Gold and Silver Bonanza

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



The drought is beginning to break up over Australia, at least in some areas which will assist the economy, particularly if the rain finds its way to WA and out West to our vast agricultural districts down the Eastern States. Agriculture is a major component of the Australian economy just as mining is so there are supportive implications for our dollar. Overall, exports have increased by 2 per cent but grain exports continue to fall, reflecting the ongoing impact of the drought. I just spoke to a leading grain exporter and there is an air of optimism now, we hope conditions improve for our farmers.

Australian retail sales rose 0.9% in January and we face another interest rate decision due for release by our Reserve Bank today. The trade deficit was down to “only” $876M for January down from $1.379B January in last year. Imports have fallen by 1 per cent, attributed to a decline in capital goods. The supply of Australian dollars was expanded by around 13% last year so support from agricultural production will be significant, in fact it was estimated that GDP growth was reduced by 0.3% by drought related impacts in the September quarter.

Fear and panic are on the rise, Iran / US tensions are accelerating alarmingly and the mainstream stocks are deflating. I have not talked about non-resource stocks in any detail before on these pages and will not go into any depth now either suffice to say that I own none. That is a zero, nil… zip, absolute zero.


Don’t panic


It is business as usual for precious metal investors… well sort of. Scary times as diversified investors apparently sell even their counter cyclic gold shares in order to meet margin calls and or simply panic / dump. My take is that too much leverage in the over-bloated system is causing an exaggerated short term blip in gold shares and a huge buy opportunity, most of it caused by the unwinding of the Yen carry trade. Cash inflows into the US are critically low, US real estate is very sick and the Yen is strengthening against the USD in a similar fashion to May 06, sharp and fast.

The PPT has to step in very soon and this will turn against the late short sellers which will drive things back up sharply. Nothing goes down or up in a straight line, this is a very serious and volatile situation and I imagine much hand wringing is going on in official circles. Nobody wants a derivative melt down; it would be bigger than they could handle, period.

Gold shares are meant to be held for such times, this is why many gold investors are invested in the metals too… in order to hedge against economic upheaval. To sell now is to invalidate all the reasons we invested this way in the first place. If instability grows worse the reasons to own gold only grow stronger. Writers have been covering a melt down scenario on and off for a few years and general consensus from the leading thinkers appeared to be that everything would go down first and then gold shares would begin to diverge and retrace their falls. I don’t know that this will be allowed to be a major melt down however the gold shares have shown us that they are not totally independent to the rest of the share market at present as we now see; in a desperate scramble for cash everything is being sold.

Do you hear that? Good positions are being dumped and this means they are getting extremely good. Gold stocks are entering / have entered an extremely attractive zone on the ASX if you can manage the risk and buy to hold while this plays out.


PM comment


Gold has been hit $22 Friday night and silver got smacked down 76c to US$12.80 in a violent move. I had called for a breather in my article on Feb 12th titled Hot Preview Uranium Compares to Gold and Silver. Gold had risen from US$560 back at the start of October 06 to the US$665 level and looked overbought. I was expecting an interim top there and a shallow correction back to the $625-$640 level with a breather for a few weeks. Gold and silver surprised to the upside and went from “getting a little overbought” as stated in the opening paragraph of that article, to very overbought at the $690 level.

The sharp correction we have just seen looks exactly like the January 3rd to 5th correction we saw a few weeks ago and will have set off stops in the paper gold markets. A big wash out, proof yet again that bull markets do their best to take as few with them as possible. They are characterized by slow upward progress in the early stages of up-legs and sharp shallow corrections continue at various levels on the way up.

Counter trend moves during bear markets tend to be sharp and brief as well. I still expect the $625-$640 level to hold however we cannot rule out a slightly deeper correction to around $615 “ish” near the 300 day moving average. We have now reached oversold levels in the short term. The PM’s are now even better value at these levels.

Is all this speculation about the short term direction of gold and silver of any consequence to most precious metals investors? The answer to this is a resounding NO. Sorry I did not mean to shout. It is of consequence to traders and I try to include comment for both classes of investor and hence the inclusion of this short term price commentary. Personally I am usually doing both, trading and longer term investing so I will try to keep the difference clear.


