The Australian Central Bank (RBA) raised interest rates to 4.25% here yesterday. I was talking to an industry professional today about this and used the analogy that Australia could currently be likened to a car driving down a highway with two drivers. One (RBA) is applying the brakes and the other (Federal government) is trying to accelerate and turning up the turbo boost.
The reason is that these two drivers have two different purposes in life. The Federal government wants to produce growth and jobs for the good of the country, and to get re-elected later in the year, and the RBA is there to control price inflation amongst its other monetary duties. Meanwhile, outside the ranch, the world continues on its own course and although many here think we are doing OK (isolated from the U.S., European, Japanese, UK difficulties) the truth differs wildly from this illusion.
Yes the U.S. has produced some modest growth, however this might have something to do with inflation (money printing) and the not too small influence of money tracking back to the USA in the corporate sector. Fact is that last year the Obama administration changed a law and made all global earnings of its corporation's taxable in the USA. Therefore money that would have otherwise stayed offshore to be invested in favorable tax havens returns home to the USA instead.
That has been influencing growth as it represents a significant capital flow. Apart from offshore sales offices these corporations are returning a significant proportion of their operations back into the USA. This is not good for the Asian business centres but it has no doubt added some strength to the USD. You could be cynical and state this has been a stimulated and repatriated recovery but we will take any recovery we can get.
10-year Treasuries have broken through 4% and the U.S. banks are playing the yield curve; and the best thing for them is that this investment requires no reserves. So why lend to SME's (small to medium enterprises)?
Stock markets have been an interesting point and on the 5th January this year I bravely stated:
"The stock market reads future trends and outcomes at times and has factored (government sponsored) growth this year. Thanks to the vast overflow and after effect of the stimulus capital flows this will come to pass initially and therefore I consider that the highest probability is that the stock market rally will continue in the first half."The ASX in Australia has trended sideways to date this year while our dollar has trended basically flat against the USD and Yen. The AUD is up sharply against the Euro and the Pound however indicating to me that our stock market has risen in relative terms for offshore investors based in Europe and the UK. Foreign Exchange (Forex or Fx) analysis has never been more important for investment decisions in our opinion.
We expect to see a further spike in the USD short term giving U.S. investors a fantastic chance to get some funds out before the USD recommences its downtrend. The Dow has done exactly what I initially thought it would and continued the trend making new highs for 2010 this month. That was a brave call however here is the rub, that stimulus money has not been withdrawn at this stage and everybody wants to believe in the growth story. The system is still reasonably flush and the funds are playing in this market. The banks are still rebuilding their balance sheets.
Pimco, the world's largest bond fund has pulled away from the U.S. and European Bond Markets to focus on Australian, Indonesian, Philippine, and South Korean debt. Their concern is about the unwinding of stimulus and the danger posed to recovery by new financial regulations. To be specific they fear politics poses severe risk of "policy mistakes."
This is not fresh news so why do I mention it? I mention it to support what I have been saying about the global debt markets and sovereign risk. You can tell people something at times and they do hear you however many will fail to understand the significance or ramifications of what you are trying to convey. Cost of capital is going up and debt is going to become more and more expensive to service. This is not good for growth going forward the bursting of this bubble will be heard from Pluto. Will it come on quickly? The answer is no – I will be writing on this topic and what it means for the gold stocks Down Under and for gold in the coming months.
My prediction is that gold is going to around US$1400 before the end of 2010 driven by uncertainty over sovereign ratings (ability to service debt), currency instability, monetary demand and investment demand. One of the key drivers for these dynamic forces will be the currency fluctuations and associated capital flows. Gold has been acting like a currency and will go up relative to all currencies.
Some currencies will be hit harder than others which will equate to a greater opportunity for gold stocks. The movements will create danger and opportunity for investment flows and we will be talking close notice of these trends as they emerge.
I believe we could soon see a short term launch up to the US$1180 area for the spot gold price. I first penned this paragraph when gold was under $1100 before Easter. As we have just risen quickly I would not be surprised to see a small pull back now in the POG before it heads higher here. If I am correct this will be a welcome rally however this move may get confused with a break out.
These following paragraphs are also a week old now but here it is for interest sake: Why do I suggest we could see a short term gold rally shortly? Where are my technicals? We are stuck in a price compression which gives no indication of direction on the break so the gold price could go either way. I have been reviewing the gold company chart set in my Members area, looking for indications, literally wondering why I am forming this opinion.
There are already some signals that some of the short-term downtrends are now exhausted in a few of these stocks. Other stocks are already up-trending and may have some further short term upside. A few flat liners in base formations are showing signs of life after death. There are also signals from the leading ASX listed gold stocks to indicate that they are leading the way for gold.
Apart from chart patterns in gold itself which could potentially be pointing to a rise I look to the XGD. The Australian gold sector bounced strongly off the 5100 area some weeks back with a powerful buy signal as I highlighted at the time. In fact I alerted my Gold Members to this as potential support before it probed down there. After a jump and some consolidation since then the XGD looks like it could easily have some upside.
The rest of my reasoning is from the behaviour of the share price action lately it does not roar like a bear or look like a bear so it probably isn't a bear. To add weight to this for my own reasoning I just have a gut feel we need to see a rally before the end of the financial year which in Australia is at the end of June. The most logical time is April for this to occur.
We usually see a false break out before the real deal towards the end of consolidation periods and this is not likely to be any different. This type of event is part of short covering and traders getting set in their positions.
I have sat through many of these consolidation periods in gold this past 9 years so I am used to it. They are important to get people used to higher price levels. They assist an orderly sustainable price rise no matter what holds the price back. I don't see the major break upwards for gold until early in the second half of 2010. In the meantime the bears are being disappointed yet again as another higher base is formed.
Sentiment in the Australian gold sector has been very poor lately and this is good news for contrarians as we gear up to re-enter at favorable prices. This next (false IMO) break out will bring back some support into April however the May to June period will probably represent the best buying for most stocks in this sector. I could almost construct a sentiment index by graphing interest in GoldOz and I am sure many other gold sites are the same.
The right time to subscribe to these type of services is actually now, not near the top when it is all over. The only benefit you might get near the top is help with when to pull out so if you have no stocks then there is no point. When sentiment is right down, such as times like this it is time to do your due diligence very thoroughly. This can be a lengthy process as you may discover that a particular issue needs to be handled by the company before you take a position. So you watch and wait for things to progress and for technical signals to trigger your entry points.
It takes a great deal of time to carefully select the right stocks from the large selection on offer. The sector is so fluid that it is hard even for full time analysts to keep up with events. I believe this rally right in front of us will assist us to determine which stocks will do best with greater accuracy once the real break out begins.
In the past few months we have seen finalisation of take-overs; mines change ownership, new floats, capital raisings, and companies moving into production, exciting drill results and all sorts of activity in this gold sector. Behind the scenes these businesses are making great progress to reduce costs, reduce risk in their balance sheets and progress their operations. This is an exciting time in the evolution of this gold sector as a whole. The excitement this week has been the proposed merger between Lihir and Newcrest which was instigated by Newcrest. Lihir has initially rejected this proposal.
I am preparing two reports now; the first is a higher risk company with a fantastic ground position and a chance to advance strongly in the coming rally. The other is set to continue to reduce cash costs and undergo a re-rating over the next gold up-leg too. I believe it could outperform its peers. In both cases I will do my best to time the release of the reports to optimise timing for this "educational" opportunity.
Good trading / investing.
GoldOz has developed a basic Member area and a Gold Members area with substantial investment tools. GoldOz website 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.