XGD Update: Very Promising
Source: Neil Charnock, GoldOz (8/3/11)
"When long consolidations finally break to the upside, the move is usually explosive."
The elite members of this AAA club are currently: U.S.(-), Australia (0), Singapore (0), Canada (0), New Zealand (0), Austria (0), Denmark (0), Finland (0), France (0), Germany (0), Guernsey (0), Hong Kong (0), Isle of Man (0), Liechtenstein (0), Netherlands (0), Norway (0), Sweden (0) and the UK (0). Note: (0) denotes "stable," and (-) denotes a negative warning, which was handed to the U.S. while I was away a few weeks back.
I expect the Ratings Agencies to follow through on the downgrade for the U.S. The House backed the new debt Bill 269–161 to a round of applause. It is good news to avoid default, but not to go even deeper into debt, with debt to GDP already at over 93%. The new (apparently flexible) debt ceiling pushes this ratio up well over the 100% level. There are many questions about the deal to be hashed over, such as the timing, certainty and efficacy of the cuts.
In Europe, we continue to see Spanish and Italian bonds sell off along with the European banks which were hit hard as reality bites. Last night Deutsche Bank AG fell 23%, Commerzbank fell 47% and UniCredit dripped 40%. The weakness in the EMU debt markets is actually making the much-flagged U.S. downgrade less of a threat to the USD because there is just no other credible alternative. Gold benefits of course, so we have seen the normally weak summer period in the northern hemisphere fail to weaken the gold price.
Italian stocks were down 4.5% last night as their 10-year yields rose to a record euro-era high against the German bonds. The spread widened to around 3.5%. Merrill Lynch Global Wealth Management remain on the sidelines on Italian and Spanish bonds as do Pimco; neither of them are interested in this yield and the current risk/reward scenario.
Confidence and trust are low, and this is one reason you have pressure under the gold price. Markets hate uncertainty and gold loves it; there is nothing certain about the future of the peripherals in Europe or the outlook for Japan, the UK and the U.S. This problem is far from over, and this all has a strong influence on potential upward momentum for the XGD (Australian gold stocks). HSBC just announced job cuts of 30,000 and this is just one in a long line of banks and companies to take this action. The unemployment phase has not hit the markets yet; however, you can expect this to accelerate from here on, adding to pressures on those bank loan books and reserves. This means we still face intensified uncertainty to come.
The XGD or Australian gold sector has bounced off lower supports around the 7000 level yet again in June, signalling the possible beginning of a major move that would see gold stocks play catch up to the gold price over coming months. The two-month XGD down-trend, from the end of April is now over, and now the larger question arises; do we break out of this longer-term consolidation in the near future? The top of the consolidation range is the 8400 level, so a decisive break above this is required to break out.
We have to assess fundamental value before we can form any sort of opinion on this issue. These stocks are extremely undervalued when viewed on a cost/margin basis, thanks to that buoyant gold price during this northern hemisphere summer. They are also undervalued compared to pre-crash levels from late 2007 when the price of gold in USD and AUD was vastly lower. The gold stocks are at the second-cheapest level they have been at, compared to gold, than they have been in the past 30 years according to Sprott Asset Management. The Sprott team have to be taken very seriously due to their brilliant credentials and track record; I share great respect for them along with the industry.
The XGD has been grinding sideways for 11 months now, even as gold in AUD terms trended a further 10% higher. These stocks were already undervalued compared to AUD Gold 11 months ago, making them even better value now. The XGD has plateaued effectively at a higher level and refused to go down over this time. This is a very strong sign; a high-level consolidation can be considered the same as a baseline consolidation and equivalent to a decent-sized correction. When long consolidations finally break to the upside, the move is usually explosive.
This 'higher' XGD level actually followed the super extreme crash of late 2008 when gold stocks hit 500, 600 and 700 day moving averages during that panic phase. This marked them down to the cheapest levels seen in decades. You don't get many opportunities like that in a secular bull yet most investors ran the other way. The point is that the 'higher' level plateau is only 'above' a super extreme low not at the top of a sustained run. There is ample upside potential to be presented when the time is right.
Considering the depth of that selloff; a major move up was to be expected yet the XGD underperformed pre-crash levels markedly as investors continued to shy away from general equities and "gold stock risk" only to launch back into riskier assets due to a lack of understanding of the emerging investment climate.
Who says technical analysis (T/A) doesn't work? We have accurately nailed the larger and smaller turns of the XGD at every single point over several months using our T/A systems and what's more, we educate members on the "how & why" as we go. I have found that the early stages of using a system can yield patchy results and put investors off, so great care is needed. Any system needs correct application and since the markets and charts are highly complex, it just takes considerable time to master.
So we teach in real time along with the market, explaining what we are doing as we go, with commentary designed to impart this knowledge. As for our recent record and the question about the viability of T/A; one or two moves in a row might be explainable, but not seven in a row.
It does seem hard to imagine that the past track of any given price can yield any accurate prediction of future price. I grant the T/A sceptics that much. What you also have to ask yourself however is how accurate can you assess the myriad of fundamental factors that can affect the price of any investment? This is an extremely difficult task. To accurately quantify any given macro event, to evaluate the effects of a mix of complex and at times conflicting macro forces and their combined effect on the micro fundamental analysis of any single company is enough to test any genius. You can be right about the company and the technology and can come unstuck due to government intervention, Mother Nature and other factors.
Things do change due to fundamental reasons; 'fat tail' events and policy can change and these can and do have an abrupt impact on share price. These factors can drive sudden reversals in sentiment, creating a capital wave that floods into an asset class or out of it, sending the price sharply higher or lower. In general though, the skilled fundamental analyst will pick a macro trend, which is confirmed by powerful economic forces to produce a steady price rise, and that sounds like a price chart evaluation to me. It is a chart measurement driven by fundamental forces, understood by this type of investor who cares little about timing except over a very broad time horizon.
Let's cut to the chase, shall we? Both methods of analysis depend on human evaluation, and therefore the effectiveness of either method (or a combination of both) depends on the skill of the operator. For me, this is the most interesting game going, and I happen to love the challenge, random nature and personal dimension of investment.
Fortunately for investors, the precious metals community has been right for a decade so far and yet many investors have not yet made their killing. Many had very useful profit levels up to early 2008 only to see their gold stocks and wealth get hammered over the ensuing months. The nice thing is that gold is in such a long-term trend, so it can be invested in successfully with the right knowledge using fundamental or technical analysis, preferably both.
Right now we see a continuation of the rise in the XGD off that 7000 level, and thanks to the RBA keeping rates on hold, the AUD has gone the opposite way to spot gold tonight as I complete this article. I am extending the discount offer for Gold Membership at my site until the end of August, due to the lack of recent promotion. It does not seem fair to put the price back up when hardly anybody knew it was on offer.
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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.