ASX Needs a Rest

By Neil Charnock
www.goldoz.com.au



The ASX is getting over bought short term and the most likely course for the next few weeks to a couple of months is – correction mode. Traders may be lucky and get a chance to sell into this market this week and wait for buying opportunities over the coming weeks, some will be even luckier and pick some of the winners that are set to go against the tide. A look at the Resources Bourse for my offshore friends…





The ASX has now risen sharply by about 10% and you will note the short term peaks above – in November, start of January, end February and now potentially… where this market has gotten overheated and needed a pause. This combined with seasonal factors seems to suggest traders should tread warily and investors should apply caution right about now. We do not see a long protracted decline, Down Under we are in a long term resources boom and the ASX is overweight resource stocks compared to other international indices.

Further to this comment - there are some stocks, particularly in gold and base metals that are poised for a run, even right now. Uranium stocks in my PDF product have very attractive charts, the stuff of dreams and investors have been cleaning up and many of these stocks now need a pause. We are about to find out what the potential new Labor Government intends to do with their Uranium Mining Policy so all breaths are now held in check awaiting the outcome next weekend. I daren’t guess at the outcome as advice or even opinion – however I can say noises from the moderates indicate that common sense must prevail. I’ll just wait and see, including the reaction of many of the overheated uranium stocks. The market is expecting a pro-uranium mining result. There may be some “live cat” bounces on any meaningful pull backs in the near term.

Gold broke out above US$685 last week (not above my typo past $885 however) and now looks set to run up at US$730 but a few resistance levels above here first. Back at the start of the year I made an educated guess at a May $730 top for the first half of 2007, time will tell. This is not a technical article, it is a fundamental one for my PDF clients and any interested resource investors. Tread warily here is my current take – the ASX is toppy and needs a pull back but there are still some opportunities in the resource arena short term. Full technical and fundamental coverage of this is in the latest GoldOz Newsletter.

I see a need to write a piece about some blatant differences between some ounces of gold and silver and other ounces of gold and silver– seems like a stupid argument because these metals are elements – they are “fungible” meaning an ounce produced anywhere is the same as one produced anywhere else. Please bear with me as it just might help you with your investing activities.


Hedged ounces: pre –sold


Banking practices were conservative during the period from the mid 90’s and even up until about 2003 when gold mining began to become more profitable again. It made good sense for banks to insist on their mining clients doing some hedging to protect the debt they issued – protection from the metal price deterioration at the time. So, un-mined ounces were “cleverly” sold forward. Many miners were forced to hedge a little too much of their future production in this manner due to the low prices at the time and now suffer because mining costs have now risen above those hedged ounces.

The thing that really exacerbated the problem was that this also came at a time of a concerted and coordinated effort by the Central Banks to sell down and or utilize their gold reserves. Actually the practice was to lease out their gold for a return of a fraction of one percent which effectively had the same result as hedging except in this case the gold was sold as real ounces into the physical market and swapped for more paper promises – in effect just an agreement to return the gold at a later date. The combined effect created the bullion buying opportunity of the millennia as so far proven by history. It also created a false dip in the already extremely low - inflation adjusted price of gold to below the US$400 floor. Point of this comment is that the rise to near $700 would not have been so spectacular if it were not for that artificial low.

These hedged and leased “ounces” also combined to create a false and distorted world view of the true worth of gold both in terms of price and also as an essential mechanism of balance within the financial system. All people interested or not, should be encouraged to do at least a cursory study of this historical subject for their own protection and survival. History does repeat to a large degree and man is doomed to repeat his mistakes without examining his mistakes of the past.


Inflation adjusted ounces: …again very different indeed


Moving forward - in 2000 we were drawing towards the end of a moderately long half cycle – bear market in tangible assets that had started in early 1980. The above ground ounces being sold through the late nineties were very cheap in historic terms. The ounces below ground were sold (hedged) at what seemed like a good price at the time.

Mining costs inflated… those ounces underground were not equal to above ground ounces. I have so far not given into the almost expected commercial modern reporting benchmark of… ounces as Resources divided by shares on issue as a calculation. For a start the difference in cost terms due to the time factor of when the ounces are extracted is substantial. So ounces controlled in the ground by developers and explorers are vastly different to ounces in production near term… at least at this point in time. Should the ounces in the ground become worth a very large sum in profit terms in future then these developers and explorers will get re-rated but not until this eventuates and there is a risk as nothing much is certain in mining or investing.

That is not to say I will not finally succumb and provide such a calculation – I would prefer to devise a way of discerning between the various types of ore bodies and ounces in the ground. Ounces are not the same as other ounces if they are still in the ground either. I certainly do not knock those who practice this calculation (sincere) - as a possible indicator because it can be viable in some instances; problem is that it cannot be applied as a “blanket” rule. More on this in a minute…


Sovereign risk ounces:


Then there are resources in the ground but happen to fall within unfriendly international borders that have little respect for project ownership. I make no value judgment here – “food for the masses” may be the case in some instances if it were confiscated for the people however this is not usually applied this way… more like “palaces for the despot” or at least $’s for the corrupt elite / powerful much of the time. There must be “fair reward” for all the risk input by the miners, venture capitalists and share holders - to find and delineate a resource… and nobody should have the right to “move the goal posts” (change the rules) after this type of investment input. I fear that when gold gets really valuable this malpractice will get much worse in some parts of the world.


