Confidence Creeping Back
Source: Neil Charnock, GoldOz (6/23/10)
"Breaking news in Australia as the Prime Minister falls on the super tax sword."
At least they could then claim that it was all Kevin Rudd's fault for not consulting the mining industry and getting the right balance, the right terms that might have achieved somewhere near the result they were after. I do not take political sides so I will leave it at that. I do support Australia however, and our checks and balances here prove this is a great nation.
I do also support the mining industry and investors in our mining sector and urge the new PM, most likely Julia Gillard, to scrap the tax proposal altogether and go back the drawing board and fix the tax system here without slamming any one industry. Whatever happened to a government serving the people and business by making it easier to earn a living? I have felt the confidence creeping back into the share prices of even diversified mining stocks this past week or two, so perhaps this political move and a major policy shift will finally reveal why.
I have severe reservations that this current government can regain power at all in the upcoming election. This might end up being the proof of my claim that if you try to mess with mining here you mess with the people—this is a strong mining culture, as this is embedded in our history and culture.
I hope this event goes down in history as proof of this concept and that our brilliant sovereign risk status will now recover. In some ways this should prove we are worthy of a first tier sovereign risk status as even an elected government could not succeed in hurting this industry for long. Now back to gold and back to the markets. . .
Gold finally broke the US$1250 level this week as we gradually leave this consolidation zone behind us and head for the $1300 level. It did not respect the $1230 level either, as sinister rumblings continue to taunt investors and CB's into the arms of gold. The inflation adjusted price of gold is still unbelievably cheap when you factor the real inflation of the money supply into the price model.
It is not expected that gold would manage to rise this time of year at all however it is. One would expect any unexpected rise in the POG to be slow and steady at best this time of the year due to seasonal factors. This movement again shows the resilience of this gold rally despite all sorts of recent calls for major falls and USD strength. Gold is gradually going through the roof, one tile at a time.
The XGD Australian gold share index is again approaching record highs after hitting over 6650 on Monday; however the end of financial year is almost upon us. There is therefore potential for a small pull back to the 6200 area on tax loss selling before we see a continued rise.
There have been several strong performers during June amongst our top ASX listed gold producers, especially those with offshore mines as expected due to the RSPT. Monday we saw several strong performances in the sector indicating strong accumulation activity.
This broader gold sector now resembles a coiled spring with tremendous potential energy after a long consolidation period. This index failed to fully recover after the '2008 stock panic' as Adam Hamilton called it so perfectly. The AUD price of gold is much higher than 2006 and 2008 levels; therefore, these shares have drastically underperformed gold.
Here is the updated chart of the mid tier producers showing this week's jump to 490. I have circled what appears to be a break out of this consolidation, which is not evident on the XGD due to the disproportionate weighting of NCM in that index. It is on the far right and hard to see, however it is definitely there. Once we break the falling resistance currently at 550 we are off to the races.
Volume has been solid as we approached the tip of the apex of this formation. We have an excellent chance of upward price action here in the second half of 2010.
The developers who are unfunded represent the biggest risk as the RSPT (super tax) still forces banks to factor in the worst case scenario. Hopefully this will be resolved soon after the leadership spill tomorrow. The fully funded lower cost producers make up the elite portion of the Australian gold sector with much lower risk so these will rebound the fastest.
We have some excellent emerging producers with forward P:E's less than one which is a stupendous opportunity. It is the smaller gold stocks that have the biggest potential upside.
Just a quick note on Europe: yes, I know I harp on about this, however I cannot believe how poorly debt is understood. Confidence is creeping back there too but for how long? The recent stress tests in Europe proved nothing because they valued the Greek, Spanish, Irish (etc) debt at par. This has everything to do with gold so let me persevere here please. This is the source of the next burst of interest in gold from the Euro zone, which will be strong, and likely to produce another burst of currency volatility.
Banks can value this debt at par at the moment because the ECB is a buyer. However, when this music stops things will change fast. At present the balance sheet looks alright and this debt can be carried as a zero risk weighted asset, meaning no reserve requirements for the banks.
Once this situation changes, and it must eventually, the banks need to account for this debt as a 100% risk weighted asset meaning 100% reserve coverage and therefore they will be forced to sell at circa 45% of face value. They will be forced to sell because they need to balance their reserve levels. Remember Governments cannot be declared bankrupt and put into liquidation; the debt has to be consolidated, partially written off and heavy measures on spending follow. Therefore the debt does not fall in value to zero but it does fall dramatically and cause upheaval for the banks.
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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.