2010 Gold Stock Boom
Source: Neil Charnock, GoldOz (11/10/09)
Gold has just breached US$1,100 after a strong move following the purchase of 200 tonnes of gold bullion by the Reserve Bank of India from the International Monetary Fund. This overhang had been troubling "ye of little faith" observers of gold.
The same day the Reserve Bank of Australia raised rates by 0.25% whereas many had factored in a 0.5% rise so the AUD temporarily dropped with the gold surge—and away went the gold stocks Down Under too. Gold has been languishing in AUD terms as our currency strengthened over these past few months but I see some positive signs ahead.
I have drawn some corresponding lines and circles on the chart below and the largest circles mark the tops in the AUD gold price at almost $1,600. There was negative divergence between price and RSI at this top and the reverse pattern has emerged over a period of many months now enforcing the power of these trend reversal signals.
Also note the MACD has now reached the "0" level and may shortly cross over which is also a positive signal. It is hard to see the $1200 rise on this chart but it is there and it could point the way to a solid AUD gold price rally ahead in the coming months.
The Economy and Ramifications for Aussie Gold Stocks
Despite some promising figures coming out of Germany on industrial production and exports we are still seeing major corporate and bank stress in the USA. The U.S. Fed has just reported that GMAC was only one of 19 stress tested banks that required (in May) a capital injection to meet obligations if (?) the economy softens.
As a major player in the U.S. auto industry, GMAC has already received $12.5B and has been unable to raise the $11.5B that regulators said it needed back in May this year. Now it has its hand out for more bail out money and they are not alone. However Timothy Geithner (Treasure Secretary) stated that the capital raising success of the other companies in the credit markets showed that the financial sector has stabilized since January 2009.
He then went on to suggest that credit is coming back "but we need to reinforce that improvement and ensure that small and medium-sized business can borrow and create jobs. The jobless nature of the "recovery" has so far indicated this has not yet happened—credit is for the "A List" at this stage as I have been stating for some time.
No wonder the Indian CB and others have chosen to become net buyers of gold. Diversification away from and an unwinding of paper asset weightings in foreign reserves is a high priority but the trick is to do it secretly or at least slowly so as not to upset the status quo. This is a delicate game being played out and I am sure India was delighted to get the chance to purchase this parcel to add to their already healthy gold reserves.
On the home front - consumer confidence in Australia is at a high level which will probably be good for Christmas sales. There are many mixed signals emanating from various parts of the world at this time and some investors have been left wondering what to do and when.
Many years back Japan was in a similar situation (down hard—interest rates near zero and things better elsewhere) and the zero interest rates on offer were taken up "large." Borrowers were happy to borrow massive amounts of Yen and "carry" that to other countries where they could invest for a fixed return—easy money on a highly significant scale. This assisted to drive economic activity outside Japan for several years.
Now we have the USA in the same unfortunate situation that Japan was in and interestingly we have Germany, India, China, Russia, the Middle East, Brazil, Canada and Australia all doing much better. The UK and the Pound are also in a similar situation to the USA in terms of the magnitude of their deficit and bank debt levels.
This imbalance offers opportunity for a massive carry trade to swell and once again provide bubbles in these other countries. The USA and possibly a quiet UK carry trade will increase as these two economies struggle to gain traction enough to increase their interest rates without an economic implosion.
Fortunately many U.S. corporations have operations offshore that will benefit from this activity and the U.S. & UK banks gain valuable time to trade for profits and begin to slowly unwind bad debts.
Any exogenous financial event of magnitude would cause capital to flood back to the U.S. and the USD to rise sharply exacerbating the unwinding of this dangerous trade in these other countries so don't underestimate the risk here. But for now the framework is in place for new bubbles to form and there are great rewards on offer in 2010 if the system holds together.
I suspect it will hold together for now and everybody will get time to become really bullish before we reach the inevitable point when the debt and inflation piper must be paid.
The struggle between paper and gold will be on in full force and I see very little to stop the rise in gold in all currencies. Confidence in the USD and the Pound (and all paper for that matter) is shot to pieces at the higher levels in banking and amongst savvy investors so we will just keep building our precious metal holdings at every opportunity we get.
The Chinese are just about to take over as the largest consumers of gold in 2010 ahead of India. We have seen this coming a long time as the Chinese were only just allowed to own gold a few years back after decades of a basic denial of this right. The sales infrastructure has been rolling out for years now and this program is now coming to fruition for the Chinese.
Currencies will fluctuate and so will gold but the trend is clear—we are going up in gold value in all currencies. Throughout 2010 a bubble will form in equities and this will include gold stocks all over the world. This is never a straight line and personally I thrive in such conditions so I am more than happy with this situation.
Short term I am seeing the expected selling into price rises from the funds and the choppy November is shaping up as I thought. I am fully expecting a slightly weaker second half of November and a relatively quiet December for gold stocks but only within an overall uptrend. Individual stocks will be topping throughout November for shorter term traders and this can be profitable to play.
We are running a special bonus time promotion for our Gold Members area until the end of November and also have a rewards program for subscribers. We aim to educate investors with these articles and provide even deeper education for subscribers. Site work has been intense lately and I am looking forward to getting stuck back into this area with renewed vigor.
We created a file to assist global investors to find the Aussie gold stock codes in the international markets and it is available for subscribers along with an array of other helpful and time saving investment tools.
This gold bull has long legs and it is only just getting exciting for those that can see the full picture. I hope you can join in the feast for 2010 and maybe into 2011 on these gold stocks. Of course we have to watch the trends and market dynamics as they unfold to ensure we stay on the right side of the trade at all times—only Mr. Market is right & it is our job to stay with it.
Good trading / investing.
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Neil Charnock is not a registered investment advisor. He is an experienced 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 his current opinion only, further more conditions may cause these 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.