The professional view: of ounces


My colleague Colin Emery - who rates the leading ASX resource stocks on the Gold Oz spreadsheet product and writes the Gold Oz Newsletter; happens to agree with me on this whole subject of ounce inequality. This is why he devised the more balanced star rating system as a general guide for our spreadsheet. The highly accomplished professional investor like Colin thinks in terms of management, the nature of the resource (host ore style, grade + depth + scale + to put it in lay terms: the cost of extraction and processing), debt, hedging, sovereign risk, sector performance & outlook, P:E, EPS, project pipeline, age of plant and equipment… even down to fashion.

Yes stocks can be in and out of fashion too and then there is the “word on the street” that only professionals have access to + then there is also professional “gut feel” that comes from close association and decades of experience. When I refer to “word on the street” I do not mean inside information so let me be clear about this – it is about sentiment on the street from professional investors + within the profession - and rumor which strongly affects cash flows into and out of stocks – often based on intangibles. Finally he balances all this against current price being paid in the market place for that stock, is it under or over priced.

Of course a deeper rating system is possible - to create wealth from the business of trading and investing in shares which is why we created the Newsletter with expertly deciphered technical analysis combined with fundamental understanding that can result in a reasonable degree of accuracy amongst this sea of complexity. Now Colin is an accomplished professional having traded for many international banks and having worked as a consultant for major mining houses too – risk minimization is also a factor amongst all the above, responsible investing. The other major factor is all about the individual investor’s circumstances and risk profile and that is the job of a competent financial adviser - back to the subject.


Summary: let us simplify


Enough on that – here is this stuff we call money and it is worth far less than it was and this is continuing to get worse and wages are stretched further and further because of inflation and now it has become so obvious except we are told “it” is “under control”. The heck it is – even the obviously self serving and cooperative Central Banks have lost control to some degree and gold is gradually telling us that. After all they cannot control where the money they pump into the system is actually invested. Not only is gold ringing the gong - so is the increasing volatility at the moment which has come off the lows of an unusually quiet phase. Well… all this is “quiet” is changing too.


Some facts about ounces: in ground ounces that is…


Back to my point now; ounces. So they are vastly different if they are paper… that is obviously not gold, the paper is as good as… well the trust and stability of the Parties and well… actually it is as good as the paper it is written on when or if it comes to a crunch. Paper is not gold and never will be even if the futures markets can temporarily be “the tail that wags the dog” by way of influence. The physical market has to regain the upper hand at some point due to rarity – you know basic supply and demand - reality.

And ounces are vastly different if they are underground because of the uncertainties of inflation and the cost of extraction. The following will be expanded on in a future Kitco article:

Now look at ore types - refractory ounces (lay terms – really hard and expensive to separate from the host ore, note there are some new technologies to be widely tested at scale) and sulphide deposit ounces (sulphide refers to chemical composition) and poly-metallic deposits (nice bonus credits from other metals = at times the difference between viability and failure) and vein swarms and ounces two miles underground or near surface. Then there are oxide deposits (free digging) and porphyry and etc …each with different extraction & processing needs / costs.

Metallurgical tests will indicate how much metal can be extracted and by which method and also help to give an indication of cost. When it comes to mining costs you have to consider economies of scale and operational costs… you find a nice shallow high grade deposit nowhere near a mining district so you have to build a town and roads and a mill right there so you have to ensure the size of the deposit is viable in any commodity price climate. It is really about the potential profit in each ounce and this depends on all of the above and more.

Take into account the grade, size and the nature of the ore that allows the long term operation to justify all that expense. There is much more to all this that I would love to cover here and it would require a book but given time much can be covered in these types of articles. I hope I have made my points; do not go for simplistic measures of mining stocks, get basic education about that which you invest in, adopt a holistic view of the entire picture and lastly get the “technicals” right for excellent timing via the art of charting so that your money grows. After all you can be right about a stock and still lose money because of timing. You can also be right and have a vastly reduced return on investment due to poor timing and missed profit opportunities along the way.


Pulling the investment “trigger”


My last point is that if more investors understood how the world has changed and more about the mining business they would have the confidence to “pull the trigger” and invest in precious metals and the miners. If they understood fiat currencies and inflation they would buy physical gold and silver too, as fast and as much as they could.

If and only if, your individual circumstances can allow some form of investment in this area, then it is a very good idea to find out more. At Gold Oz we are slowly building the education side of our site as a free service and we sell helpful products to pay our way. I write these articles to help spread the word about PM investment in general and to promote our wares.

We specialize as full time professionals – Colin is a professional consultant, author and broker, I create broad educational tools to aid investors in the ASX mining sector. I have developed a convenient time saving & broad snap shot view in thumbnail format to cover and classify about 280 PM stocks, another in the same PDF format to cover 60 uranium stocks.

Then there are the deeper products, with our unique professional input in the spreadsheet - and lastly the Newsletter by Colin. We are still getting set to automate delivery of this service and luckily the investment world has not caught on as to how valuable, usable and accurate this product is - for we would get buried in the demand (manual delivery) and I have other work to do. See the About Us page at our site for the details of Colin’s stellar career to date. We are running a top value introductory discount special on the Newsletter at this time and the response has been excellent – you still have time and details are on our web site at www.goldoz.com.au .


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.