Longer term view is important when things get volatile…


In regard to the action we saw last week, now continuing early this week; I compare the current oversold (short – term) price of gold and silver to long term trends and inflation adjusted prices and it inspires me to go outside and mow the lawn. I don’t mean to make light of the current situation, for those with a different portfolio structure and / or investing style with their portfolios things are quite different, very difficult and I feel for them. Let me clarify, I am not trading at present and now hold share investments as PM equities and bullion so the volatility was not an issue, I felt relaxed.

I feel very confident about the investments I hold because I have researched extensively and reached an understanding that allows me to shrug off volatile conditions. My share portfolio fell in value however the underlying value of the shares did not which is a very important distinction. Let me clarify the other point in this paragraph too, inflation adjusted PM prices… gold as compared to 1980 is currently equivalent to US$152 in 1980 dollars. I currently use x4.2 as the inflation adjustment factor although this figure is really 2006 dollars so a bit (10 %??) out of date. Silver is US$3.05 in 1980 dollars at the current price of US$12.80 2007 dollars, that is $12.80 / 4.2 = $3.0476. The supply of all fiat currencies is accelerating, something we all expected under the inflation scenario. 2007 dollars are not worth as much anymore so valuing metals this way requires some adjustment to put the current price into proper perspective.

Enough said gold and silver are at super cheap prices and I say thank you for this final opportunity at this point in this consolidation, I am going to now convert some cash to PM’s again at this level. Then again I have to choose between many foolishly oversold companies on our local market, stocks so far below my fair valuation estimations that they now represent extremely low risk investments. The gold bull is young in Australia; I see rock bottom conditions for some fantastic stocks, if you have not loaded up yet do not miss this opportunity, within 12 months we will see awesome returns reminiscent of early bull market US gold stock returns.


Comparison


I will say it again, at the risk of being boring; we are nearing the end of this significant corrective phase for gold and silver. The gold and silver shares may lead the physical metals however we have to wait and see about that. As gold completed a very similar consolidation phase back in September 2005 it is worth a look back for comparison.

Gold had topped at the US$450 level at the beginning of December 2004 and consolidated with three major dips, a final shallower dip in November 05 was followed by a break out and then test of recent resistance / new support as is very common on charts. This last consolidation phase endured by long term gold investors lasted 9 months to the third low and the final dip offered a similar bonanza. It was a fake move within the real direction of the rally that threw off the last of the shorter term holders of stock and bullion from what lay just ahead. What followed was a massive $300 rally to May 06.

Now to this consolidation phase; top was May 06 followed by a very sharp decline to an Adam bottom at $543 (dip one), a bounce up was followed by a second hit down to a curved “Eve” bottom formation (also inverse head and shoulders) and the 300 dma in early October 06. The last major dip of this consolidation was no. 3 just recently at the start of this year. We just saw the start of the break out with a jump to $690 and now back to test short term support / recent resistance.

Now here is the kicker… before the rally really took off in September 05 we saw one last fake move back to $429 and almost to the 300dma for the last time (as mentioned above). This shook off numerous investors at the start of a magnificent bull rally. I believe the probability is high that this is what we are currently looking at. These patterns do not always repeat, this matters little in the overall direction, however I have seen it happen over and over again so I find it interesting.


What now?


This time the tentative initial gold breakout mini-correction may take 2-3 weeks to resolve culminating in a last bottom at the 300dma and look for divergent share behavior. Share price divergent behavior is not necessary of course as the current climate in the share markets is not exactly conducive to any share accumulation strong enough to cause rising prices in any sector as yet. The baby is being thrown out with the bath water so gold and silver stocks, resources… anything is out the window and down the drain at present. Dead cat bounce in general stocks is quite possible this week.

I wrote that timing was improving back in my last essay and strongly believe this still true. Thanks to the panic we just saw I am now growing very confident that we now see almost perfect timing… too close to call for many PM related stocks already. I am usually more candid than this however at present I am extremely bullish so want to see as many investors look at this situation as possible for their own benefit. I am about to follow up with additional information on investing in these stocks and how to follow up with additional research to highlight them along with maximizing your returns. First stage is to get the data, become acquainted with the sector in general and aim for the leverage that can only come from getting in this close to the bottom. Trying to profit and move capital around between trades when you only follow 5 to ten stocks is very hard. The following will arm you with a blue print to formulate a plan.

