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Gold Bull Run is Still Happening

Commodities / Gold and Silver 2012 Aug 27, 2012 - 10:00 AM GMT

By: Neil_Charnock


Best Financial Markets Analysis ArticleThe gold Bull Run of 11 years is still happening; make no mistake about that. The fact that the USD gold price has held above the $1525 level is a strong indicator. Seasonal factors and other strong indicators tell me this long gold price consolidation period is nearing its conclusion at last. Gold has formed a new higher base from which it can launch higher.

Conditions for gold remain positive because the sovereign debt crisis is still in full swing. The global de-leveraging is still in progress, its capital destruction still offsetting fresh monetary inflation. This deflationary offset is only encouraging governments to continue with their Keynesian printing press 'solution' and thus maintaining a steady long lived incubation period for the eventual parabolic rise in gold.

That will be the third phase for gold when the public wakes up and it may happen for longer than most investors imagine. The encouragement of printing press excess I speak of is the current lack of inflation in the face of all that printing. The USD has been gradually losing a once bullet proof status as worlds reserve currency. This is a major event for the world financial system and international trade.

Once the transition away from the USD for trade is complete the living standards for my US friends will surely be lower. The value of gold in USD's will be much higher. Gold will go up in all currencies. US citizens need to look at gold and need to look at international gold stock investment to diversify and protect their global purchasing power. It will be highly beneficial for US investors to repatriate cash back home after the USD falls so selling offshore gold stocks will provide a double whammy.

Forex flows will be volatile so nimble investors will maximize their profits over the course of the gold stock mania. We are not there yet however we are at a very important point in history for gold so it is certainly time for all investors to be looking at this opportunity no matter where they live.

Confusion and indecision still control the broader stock market sentiment and who can blame investors. The 'risk off' safety trade has dominated markets this year to date pushing money into US bonds and to a lesser extent some other markets. Money has flowed into AAA Aussie bonds keeping the Aussie dollar (AUD) higher, even though commodities have clearly come off the boil.

The US trade is easy to justify, despite the problems the US faces, the US markets are highly liquid. I would also back the USA any time to eventually get through the major issues because Americans have the proven ability to overcome difficulties. The 'risk off' capital flows I refer to above however are short term and the US faces very serious problems even if we have seen some improvement.

What I really like is the Americans never say die attitude and their strategic move towards internal supply of cheaper energy over coming years. What really bothers me are the other headwinds blowing in from Europe (banking and sovereign crisis), Japan (trade, debt levels, demographic issues) and for other reasons the Middle East. Systemic risk is extreme; so much so I actually expect major events to unfold that will change the world as we know it. The abyss does have a bottom, even though we are in a massive cycle transition this is not the end of the world as some would have you believe. Bubbles come and go; at the moment bonds are very expensive compared to shares. Discovering where the capital flows will head next is the basis for sound investing.

Markets now rally on some improvement of numbers out of the USA. They rally on added stimulus within China, hope of QE in the USA and that the Euro Zone can somehow solve the structural problems they face despite seemingly impossible odds. Europe has suffered massive outflows of capital. Market conditions there are still excellent for gold, the fundamental picture has strengthened. Interest rates are still tracking well below inflation; this is referred to as negative interest rates. I also argue this is a form of QE.

The chase for alpha (yield) is on; this sets up an interesting scenario for gold stocks. As gold rises faster than costs now they will increase dividends and attract more and more attention. Capital growth will be the other driver of upside for gold stocks as gold finally resumes its upward momentum. Funds are chasing a return over the coming months and the beaten down gold sector seems ripe for a good hard rally to provide them with a nice Christmas bonus.

The gold bull has paused over recent months and so there has been much debate about this subject. The sovereign debt crisis and the global de-leveraging process rage on and on. Smoke and mirrors are still being deployed to promote hope in the mistaken belief that consumers might return to strengthen growth if their sentiment improves enough. This is an important point as it is at the heart of why gold will continue to rally.

Keynesian Failure: gold is not finished

Here is an old quote; I have regurgitated it again as it seems very important right now. "The Queen of England famously asked her economic advisors why none of them had seen "it" (GFC) coming." Understanding and adjusting for the evolving market dynamics is apparently beyond Keynesian economics. Otherwise the Queens economists would certainly have seen "it" coming. The methodology is flawed and thus you get false signals for Central Bank and government intervention.

Keynes never stated that continual deficits were acceptable, his theory has been misused and he has also been misquoted on gold. The problem is that his radical idea that governments should spend money they don't have passed its use by date long ago. He came along in the 1930's at the beginning of the long wave debt cycle and spearheaded the idea of stimulus and government intervention in the business cycle. His thinking has permeated modern economics and herein lays the problem. This problem now belongs to all of us however it is great for gold.

The theory worked in the world of the 1930's at the beginning of the debt cycle. However now we are at the end of the debt cycle, in a debt bubble. Governments became addicted to 'big' government and spending. Keynes did not anticipate that governments would succumb to the intoxicating urge to seek re-election by cherry picking his theory and would be constantly stimulating via deficits for popular effect. The Queens economists were trained in a theory that worked on, or was derived from an old model.

