Bellwether Signal Confirmed
Source: Neil Charnock, GoldOz (4/13/11)
"Gold is up only about 480% from the 2001 low right now, with no inflation adjustment."
On March 24 in No. 28 I stated this: I have marked two ellipses, one on price that shows the bounce off support (confirms it once for now), and the one on the MACD showing a potential cross over. If it does cross over and price breaks above the moving average, which it is currently nudging, we will run up to at least near the top Bollinger Band short-term. This is exactly what happened. (Chart omitted from this public essay.)
Despite widespread nerves and some negative market commentary out there we held our nerve and are comfortably ahead on our investments as a result. We also called the gold break out precisely in No. 28 and had mentioned this would happen shortly in a very recent public essay. This pull back in gold is just a pause and another buy opportunity for the gold stocks. I will cover my reasons for this statement after some brief excerpts, which provide our views and track record.
April 6 No 29 analysis excerpt
Newcrest may be leading the way to start the next up-leg of the Australian gold sector. This is a classic signal and I give it to you all first—perhaps I highlight this in a week or so as promotion to the general public.
NCM has printed a massive buy signal and here it is: (chart for members only)
This is the daily chart on NCM for the past year. I have marked two key divergences that have marked the two turning points for the past several months. This is the reversal and it is a high probability that this is the beginning of the next Australian gold stock rally.
I have been looking, and reading and searching for a signal like this for over a week. I have visually lined up the NCM weekly 5-year chart with the Gold Producers Index 5-year chart (only second chart shown). I have done this to test the NCM signal as a measure for the entire gold stock complex here in Australia. If correct then this is of extremely high value to investors in this sector.
The area with the least agreement with this theory was at the far left of the charts around A. Obviously the stocks that make up this index were more volatile back then as there was a pronounced high before A and a lower low after A. After that the correlation was striking—B was a major sell signal for NCM and the index, C was the turn point at the end of October 2008 for both.
NCM led the way up out of that panic crash in late 2008 along with the other large gold stocks. As I said though—NCM printed a buy signal and then turned up leading the whole index ahead of that rise. NCM then consolidated without a sell signal in 2009, which was interesting. No sell signal and no meaningful correction either. It printed another weaker buy signal at D (subscribers only).
E was a sell signal for NCM and this led the index down a few months back, F has now marked a fresh buy signal. Remember that this index is not weighted. Therefore the size of the market cap of NCM would not influence it like the XGD. In fact NCM is not even in the Gold Producers Index as shown here.
Therefore, the index more accurately represents the whole sector; we are not comparing apples to apples and arriving at another apple here. My theory therefore has some credibility when you go back over the past 4 years at least—NCM leads the way and NCM just printed a nice strong buy signal. The bottom chart (shown) is more volatile because of the smaller stocks in this index—the opposite is also true NCM is more stable.
NCM is the premier gold stock on the Australian exchange. My theory is simple and yet I have not seen it anywhere else. It looks to me that a buy signal or sell signal on NCM is a fairly reliable indicator for the Australian gold sector. On this basis I am going to layer in more investments with added confidence for the GoldOz Educational Portfolio.
General Bullishness on Gold Stocks
Gold is a safe haven and it attracts and deserves a considerable value when times get rough. My theory is that this is not currently factored into gold at current prices but why would I think or say that? This is a slow motion train wreck, a debt collapse and these happen over time. Even though gold bugs know the train has left the tracks the general public do not. A shift is happening however.
Gold rose from $34 to $850 throughout the '70s, however, this rise was a little more modest after inflation is factored in. Gold may have been up as much as 1400% after this adjustment to the top in 1980. Gold is up only about 480% (up $1200 from $250) from the 2001 low at the moment with no inflation adjustment. Price inflation has been significant during this period on oil, food and general commodities. Money supply inflation has been dramatic, unprecedented by historical standards since 2001.
Gold is up only 70% from the 1980 peak 31 years ago. By these metrics gold is still very cheap, especially when you consider the risk in the debt markets and level of currency debasement out there.
Houses were $30k in the Eastern suburbs of Melbourne in the late 70' s and peaked at $600k to $700k in the past two years. This is a rise of 20x or 2000% even at the lower valuation figure of $600k. That is a bubble. Federal debt has risen 2000% from $700B to $14T since 1980; this is also a (debt) bubble—the largest in history.
When the money eventually comes out of the short end of the bond market (gradually on maturity) it will look for a safe haven. This is risk adverse capital meaning it seeks safety above yield. That has to include gold. It also creates a flood of liquidity as the debt markets contract—loans are harder to get you have to be on the A list. The B list misses out and the money left over after bondholders take a haircut floods the economy creating inflationary pressure.
Unfortunately many people will miss out on the gold lifeboat because it has gone up in price. The same thing applies to gold stocks and even many gold bugs are in danger of missing quality stocks because; they have gone up they get overlooked. This makes them less attractive to the less informed. We have been there since the beginning so they already look dear to us in some cases. The shift I mentioned a few paragraphs back is set to push gold much higher. This completely changes the fundamentals for the gold miners.
The Best News of All
You have not missed out on the highest leverage opportunities from this ride if you are new to the Bull Run in gold. Some investors are alarmed that they have not made their fortunes out of the gold stocks to date. There is a fundamental reason for the fluctuating fortunes of this gold sector in the past, apart from the gold price.
Because of the rising cost of gold mining over the past 20 years the companies involved are currently making, in a relative sense, little money considering the rising price of gold. Sure there are the larger producers and the low cost special producers and they have been the stellar performers so far. There have also been some decent sized discoveries and a great deal of organic growth in the better stocks that we have covered. They have been the early movers and have so much further to go.
In comparison gold and the ETF' s have done really well and are currently recognized as a major limitation to the cash flowing into gold stocks. Physical gold and silver have also outpaced many gold stocks. This new phase should change this situation.
In my view many of the gold stocks have not been that attractive in this early stage of the gold bull precisely due to the high cost of modern gold production. Royalties, energy, rehabilitation, sterilization drilling, the cost of exploration, deeper mining and all sorts of environmental considerations have rightly pushed up the cost to an average of over $900 per ounce for newer mines of modest scale. The problem is that large discoveries are getting few and far between. This pushes up that average cost of production with a larger and larger majority of production coming from smaller and smaller deposits. After administration costs and debt repayment are removed this has not left a huge amount of profit for most of the gold miners.
In this next phase shoots up significantly above average current cash cost levels. The costs might continue to rise for energy however the exposure of gold miners as a component of overall cash cost is nowhere as severe as the long-term cost rises we have seen since 1980. I expect the bond crisis to escalate at this point in time as the debt implosion starts to accelerate. This will increase currency debasement and uncertainty. The rising interest rates will gradually increase the pressure on bonds as they have in parts of Europe.
If I am right on my timing, selected Australian gold stocks will begin a new phase of accelerated price rises just as gold did in September 2005. That is when gold cleared US$455 per ounce. The lag caused by cost pressures on the miners will soon be over once gold clears the $1500–$1600 range. At $2000 per ounce these miners will be making massive profits. The marginal higher cost un-hedged miners will benefit greatly as they are the most leveraged to gold. Take advantage of our current special on Gold Membership if you are interested in our leading research and education.
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.