Radars On Now

By Neil Charnock
www.goldoz.com.au


At GoldOz we see the gold and commodities boom coming into clearer focus for mainstream investors thanks to recent events in the credit and housing markets. It is time the broad investment community began waking up in droves to what is happening and this process has barely started. The US Fed has just dropped interest rates by 0.5% which states their concern about the growing US housing slump and the potential effect on the wider US economy. It also states their intent to continue to reduce rates in order to support the stronger areas of the US economy. The Fed has temporarily given up on the USD and their inflation fight. It is certainly high time you switched on your radar on gold stocks if you have not already done so.

The US was not a big destination for Australian resources and overall the growth boom in Asia and elsewhere continues. Global capital is flowing into Australia and into our mining sector. The recent Australian APEC meeting saw the Chinese Leader Hu Jintao stop by West Australia in the heart of our mining boom before he ventured to Sydney - no doubt Chinese interest in our resources was the motivator.

Gold and silver have been strong lately and a suspected break out in gold that the GoldOz Newsletter called correctly in early September - from the $US673 level did eventuate. Gold shot up over $70 an ounce to new highs for this rally to date and there have been interesting developments in the silver market too. This will have heartened the gold bull believers and rekindled some very low faith – sentiment was driven to terrible lows. We true believers in the inevitable re-emergence of gold as an essential asset for monetary stability and all investors were surely tested. The key break point for us was the $US692 mark with confirmation just above this level and the rally has been strong ever since with plenty of noise and momentum.

The relative strength of spot gold has almost reached the powerful 80 level whereas recent rallies over the past 12 months have stopped at a reading just on 70 – this means that this rally means business. There is potentially enough momentum to carry this a little higher, from an ultra short term perspective - I think it will, and yet a pull back right from here would not invalidate this as an important price movement and break point. The RSI is likely to rise higher and then stay in overbought condition for some time to come – even with a minor pull back. RSI is a very useful investment entry or exit indicator once you understand it well because it can signal divergence (price reversal formations) in addition to power and weakness.

We are anticipating a pull back and a test of the break point of the price of gold at $US692 or perhaps higher but the “jury is out” as we await a verdict on this pull back target. Of course beyond this we see this break out as the probable beginning of a significant up-leg to $US830 this year – or better.

The Australian scene

The CEO of BHP recently stated the words “stronger for longer” in regard to the commodities boom. China was offered as the driver and that this would continue for several decades – GoldOz has held this view since $4 copper was being called as a top last year. Such elite and highly informed opinion at this time is not insignificant. Two of our largest gold producers; Lihir Gold and Newcrest Mining have now decided to eliminate their hedge books clearly stating their view of the forward path of the price of gold. As for the gold action lately - the effect on Australian gold stocks is obvious – this beneficial factor will add to all the investment and activity over recent years because a great deal of progress has been made.

So many companies have raised money and advanced their projects here over the past two years – most of these are seriously undervalued so the investment opportunity is great. From a fundamental perspective these companies are advancing their drilling and resource definition, feasibility studies and project development so there is growth from this angle – add a rising price of gold and strong commodities to this picture improving project economics and potential returns and you get significant upside potential. Add take over activity as majors struggle to replace resources and reserves and you get even more potential.

On the technical front I still see some long base formations on some gold stock charts and a number of early stage break outs with major upside potential in this rally as it gathers steam – even more spectacular in percentage terms because the gold bull is younger in Australia. Many of our gold and diversified mining stocks are already in blue sky territory, leading the way for the others. A special report I passed out to early subscribers on a small cap stock has turned into a three bagger and looks like doubling from here too over the next several months – just one example of a group of emerging companies with excellent potential.

On the super heavy weight front it is amazing to me that BHP is gathering excitement about the gold content within their portfolio when this is a sideline or by-product activity for them. In years gone by this was never a consideration as far as I can remember.

Some of the best opportunities are with mid tier and smaller stocks that are now blessed with expert management teams and or significant resources at economic grades. Australia is resource rich and has stable government and I mean both major political parties – Liberal and Labor.

We have an election looming shortly but both of these parties know the obvious – the Australian economy is booming as a direct result of the resource boom so their economic management credibility depends on maintaining a vibrant mining industry. Our sovereign risk rating is in the most favorable of major mining centers right alongside Canada. I see no disruption whatsoever as a result of the coming election as the opposition also holds a moderate stance on general mining. If Labor wins I could not see them allow open slather on uranium however and carbon offsets will become necessary on coal sooner rather than later because they are more environmentally conscious than the current Government.

Keeping the perspective

Gold did reach similar non-inflation adjusted levels back 27 years ago however this is too long ago to be of current relevance from a technical or fundamental point of view. The world is so different now thanks to globalization and the massive volume of currency creation that has occurred over the last two decades. I noticed “27 years high” stories in the mainstream media which amused me as they seemed to infer that gold was now “expensive” again which is ludicrous in the extreme. From a psychological point of view this does put gold back on the radar for a wider group of investors – the perceived record high price arouses interest. In real terms however the picture is quite different. Back in 1980 and over the early 80’s gold had a much higher value in terms of purchasing power that it does today.

Nobody would call a $50,000 house expensive these days, yet property reached such highs around 1980 – food was a minor part of a household budget back in those days too. My wife and I would do a full weeks food shopping for $30 max in 1980 and I would not state that a similar basket of food was expensive if it now reached the dizzy heights of $30 - oh gasp.