Hyman Minsky tried to tell the other economists about the error of their ways. From Wikipedia: "Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous (editor: originating from within) to financial markets." In other words he took greater notice of the business cycle, investor sentiment and crisis. This is more akin to market trader's tools. He later argued against excessive debt accumulation and deregulation - if only he had been more closely followed, yet the main stream Keynesian teaching still persists.

Conventional macroeconomics still insists on being 'right' without understanding the model is broken and without incorporating the flaws of politicians and political agendas. They will soon push this debt bubble to an explosion or collapse the way they are going. Gold has to benefit and this is the big "why" it has further to run. Investors that saw this crisis coming over recent years increasingly turned to gold. We all saw it coming however the trick was to get in early and articulate the reasons for your position. Without certainty you can get shaken from a correct position.

Every aspect of my analysis highlights that "it" is still happening. From the epicentre currently in Europe to capital flows and government rhetoric / policy "the song remains the same". I cover the debt crisis as the core of my top down analysis and have recently tried to discover how economists could be so wrong.

The proof they are hopelessly lost is on the score card in case you have not been watching and analysing this aspect of the world we live in. The Australian RBA was still pushing up rates to manage inflation and the Australian economy in February and March 2008. They did not lower rates at all until September 2008 (25bps) and then October when they started to panic after the event. Since the GFC "ended" (I still have seen no proof of this "end") the Australian government stimulated with massive successive deficits which added drastically to GDP here and yet the RBA had to 'cool' the economy here by putting up rates.

This is akin to driving with one foot on the brakes and one on the accelerator. This is just further proof that the current management of economies is flawed and therefore no solution will come until these flaws are addressed. I wonder how long the AAA rating on the UK and Australia can last. Here in Australia we face a housing bubble, constrained bank lending, an unfolding sub-prime crisis and slowing commodity prices. The wider problem is the banking crisis worldwide; banks are going home they are not rolling over syndicated loans or providing the same level of wholesale funding offshore and this has obvious implications.

This crisis is still unfolding and this is why gold has a long way to run. The debt bubble has not been resolved. The structural deficiencies in the Euro Zone have not been solved. The sovereign debt crisis is alive and kicking. The mis-valuation of the gold stocks at this time has also been quantified in my work - you can Google "How undervalued Part 1 or Part 2 if you want access to this research. I will also confidently add that this is a major distortion which must resolve in due course. Gold is still very cheap at under two times the peak achieved 32 years ago in 1980.

It is funny how people can 'adjust' for property at 14 to 15 times the 1982 price levels (in Australia) and do not allow any inflation adjustment for gold. Then, despite a failure to look at total costs and do any extensive research, they assume gold is in a bubble. That price move over recent years was just a catch up in inflated terms for gold which is at base value here. Total costs are circa US$1200 for the industry when you add taxes, royalties, replacement of resources and rehabilitation.

Back to the gold stocks the picture is quite fantastic. During May, on the fall I highlighted for Members that a further fall was coming which I was able to provide a blow by blow prediction and account as it unfolded. This has enabled us to layer in some fantastic trades right on the money over recent weeks and this now continues. Despite beginning our Funds during the most recent highs on the chart below, we are currently up over 10% during this period. The opportunity is stupendous as the following chart indicates. I draw your attention to the RSI indicator in the box below the index.

Note the red infill during 2008 preceded the last of the fall which was followed by massive profit gains. We have now completed a very similar pattern and believe the probability now favours that we are at the take-off area once again after an oversold low. The junior index shows a similar picture and the producers look set to rise. We believe we have enough signals and analysis to support our view to go public now; that this index is either just past it's low or has extremely limited down side risk.

Australian Gold Emerging Producers Index

As you see above we are oversold. You make money investing by buying cheap and being patient. It is a case of trusting your analysis and waiting for over valuation where you then need to sell. Clearly this is an attractive entry point. We have followed the weighted XGD here and the picture is also clear. Our educational portfolio has shown Members how important weightings and stock selection are. We run two Funds; one conservative and the other aggressive. As you would expect the aggressive Fund has done worse during the long downward spiral since they both began in February 2011.

Capital preservation techniques have enabled us to stay invested right through the fall registering a profit to this date on both Funds. They started at slightly different dates yet FundA "Aggressive" is up 7% (XGD down 23.2% during same period) while FundB "Conservative" is already up 10.67% (XGD down 25.7% during same period). These returns have been achieved to the bottom of this long bear market; imagine what they will look like at the next top.

We believe the global set up for gold stocks is exciting right now and the same goes for gold. Our Memberships are on special for the first time in a long time to celebrate this opportunity, until the end of September. Details are on the front page of our site if you have interest. We see some extra special set ups for major capital appreciation in the coming months and years in some cases.

Good trading / investing.


Neil Charnock

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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