I am going to work hard to update the charts and prices on my ASX PM stock PDF files tonight and I now make a special offer to the first 200 annual subscribers… Only AUD$99 will get you the current + 4 additional quarterly sets of reports including the initial delivery (total 5), usually $30 each and I will include my updated in depth uranium report covering over 60 ASX stocks for $1 total AUD$100, all up around 300 companies covered in a convenient time saving format. Under this offer many of the better prospects have a chart included to provide a visual price history and so file is quite large at about 3KB. The stock reports are already sorted by stage of development and market capitalizations and this series of 4 sets of reports over 12 months will save you a great deal of time while assisting you to clean up on this opportunity. Demand has been good considering current conditions, feedback has been excellent so I would urge you to act now if you have any interest, 3.5M people hit this home page daily.

Please note carefully: buyers will have to help me to help you with this as I have not added a button for this offer on the store page at www.goldoz.com.au as yet. The first 200 investors will have to email me to advise us that they have bought the $100 product on the store page but actually want this limited offer. I will address this issue very soon as the site is about to expand. Spreadsheet clients will receive a special edition as well in the next couple of days to assist with the current conditions.

We could see an extended volatile base form over the next few months as seasonal influences dictate sentiment. For instance we have not seen a full blown lift off become evident until August and September following most of the consolidation phases in this gold bull to date. The last strong junior PM stock rally on the ASX started in July 03 and we have seen a great deal of volatility in this sector in the last 6+ months. In 2003 it was the stocks that led the metals. Even though gold only broke up through resistance in AUD in H2 05 there has been considerable activity in the mining industry here. This is an under statement. A continuing process of capital raising and exploration, take over activity and investment has been highly significant. Yet many stocks are at the beginning of their cycle and ready to begin to rally.

Many companies are poised at or very near very interesting expansion phases in their corporate life in the junior sector. Demonstration plants, sorting new production glitches, exploring very interesting high potential deposits, raising capital to go into production and even final preparation to recommence mining are a feature of this market. So don’t expect a great deal of additional discounting on several of these companies either; they never bottom all at once.

Moving upscale to larger developers and mid tier producers we see feasibility studies drawing to a close, some exceptional deposits under extended delineation and expanding production in other stocks as the mining sector gears up in response to this ongoing boom. Then we have uranium stocks, some of these have been sold off as well and the sector is hot. I just updated the charts on my uranium report and several rallies had extended considerably. Further opportunity exists for this sector as the political process for the federal opposition (potential new Government later this year) draws towards a planned conference in April.

The beginning of this latest rally should be slow, stocks consolidating. The new leaders, both large and small stocks, will begin to rise very shortly for company specific reasons. It is not for everybody however bottom fishing can be extremely lucrative at such times due to the leverage gained from buying near low points.

These are “selective” shopping conditions and not time to panic if you are in resource stocks. There are some screaming buys right now and lots of volatility so trading can be excellent during such times. Over sold stocks can get hit and bounce back up 20% in a day in this market at present, provided you know which ones are headed back up this is a wonderful time with long and short term investment opportunities in abundance.

As this current gold metal base forms we will see choppy trade in resource equities, some of our larger resource stocks are trading at very low P:E ratios and represent excellent longer term investments right now. As I have previously stated the financial results are still coming in for this sector and new earnings for H1 06/07 financial year are reflecting the commodity boom.

Good trading / investing.
Regards,
Neil Charnock


PS We provide information services that cover this kind of invaluable data for busy investors; a new version containing an innovative rating system on our market leaders as researched by our expert panel is now available. We also cover ASX developers (split into 2 categories), explorers (split into 3) and producers (2 groups) in our popular time saving, convenient and very comprehensive product which is under constant development, only AUD$30. We have a site under construction at www.goldoz.com.au and our panel now includes a highly experienced international trader with high profile.



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.