XGD Confirms New Rally
Source: Neil Charnock, GoldOz (3/8/10)
I have fantastic news to report this week. The XGD has formed a powerful buy signal indicating that the way forward is up again for the Australian gold sector. . .Chances are that this will continue and that the awaited second leg of the gold rally that began in September 2009 at around US$954 is now back on track.
This is the long-term chart and simplified pattern of the upward price of gold. The long consolidation patterns are easy to define. Each successive rally is larger than the last and you can see that once the horizontal consolidation top was breached in the chart above we saw a double leg rally marked in Part A and Part B. The good news is that Part B is just beginning for this up-leg. The patterns are never exactly the same and the scale gets larger keeping us fractal fans on our toes. The consolidation between legs this time around at the larger scale took longer than the first pattern possibly due to scale and the Christmas break in the middle of proceedings.
Part B was also slightly larger than Part A in the–$1400 area. Now to the XGD index Down Under. The buy signal divergence is clear below on this chart so it is in agreement with gold.
Daily XGD Chart
The XGD index is dominated by NCM which is our biggest gold miner. This company just happens to be amongst the world leaders in terms of production, valuation metrics and global diversity of operations.
This is just another example of the global status of Australian mining. Take BHP and RIO as further senior examples and you can quickly imagine that Australia is not really off the beaten track as many investors imagine. Several of the top North American funds and many major banks have a stake in our gold industry which backs up my thesis nicely.
You might ask why? Globalization and internet information flow have now reached a stage where the Australian gold and mining sector will have to be valued in terms of global valuation metrics which means the current undervalued status of the mid and lower tier miners will not last. Given the underlying strength of the fundamentals for gold one can quickly see that this will enable considerable additional leverage on capital returns over the coming years. The investors that come to understand and exploit this sector now will reap the rewards.
Here is a longer-term (weekly) view of the XGD and you can see the solid bench this index has formed in between the two horizontal lines. In the top of that circle, if you look carefully, you can see the move today. There are some resistance levels at 5700, just over 6,000 and up at around 6,300 to be overcome before we can move up to tackle the older 6,900 level and blue sky.
Australian Gold Index—XGD Weekly
Security of tenure and other sovereign risk issues are extremely important to miners due to the significant capital investment and time taken to bring a project to fruition. Australia rates up there with Canada ahead of the USA leading the world by this benchmark as well. Our status has been improved throughout the financial crisis. This factor also carries a significant weighting for investors and rightly so.
I am not being patriotic here I am giving you the reader a heads up. Australia is positioned as part of Asia and an excellent place to do business. We are an excellent prospect for overall strength in our currency in the long term and therefore Australian resource stocks represent an opportunity for the global investment community as a hedge. Currency gyrations are going to get severe and I am not saying Australia will avoid severe ups and downs. Our currency market is small much like the silver market so beware we can be just as volatile at times such as in 2008. However just look at the recovery since.
What I am saying is that the long-term security of your capital investment in Australia will be superior to the USA, Europe, Japan and the UK if you choose the right sector. Selected mining stocks including energy, gold, rare earths and specialized metals will assist you to maintain your asset values while other asset bubbles burst. You could be looking at a currency benefit and an investment gain if you get it right—a double whammy for your investment capital.
I believe it is the emerging gold and energy stocks that will out perform however the large stocks lead the way and this process has begun. The Australian dollar is just one of the commodity currencies so a basket of prime candidates in China, Canada, Brazil and Australia should all do well.
About a month ago I announced that the markets were "Oversold" and they have barely looked back since. We first alerted our Gold Members to the 5100 support level on the XGD and it held twice after that. Today the XGD broke through the first significant level at 5600 backed up by all of the leading components in the XGD. Many Australian gold stocks have just printed powerful buy signals and will now move forward back to test the highs of 2009 in the near future.
I am preparing a brief report this week on these technicals for Gold Members. Our recent upgrade to the Ratings Tables should give investors the ammunition to further their own research and pull the trigger on the better prospects.
The Australian gold sector has acted very intelligently as a whole by raising money while the going is good. As the debt bubble eventually bursts capital raising will be harder to accomplish. Having said this however I believe that the gold miners will be one of the few sectors of the economy that will attract investment capital. They will be part of an elite group that will be able to secure borrowings. Now we come again to the cost of borrowing.
Greece heaved a sigh of relief last week on news that it had put its 10 year bond to bed at 7%. Europe joined in the cries of relief that this was overcome but hang on a minute guys are we missing something. This is providing us a benchmark indicator of how sovereign interest rates will act on funding difficulties this year. Bank rates are generally about 2% above sovereign rates, corporate and retail rates even higher again.
Careful of Asset Price Devaluation Ahead
The outcome is that funding is getting more expensive and this is the new trend for any country facing over extended budgets and deficit issues. Now imagine what has to happen to asset prices in Greece on a 300+ basis points rise in interest rates overnight. In case you can't imagine this it is not a pretty picture.
Australia just put rates up 25 basis points again to try to ease the latest government created property asset bubble (on top of the other real estate price bubble) but imagine what would happen if that interest rate rise was over 10 times this level. Most Aussies are living in "La La Land" and thinking that we did so well through the global crisis so all is well for property even in a rising interest rate environment. I heard a comment that many Aussies now prefer Real Estate to equities.
Well they are going to be hit hard when things reverse as their precious property investments will not be liquid. That means that by the time they realize they are wrong it will be too late. Banks that are fighting for market share up at these levels are going to take a hit too but nothing to the extent these poor misguided investors will.
The smart money is still moving into gold and gold stocks around the world. Now that the smoke and fear of the recent minor correction is over the gold stock prices are heading higher once again here in Australia.
Australia is part of Asia by default and we are well placed to benefit from this fact and from supplying growing economies. Euro zone investors and those from the UK and the USA will gradually gravitate to this market here—after all some of the biggest name investors and funds are taking larger and more diverse positions in the ASX gold stocks.
I have recently completed a file to show some mega profits generated in the last few months including a trade that has only just begun—yet has created a significant profit even during this weak market. It is at the head of the latest news (March 1st) on the GoldOz update page and you can down load it for free if you are interested.
A major gas deal was announced today resulting in a 46% gain in that stock and renewed excitement in the gas sector - so both gold and energy are still the place to be. I have also provided a link to a special report on tax changes and legal solutions available here— special file link.
Good trading / investing.
GoldOz has developed a basic Member area (news only) and a Gold Members area with substantial investment tools. GoldOz web site is a growing dynamic resource for investors interested in PGE, silver and gold companies listed in Australia, ASX share quotes, Aussie Gold Index charts, brokers, bullion dealers in addition to the company research via our paid Membership services.
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.