2007 2nd Half Outlook for a Key Resource Economy

By Neil Charnock
www.goldoz.com.au


As tax loss selling hits some key resource stocks during June we are seeing gold, silver and some base metals bounce upwards, initially off important support levels. The first half of 2007 has been extremely fertile profit territory and with the strength of the AUD against the USD it has been an excellent investment for offshore investors. I did take the trouble to inform my global investor clients and Kitco readers that this was a high probability in 2007- back in January.

Back in January this year I had this to say…

“Times are as uncertain as they have ever been; this creates a fertile climate for a precious metals bull. As investors we have to study money flows, trends and sentiment in order to stay alive and prosper in this game. There are a number of things we can be certain about:

1. Inflation will continue (increase of money supply).
2. Global liquidity is MASSIVE. All this liquidity has to go somewhere.
3. Volatility including; price, sentiment and geopolitical issues will continue.
4. Chinese and Indian workers want a piece of the Western lifestyle.
5. Big market players (including Governments) do not have our best interests in mind.

I suggest to you that the area of highest profit potential for investors during 2007 will come from second guessing where all that liquidity will go next so this is the purpose of this article. Let us examine which trends are over and which trends will continue.” And then I also wrote…

“So, assuming bonds and property are poor investments in 2007, perhaps the general equities may also be topping… where is the current opportunity? The contrarian in me indicates commodities such as gold, silver, PGM’s and even copper may not be as poor as you would expect. If that was a top in copper it was the strangest top I have ever seen. Only copper and oil have dragged down the CRB index to date with aluminum, nickel, zinc and lead all near record highs. The resource sensitive Australian dollar is near record highs. Copper is being talked and sold down with gloomy US housing figures yet US housing is not the key to copper prices… China is.

Sure copper prices are unlikely to reach the parabolic heights of 2006 however if energy and other cost pressures reduce as is the norm for this part of the commodities cycle the resource stocks, including copper equities may be far better investments than investors expect as well.”

I am very pleased to have stuck my neck out and made that call, it was no guess however public view predictions can potentially leave you with egg on your face at times. The fundamental research I have conducted and that which was confirmed by Colin Emery, Gold Oz Newsletter contributor, has allowed me to confidently invest on this strategy. Colin has traded metals for nearly 30 years and at a very senior level for the Treasury Departments of major International Banks for half that time – a highly valuable second opinion in anybodies book. His resource company experience allows him to understand the resource stocks Down Under better than most as well – in fact he has worked as a consultant for many of them including the biggest.

This article has a similar purpose however more specifically for the second half of 2007 which is now almost upon us; now is the time to get set. Colin and I share the same concern, as the metals weaken; the hit rate on Kitco drops, our subscription rate drops… the same old fear and greed rule the day.

This level of uncertainty has led to one resource stock I have just bought, being heavily hit from $1.40 recently to the 90c range and they are mining nickel and copper with zinc to re-enter their income stream. They are back at about $1 ($1.10 a day later as the vastly over sold condition quickly reverses) as I write and at $125M Market Cap and yet they would be earning a gross profit of about $2-$3 M per month at their current rate of production. This is set to rise yet the tax loss selling was ongoing for its own sake and created a fantastic opportunity. Another prime resource stock I know of is selling at a P:E of under 5 and there are other similar situations – these are misunderstood gems and the second half of 07 is misunderstood too in terms of ongoing commodity demand. These stocks are not “penny dreadfuls” either – they are quality companies growing excellent projects.

This is precisely when investors should be subscribing, getting better educated, picking out the elite stocks, hitting Kitco for regular price updates, product and opinion – and buying undervalued gems set for price appreciation. We are concerned that our clients and all investors get this right yet the indicators are that this is not always so. It is not easy to do, buy when things look bleak - even if it does sound simple – once these stocks take off the timing risk increases and the prime leverage opportunity dissipates.

A great term – prime leverage… I mean that buying close to lows produces much larger percentage gains in your capital (prime - meaning number 1, A1, optimum) and therefore you do better. This is simple mathematical theory. I use the word dissipates as it refers to a dispersal which is like a spray… price rises cent by cent and buying opportunities can be seen to be spread across the higher and higher price spectrum. The higher the share price rises the lower the net and percentage gains become.

Take my purchase in the stock mentioned above – I see $1.40 as a near term price target (later to over $2) and now have an average purchase price of $0.95. At $1.10 in a few days I am up nearly 16%. At $1.40 this would be a 47% gain however if you wait until you are certain it is in a strong uptrend it will be trading at mid $1.20’s or 30’s and you may expect an initial 10-20c gain, (7.6% - 16%) however with higher risk and a chance of getting chopped out on a stop loss as it next consolidates. It is technical analysis and “whole picture” fundamental research that identify these opportunities. At $2 I would be up over $110% yet if I waited for it to break that $1.40 level and confirm the rise I would have stiff competition for stock and a maximum gain from $1.45 to $2 would be 38%.

So how did the commodity stocks perform as a whole in the first half of 2007??
Take a look at how the ASX S&P 300 Metals and Mining Index has performed since January in the graph below. This index of ASX Resource stocks has moved upwards from 3300 to about 4300 and the opportunities are still significant. There have been some star performers in this index; they have done far better than the general index - and I see an equal performance from some in the second half of 2007 as this relentless commodities boom continues Down Under.





BREAKOUT - Feast your eyes on this chart above for a time; at the far left there was a spike to about 3400 eighteen months ago and then a break out to the 4000 level in May 06. Then we see a long healthy consolidation and test of the 3000 level with a last test at 3300 in January 07 when I wrote that article. Current position / bias is “breakout” for the second half of 2007 - with potential brief consolidation at this new higher 4080 level and a test of new support (recent resistance) during June. The over sold stocks have seen their lows in my humble opinion (IMHO), at least the risk is so low now that it is now safe to layer in some initial positions but keep some powder dry for near term June buying opportunity.

