate rise here (they did not deliver) do to high exchange rate concerns. The Gold Oz panel expert Colin Emery sent this to his clients on 28th March…

“But my point here is in regards to the speculation the Reserve bank will raise interest rates in the next weeks I think this appreciation of the currency may hold the Reserve Bank back on this – our currency’s strength is a important factor in their deliberations – nearly up there with Inflation – and in my book above all the talk regarding housing markets and mortgage rate effects.

I also think the recent strength of the stock market indicates that investors don’t see rate rise as a concern. I still see two hikes by Xmas and the Bond market has factored rises in - but I don’t think we will get one this month. My upper target of 0.8150 held first visit up there and expect a pullback on RSI basis and no rate hike to supports at 0.7950 area – but then longer term look for retest of 0.8110/50 area and end of year target is then a high of 0.8610 and settling around 0.8420.”

Well Colin got that right, no rate rise today…

So we expect further strength (already happened) and then a shallow dip (happening right now, started today) before a resumption of the uptrend of the Aussie dollar against the Greenback. Strength in the AUD is also about our strong economy, interest rate yields are also good and so are our dividend yields. I have been talking about the investment opportunities here in Australia in the Resources sector in particular and these capital flows and Colin Emery confirms this view. Investors should visit our web site and the “about us” page for confirmation on Colin too because he has excellent credentials.

With carbon credits and climate change making constant news at present it is worth noting Colin also had an input in the development of the carbon credit trading system in the early days and I am honored to work with such a visionary man. For investors interested in the Australian resource leaders we produce an Excel spreadsheet with or without a general star rating guide by Colin for a very reasonable price. I am adding new stocks again this week, another new producer and now some large developers with promising upcoming projects.

The immense strength of the commodity boom on this small economy is very significant. Down the track I see the older AUD / USD exchange rate high of February 1989 @ 89.72c as a possible 2008 target. I discussed the implications for US investors placing capital into the ASX resources sector some time back as “a scenario you should be aware of”. It seems I was right and this “likely scenario” is much more likely now than not.

Here is the thing…if you invest outside the US and the currency of that country appreciates against the USD while you are invested and you will make a profit on the exchange rate. Invest in a bargain resource or gold stocks capable of playing catch up with their counter parties in the US or Canada and you have a double whammy investment opportunity. Of course gold / resource stocks in Canada will remain a prime market however don’t overlook Australia as a relatively stable and low sovereign risk investment destination.


Development No. 3


One of the absolute greats in the commodity analysis community, Mr. John Embry of Sprott Asset Management (www.sprott.com) has spotted something most of us failed to even notice. Gold has made an all time record monthly highest close as of the end of February 2007 at US$669.35 eclipsing the end September1980 figure of US$666.75.

Of course the comparison is not adjusted for inflation however it is significant proof of the continuation of the gold bull trend nonetheless. Many investors, to my surprise even in the mainstream commodity analysis world, do not adjust for inflation even as far back as 1980 (I am not suggesting Mr. Embry is in this category). Therefore this milestone should be given more significance in their eyes. Is this really a record high in real terms? Not if you take the monstrous monetary debasement that has occurred since 1980 and the required inflation adjustment into account.

Gold and silver are still very cheap and rare and investors will do well to get in and save in metal instead of cash which will continue to be debased at increasingly higher levels due to the current and near term conditions.


Trading Australian gold and resource stocks;


My analysis tells me we are on the verge of an extremely exciting stage in Australian gold stocks. I have been reporting increasing activity and volatility in these stocks as they prepare for significant lift off, many have shown excellent returns already. The lows are already far below, “the train has left the station” for some stocks however there are still some ground floor investments Down Under even at this stage of the secular gold rally. I have passed out a report on a stock here that has a half billion of nickel at excellent grade + over $600M in gold to boot + infrastructure and all at $25M market cap… amazing! It is not the only example either. Time to get in at base level on any of these stocks is growing short now, I expect an extension of this rally into April - May followed by a financial year end dip… and recovery through the third quarter to begin a strong rally. Market forces and stock behavior are indicating this along with normal seasonal factors.

I have evaluated a few of our smaller producers and near producers lately, amazing value even before metal prices rise. Of course their current activities have to be confirmed by the post reporting process however this is business as usual. Most investors wait for the quarterly release of production and financial data for confirmation after the event however technical analysis gives as an early indication of opportunity.

I promised some additional assistance for buyers of our PDF files on the ASX precious metals stocks; so here is another update. First one for this week may work more for the experienced traders who have a good degree of education on resource stocks…

The live cat bounce
I want to highlight a trading technique that requires a considerable level of skill and not for a raw beginner. Beginners and more conservative traders might like to observe this in the market as part of their education. I call it a “live cat bounce” and just saw a classic on one of our leading resource stocks. I love these situations and try to keep a little aside for such opportunities. There are usually a few around at any time in the market.

At or near the end of strong general bull runs in gold where the stocks have followed gold up to overbought levels I generally try to sell down most of my share trades. Being cashed up at the end of these levels there are more if these situations than at other times so you can pick the strongest and the best for this play.

You have to carefully judge / pick a quality company; new growth and very dynamic, that is rising sharply and if you missed the initial run you just have to wait. It can be painful to wait however it is never a good idea to chase a parabolic rise, unless you are a highly adept short term momentum trader. At some point it will pull back sharply, most likely to a Fibonnachi or Gann retracement level at around 61.8% - 50% or perhaps less (38.2% or 33%) of its total rise from the last “take off” price before the parabola.

It is like catching a falling knife and yet when you do grab you must not let go or it will land in your foot! Ouch… and you take a nasty loss if it overshoots the turn point and you let go / panic so buy in small at first as an exploratory trade. Then look for the turn signal at or close to one of these pull back levels to increase the depth of your trade. So, not being willing to let go of the falling knife, you must be certain of the company / deposit and that the reason for the rally is real and justified and not a “pump and dump” in progress… price and excitement just gets ahead of itself even in a quality play under development. The RSI must have hit very over bought levels, perhaps 80 - 85+ is a good level to watch for, the higher the better.

After the completed retracement you get a sharp and highly profitable rise back, often up to old highs or better and yet you may elect to take a quick 30-50% jump in a week or two. Alternatively you can even elect to lighten and wait for a higher price spike than the original peak of the recent parabola. Negative divergence between a higher price spike and a lower RSI high will signal the time to let go the last of the trade to maximize return. This process can continue up along a strong run for many stages if the conditions, company and resource are right.

For less experienced traders the divergence I speak of means you get a higher price spike in the second rally up and yet a lower RSI high point than in the corresponding initial rally. Two price spikes, the second one higher and two corresponding RSI spikes, the second one lower. There are useful Bollinger band patterns where the second spike pierces the upper band when it has flattened to confirm this signal. The first spike will have pierced a strongly rising upper band due to the parabolic rise in price. We aim to provide content on our site on these important trading tools in due course.

Now for our Gold Oz Newsletter by Colin Emery, if you have an interest in the international metals, the ASX or resource stocks we have a new exciting product for you and an introductory offer. Learn from and be provided with technical information / charts and fundamental comment on the ASX, the Metals and Mining 300 Index, copper, gold, silver, nickel, zinc and tin. Also around seven individual stocks covered each week and the best news; apart from the accuracy… it is around half the price of most weekly newsletters. Three, six and twelve month subscriptions are also on offer at deep discounts near the bottom of the store page on www.goldoz.com.au. Note: if you have saved this site in your favorites then delete it and load the new version.


Good trading / investing.
Regards,
Neil Charnock



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.