But it is important that gold is back on the radar and making progress after a 16 + month consolidation phase. During this last 16 months money supply has increased by approximately 16% and inflation in official terms by approximately 4% so do we now adjust for this too? My point is that things are rapidly changing in the world of money. Perhaps it is correct to say that the relative value of the price top in May 2006 at $730 would need to see nearer $800 (about 10% inflation adjusted) an ounce in current October 2007 dollar terms to reach price parity.

The shame of false or ignorant media reporting is that much of the public is still unaware of the rally or the root causes – many now know something is wrong because of the train that just hit them in the face – the tragedy of losing their home or job and the cold chill of financial hardship. For them it is too late to try to buy gold as they struggle to find accommodation and keep up the basics. Another group are unwittingly skating towards the same fate and have no idea what is coming – many of this group are currently comfortable even with high debt levels.

The level of ignorance in the mainstream investment world astounds me – evidenced by the enthusiastic buying spree that followed the Fed 0.5% rate cut. I has been discussing the likely Fed outcome with investors and finance industry professionals and had hoped it might still be possible for a 0.25% drop to sooth the markets and current “situation”. The worst outcome and most severe indicator I imagined was that full half percent rate cut because it indicated panic at the highest level. This is great for gold and for the creation of continued volatility which suits seasoned traders however not good for US citizens in particular. But increased inflation will probably see higher stock prices in the US even if not in real inflation adjusted terms.

I want to keep this message simple so that a broader audience can experience and understand the message. The big interest rate drop signaled that the Fed has given up the inflation fight – given up all pretence of the “strong dollar” policy and rhetoric – and gone for a helicopter dissemination campaign as they crank up the printing presses to keep the show going at all costs. I am sure there is a good reason in their strategy, big picture wise, but that has little to do with the well being or social consequences to be inflicted as a direct result of this monetary policy on the middle and lower economic classes. Hell of a sentence but I am not amused – as much as I like making money it is not everything.

Enough of that – how to cope with and survive in this economic climate – and better still how to survive in comfort by exploiting these conditions? These are the key questions. It is a simple answer to simply state that one should invest in gold, silver and gold shares – but how to do it well and how do you assist a novice or poorly educated investor on this subject. Note I say “on this subject” as there is a large group of people out there with sufficient intelligence and or common sense to grasp this if they are just given the plain facts in simple terms – so that the message is not lost in jargon. Pass on the word about gold to all you can – at least you will have tried.

Technical education comment

I harp on about stock behavior and some readers might wonder what I am on about – so here is a glimpse – a small example. I watch the “depth” on stocks and the bid and ask patterns because it tells me a great deal. For those that don’t know the “depth” is a line up of buyers and sellers at price levels in a sort of table divided into two sides – it is limited in the fact that buying or selling can be placed directly onto the market so that it does not necessarily have to be placed in the depth first. That is if you want to buy or sell at “market price” then your sell or buy offer does not need to sit in the depth table waiting for your order to be filled.

I look for certain criteria in the depth before I trade a stock as a part of this method as there must be good demand, in other words strong interest. I am watching one stock right now, on and off, as I compile this article – and it is amusing to see how hard it is for the eager buyers to accumulate their desired market share. The bid has built up and the selling has subsided to a marked degree of late – despite the price sitting right below a technical overhead resistance level. Then I see the large bids removed to try to suck in some sellers, to spook them that the buyers have changed their minds, which seems to work to a limited degree. Then the “ask” (sellers side) builds up at that price level briefly only to be snapped back up in one buy grab. Eventually this game works its way higher in price until the price resistance barrier is passed and the price goes for an excited run. But stronger hands hold the stock now as evidenced by the lack of selling. As the buyers get desperate for more shares they have to raise the price in order to get sellers to “come out of the woodwork” and part with their investment. This is the sort of behavior you like to see in a stock you are invested in.

This brings me to my overall trading strategy of which I am happy to share some basics for free in these articles. While prices are rising I concentrate on capital growth and lean towards investment rather than trading. This can take between three and eighteen months or even longer. I select price levels and use certain buy signals I have developed to time entry points.

When prices are marking time, this is called ranging; I concentrate on trading in and out using standard deviation (Bollinger bands), moving averages and other signals. This involves shorter term techniques and fast decisions over hours or even a few days. Conditions are changing towards an investment climate for gold stocks in Australia at present so it is time to switch on the radar. I use a broad knowledge of many companies and work with a series of watch lists – looking for promising behavior. I use fundamental and technical analysis and it is always good to have expert second opinion as you are always learning in this game – or at least you should be.

We have some excellent research tools that can save you precious time to discover what is available in the resource sector on the Australian Stock Exchange – and we have a very accurate Weekly Newsletter that can assist you greatly as a valuable second opinion. It is written by a senior trader that has been successful at the elite level on an international basis for over two decades – and you have to be better than good to achieve this feat.


Good trading / investing.
Regards,
Neil Charnock



REGISTERED ADVISOR – WHO THE ADVICE COMES FROM IN THE GOLDOZ NEWSLETTER:
Colin Emery is currently a Branch Manger and Senior Client Adviser of a Stock Broking Company in Queensland Australia. Prior to his work in Share broking he spent nearly 20 years in Senior Management and Trading positions in Treasuries for major International Banks such as Bank Of America, Banque Indosuez, Barclays Bank, Bank Of Tokyo and Deutsche Bank AG. He spent a number of years as a Senior trader in New York, London, Singapore, Tokyo and Hong Kong with these institutions. He also was Global Head of emerging energy, emission and commodity products for the leading Energy and Commodities brokerage firm of Prebon Yamane Ltd – Prebon Energy for four years before moving to Cairns in 2003 to focus on the Stock market and Private consulting work. The private consulting and advisory work currently undertaken is with companies involved in Resources, Energy and Renewable Energy and Forestry.
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.