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Gold April Disconnect

Commodities / Gold and Silver 2010 Sep 28, 2010 - 08:00 AM GMT

By: Neil_Charnock

Commodities

Best Financial Markets Analysis ArticleYes I know it is now September, and no this article is not five months late.  We have been in a consolidation phase and this has been a very strange year.  Gold made a high in May just US$50 below the current record price which is nudging US$1300.  At the Northern hemisphere summer solstice, on June 21st this year gold made another high just US$34 below Mondays close.  


The XGD separated from the general stocks back in April 2010 which is not something you hear about on the news here in Australia.  Gold is still virtually un-owned here in Australia – only a small percentage of investors are interested because we were barely scratched by the GFC relatively speaking.  Property has not crashed here in most city areas and now we are being told “it is all better now”.  I want to tell you about the most promising set up for gold stocks since 2005 here in Australia at this time.

We have witnessed some lacklustre buying and relatively mediocre gold stock rallies since the peak in May 2006 when gold first nudged the US$730 level.  March 2005 saw the larger gold stocks take off and in July that year the whole sector took off.  This preceded a 75% gain in the gold price and, importantly this also mimics the behaviour of the past few months. 

This is extremely bullish for gold and the Australian gold sector once we get past the next correction.  It is very common for commodities, shares, currencies and whatever to retrace back to prior resistance immediately after breaking out above such a level.  Given the sense of unreality in markets outside the current gold stock behaviour I am exercising great caution however.

This year the gold stocks have taken off in September breaking all resistance and looking exciting, just as exciting as 2005 given the broad nature of the rally.  However if you look at their behaviour back over the past 12 months we now have confirmation that the Australian gold sector actually separated from the rest of the stocks in April – hence the title of this article above.  Before I dissect this and what it means for the future we have to do some top down analysis.  Current events are not making sense so we have to be wary that a correction is not due for our gold stocks before the rally lifts off.

Keep your eyes on Europe again this week as the Irish Government decides how the split up of losses is handled for Anglo Irish bank.  If it takes on all the loss it adds to horrendous strain on their budget.  If it passes losses to investors, the bond holders, they will take a haircut and get skittish and this would be contagious.  Banks have to refinance debt as it matures and the Irish banks have to refinance over US$30 B in the next month or so.  We have also been covering the ECB / IMF funding package (QE) for Europe in our newsletter as it is a highly important and evolving aspect of the current financial climate.

We have also been looking at the spin coming out of Wall Street lately and dissecting it so it is laid bare.  The recession finished officially in June 2009 even if the economy is no longer strong.  The markets players have two views which is a normal situation, right?  Well the problem is that one camp states that we have “adequate” growth and things are on track so you should buy equities. The other camp is saying things are bad, and that another round of stimulus is imminent.   They argue that more QE is imminent so we should buy the equities.

I hope the rest of the gold community is having trouble with this concept at present because it seems surreal to me.  Things are bad so the market goes up based on hope - or - things are good so the market goes up.  Money is flooding into bonds and out of equities and yet equities are in rally mode.  Gold is benefiting from all sorts of factors and I hear there is a chance of a short squeeze.

My area of speciality is Australian gold and as one of the top few global gold producers I think there is more relevance to Australia than it receives.  Here is the 12 month score card for most of the Australian based gold companies we cover in our data base and chart sets as part of our monitoring.

Large Producers: 2 down trends, 3 ranging (1 base) and 16 uptrends (many very strong).
Mid-Tier Producers: 3 down trend, 10 ranging (3 base), and 9 uptrends (some strong).
Smaller Producers: 6 down trend, 3 ranging and 5 up.
Larger Developers: 4 down trend, 4 ranging, 11 up.
Smaller Developers: 5 down trend, 10 ranging, 4 up.
Explorers: 13 down trend, 11 ranging, 10 up.

We note 6 obvious trend changes in the explorers and more in the other categories.  The statistics are raw and actually belittle the effect of the break out since the start of September.  This performance period is part of the basis of our research as we seek to identify the next batch of outperformers in our Ratings Tables.  This has proven to be an excellent predictive method for me over the years.

Our research has also identified numerous ASX listed gold stocks that are and very cheap compared to gold at current prices.  As gold rises further this sector will only get stronger providing amazing returns for our clients and well educated gold bugs.  We believe you can only maximise returns if you have sufficient information and the right analysis across the gold sector.  Without an understanding of gold mining companies you can be led to make simplistic assumptions that allow you to select bad investments.

We believe that the recent changes to the credit markets took the downside risk off and opened the door to this current opportunity.  There is not room for the complex explanations here in this type of article however it is all covered in our newsletter service.

Wise investors avoid risk as a primary motivation.  We saw tremendous risk building in equities a few months back due to the bond markets.  Changes to the Financial Services legislation added pressure and omissions in the European stress tests were apparent to us.  These omissions are now recognised more widely however recent changes in Europe (ECB policy for example) had negated the chance of a sovereign default and markets have thus been in rally mode.  The bond funds are even buying Greek and Spanish debt due to these changes.  Time has been bought and profits are being made.

As I said above the true disconnection occurred back in April so let’s take a look at two telling charts which show exactly what I am talking about.  On this first chart (general market) I have circled the start of the year, the disconnect point in April and the averaged trend since.

Chart 1 XAO All Ordinary Index 12 month - daily

The weakness has been general - hitting Energy (XEJ), XJO 40 Financials (XJO), the 300 All Metals and Mining (XMM), Health Care (XHK), InfoTech (XJO), Materials (XMJ), Industrial (XNJ) and the XJO 50 Telecoms (XTJ).  It is hard to find anything that has done any good except gold since April. 

The gold stocks had been mixed and were not in a clear conclusive trend until the past 4 weeks.  We did highlight some smaller runs earlier this year however what I am talking about now is a “different kettle of fish”.  Here is the XGD chart and I have highlighted the divergent pattern since April.

Chart 2 XGD Gold Index 12 month - daily

As you can see the first circle on left above again marks the start of 2010 when the gold stocks followed the XAO down. This chart is for the same period as the XAO chart – the past 12 months.  The XGD disappointed us into April as it did not keep pace with the XAO which managed to make a new high for the year in April.  I marked a larger circle on both charts around the April highs.

From here the XAO fell sharply and yet the XGD managed to maintain a gentle accumulation uptrend all the way to the breakout point at about 6800.  As prudent investors we are still wary of risk and have outlined how we think it is most likely to play out for our Members as the year progresses.

For now we are delighted with feedback on our newsletter and our coverage of macro trends this year to date.  This is extremely challenging to call and takes a major amount of time to stay across.  Now we face the most exciting investment climate for gold stocks since mid-2005; one which we have waited for here.  This is broad and strong unlike the smaller rallies we have been calling for you all. 

Basically, we have a speculative end rally right through to the leaders – all confirmed across the boards but best to stick with quality.   I have not been this excited about this sector for years – if you are interested sign up and see what is happening for yourself.  Beware the end of the US financial year and of Ireland.  Credit spreads are widening throughout Europe and the bonds have been behaving like they did from mid-2007 since April this year.  Fires are still all around but that is why you are interested in gold – right?

Good trading / investing.
Regards,

Neil Charnock

www.goldoz.com.au

GoldOz has now introduced a major point of difference to many services.  We offer a Newsletter, data base and gold stock comparison tools plus special interest files on gold companies and investment topics.  We have expertise in debt markets and gold equities which gives us a strong edge as independent analysts and market commentators.  GoldOz also has free access area on the history of gold, links to Australian gold stocks and miners plus many other resources.

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.

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