Gold and silver have been beaten off the mark this year as physical shortages of Ni and price strength of zinc and copper supported profitable mining activity. Supports profitable mining operations - so too does the perceived future earnings as new projects are brought on stream in response to growing global demand for commodities. These companies are growing Down Under and yet yields and P:E ratios remain low in some key instances. Why? I see the nerves that this commodity boom may be over and that China is about to melt down as a key issue. Fear of resource stocks has led to undervaluation which is a value investors dream. From a contrarian point of view the low sentiment is very encouraging because if this were a top (and not a break out as I suspect) then investor sentiment would be very high –euphoria and greed not fear and disinterest.


Gold and silver in H2 2007


In that January article I also stated… “In 2006 the money flows have been directed at China, infrastructure development in Asia, the general stock markets, base metals, uranium and new mine / smelting investment amongst some other sectors. The US housing and oil / gas bubbles popped in 2006. Gold and silver were fairly flat after their initial rallies as they absorbed new higher price levels. Interest rates are likely to rise in response to inflation or to attract foreign capital flows into the US. Alternately rates may remain fairly static at best as inflation continues to remain hidden and economic weakness prohibits rising rates so a bond rally would seem unlikely. The Fed remains in between a rock and a hard place.”

And so it has come to pass. Now we get set for some fire works in the second half and note; I should not have included oil as a popped bubble, it is a commodity and will continue to be in greater demand than supply can deliver.

Base metals out shone the precious metals in H1 as expected yet I was about to move to pure precious metals stocks for my portfolio until I did some additional analysis. I have held diverse miners, those Down Under that mine or plan to mine base and precious metals. I shall continue to do this and add additional weight to PM stocks in my portfolio rather than specialize in PM plays.

Why would I do this if I expect the precious metals to out perform the base metals in the second half? Firstly I still see a strong outlook for base metals in H2 as demand continues to be strong. I see continuation of tight supply conditions because it just takes so long for new mines to get into production and the whole industry has been caught off guard. So nickel and gold miners or developers for instance… strong second half. Copper-silver and iron ore copper gold deposits too – strong and I may have even underestimated our friend copper. I know Colin is covering zinc very closely in our Weekly Newsletter and some of our elite diversified zinc miners will be on my radar too; this is a major opportunity because some of the zinc plays are highly undervalued.

Secondly, even though I see gold and silver being the stronger performers in the latter part of the year I actually the base metals have more to run during the third quarter due to seasonal issues. I have noted a tendency in past gold rallies; investors are initially slow to respond to price breakouts. We are nearing the end of a healthy consolidation and most investors have now accepted the current price level of gold.

Gold and silver short term outlook:
Here is a snippet on gold and silver from our Gold Oz Weekly Newsletter from Colin Emery… just to finish off this weeks article.

``Heavy central bank sales appear to have peaked for now,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``We expect $700 to be revisited.''

Silver futures for July delivery rose 27 cents to $13.74 an ounce. The percentage gain was the most since Feb. 23. The price climbed 5.7 percent this week, the most since early December.

The metal had slid in the past six weeks. Historical price charts show …… It goes on with what a chart is meant to show what happened – well the point of charting is to know what IS going to happen…..and notice all the commentators out now talking about it – well maybe if they know so much they would have been talking about it over the past three weeks….but this is why we look at technicals as all that was happening – and one of those facts is Central Bank activity - is IN THE PRICE and IN ITS MOVEMENTS…and we have known for the past weeks that using some old market clichés – ‘That there was more selling than buying” and that may have included a major seller.…and to be honest may be nice to know so you sound like you know what your talking about but when it comes to trading knowing what’s happened is just that - interesting – good for dinner party comments – good for historians but not traders. What is going to happen is the question – We got that move spot on at GoldOz last week and I hope you did do as I said which was – again so you don’t have to scroll back….“Look to buy for a move to test resistances” So let’s look at that chart again…







Over the past few weeks I have said start buying Silver at $13.20 or lower – and that a reversal was being formed as the circled area shows. I also last week drew the line 3 on the chart and mentioned that if that short term downtrend triangle edge was broken we would have the confirmation the correction was over. It was broken Tuesday last week and confirmed by holding above it Wednesday. Then look at the strong move up to end of week to close above the longer short term triangle edge line 2 which I also mentioned last week. This is therefore a very strong confirmation for silver - of a rejection of the lows. Look to buy any pullbacks to line 2 and the supports (see below). Silver this week; to test horizontal resistance line 9 which is meeting the lower of my two upper long term triangle lines – 8 at around 13.80. If broken the upper line 7 (note I’m using the same chart numbers as last week so you can flick back) up at 14.47 (14.60 last week) and moving lower. Note though the RSI has had a big leap – so we can expect some consolidation at these levels first.





Much more for subscribers, all metals and some key resource stocks weekly. We have automated our new secure store at Gold Oz so any potential clients that did not like the old system can go in now and take up the remaining positions of the Newsletter discount offering. Annual subscription only AUD$250, for a little longer, less than 50 discount positions remain on our introductory offer. Colin really is an elite trader and you will learn a great deal while you make profits from our resource stocks. As I have said before you don’t get to the level Colin traded or worked at without knowing the investment trade to a high degree and you don’t stay there for 15 years either.

Knowledge is power – also get the PDF set for a broad range of 310 companies Down Under, get the data you need to make awesome investment decisions for the second half of 2007 – annual subscription is just AUD$99. Go to www.goldoz.com.au , new data on investment education is added weekly.


Good trading and best 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.