ASX XGD Breakout – Gold Rules!

By: Neil_Charnock

With several key gold stock “break outs” being reported around the globe at present – I have another confirmation for you all – the Australian gold index has broken to the upside as well. Physical gold is a little overbought short term – very short term but I don't expect a deep correction or a long correction just a dip – for now let's look at the companies because they often show strength before physical metals launch. The important 5000 point level has now been broken in the ASX Gold Index – the little known XGD Index (little known even in Australia ) and here is a chart thanks to our friends at Yahoo Finance. You will note the strong RSI level achieved back in April at +80 which warned us this was possible - and now the most important test is the break at the 5000 level.

The 50 day MA as shown in red is trending up and all this is happening despite record strength in the Australian currency – a not so small issue that would have seen these gold stocks in the doldrums over the past few years. Not this time though, savvy investors that have loaded up on these stocks as they obviously believe the strength in the AUD is actually not a major issue… here is the XGD chart to start with and I see an uptrend that is now showing signs of the beginning of an acceleration…

I pondered the question of the high currency and strong ASX gold share sector – I let it lay for a few days until it suddenly hit me – obvious when you think about it –yes the strong AUD has been an issue in the past and it was negative. The difference this time is that gold has held this level for some time and any rise from here, which now looks increasingly like a high probability, will see direct impact on bottom line profits. Of course this does not apply to the lower percentile of the production cost operators – but the higher two cost quartile producers.

When gold was back under $AUD600 before the first half of 2005 the impact of a high dollar was different. Many mines were marginal at that price after strong cost increases so any drop in the price of gold or rise in our dollar at the time resulted in heavy selling on the XGD and any gold related stocks not represented in that index. Now the outlook is far different. While costs are still high - most mines, even now, have a profit margin at the $AUD750 level and the probability of $AUD900 and above is looking good in the medium term. Most gold miners here in Australia are not specialist gold producers and base metals have held up well with the recent exception of nickel. These base metals have so far, out performed gold in AUD terms so profit margins are healthy and looking to get even better for these diversified miners too.

I also have the sense that the rising mining stock phenomenon is going to become more widely accepted in mainstream investment circles over the next two years – most investors join the party late and this time will most likely be no different. Not that I think that two years will see the end of these conditions – I do have it marked as a time to watch for a shorter term peak and an investment blow off of significance would alert me to that potential.

I have said it before and will repeat myself briefly now – the gold bull is young in Australia . Any serious strength from now on will result in a catch up for this ASX sector and the stocks have been behaving like this is going to happen – I have seen it all before.

Inflation??

I have read learned writers lately – who have stated there is no gold bull so far and the whole rally has been a function of devaluation of the USD. What they are saying is that there has been no gold bull in the USA so far and the reasoning is logical if you analyze it in detail… the relative value of the USD is apparently falling faster than the gold price is rising. Dollar collapse not gold bull. Also another theory going around that it is all just hedge fund speculation.

I see both sides of the argument - however what is real is the gold and resource stock bull market because of the leverage they have enjoyed as compared to dollar dilution via the printing press and compared to any loss of purchasing power on the global currency exchanges. So does it all matter as to why metals have risen? Not to me - all that matters is activity and gold stock appreciation that I can trade / invest in and make profits from. Now - back to their discussion…

In fact when you break it all down the price of gold should be much higher when compared to real estate for instance which – in USD terms and AUD terms – have risen faster than the purchasing power value the respective currencies have fallen. I bought a house in the Eastern suburbs of Melbourne Australia in 1982 for about $40,000 which is now worth, or should I say would sell for around $400,000+ so we have seen 10X appreciation of this asset class over this period. So gold would also have a 10X potential right now under this example – and gold was about $600+ in 1980 so $6000 would not be out of the question you might think. It all depends on what you compare this inflation to – don't choose electrical goods if you want a nice high expectation as there has been deflation in this area – it is all relative.

So is the value of the AUD or USD worth 1/10 of its value in 1982? Not compared to wages it is not – especially as compared to disposable incomes as these have fallen significantly – things are much tighter for most families now thanks to relatively static tax thresholds and GST and inflation in food & energy costs.

In my view we have monetary inflation caused by the last 3.5 decades of monetary policy – then we also have cost push inflation which is a local factor in mature economies – globalization and cheap wage zones distort non local production goods (non food and energy) and this is all mixed. Hence people get confused when the Governments tell them inflation is low.

The gold bull is also real to me because the price is now rising in my local currency and this is now a global phenomenon (on average over the last two years) – the price of the shares in gold stocks are now rising again here and I can trade or invest and make money from this again too. This has been happening for more than 3 years now so I count it as a secular (longer term) bull market – I have participated since 2001 in this rally and so this is real to me.

Do I care if money is being printed faster than the price of gold and silver are rising?? Yes – and I do sincerely - I thank those who have been putting forward this type of analysis as well – I care because it points to even more potential upside as the precious metal prices catch up to the “printed” inflation and relative value levels caused by monetary policy. They most certainly can catch up because there is no particular labor saving via mass production possible in the capital intensive mining industry – it is still expensive to win gold and silver from the earth in China or anywhere and drilling / risk / production facilities etc are expensive too. Note: if the price stays static production will drop off further exacerbating the supply imbalance currently made up by the Central Banks.

Gold and silver are rare and there is no getting away from that either. There is re-weighting of foreign reserves in favor of gold underway in some Countries too - and this can produce massive demand and price appreciation. New industrial and biocide applications for silver will continue and there is always a chance of the re-monetization of silver in Mexico for instance. Supply is not known and this is a very interesting market to observe.

Is it going to be new investment demand or more currency devaluation that causes the POG and silver to rise? I think the former because the new inflation is selective which my main point here. Central Banks can print money but they cannot control how it ends up being invested. The currency devaluation is likely to add to this demand which would be a by-product of the printing press activity – the real interest rate return minus inflation will continue to be negative which is great for gold.

The Aussie Dollar

Those investors in the USA that listened to me (or others) and invested in Australia have had a double whammy profit by now due to the AUD strength. Now for those investors still intending to invest in Australia from the USA – here is some AUD analysis for you direct from the July 2 nd GoldOz Newsletter by Colin Emery.

“We were looking at strength in the Australian dollar last time we had a look – strength over the coming months and it hasn't disappointed. Well maybe it has disappointed Australian exporters and manufacturers and tourists. But it has reached a crucial long term point up here at 0.8750/ 0.8800 as this was a high way back in 1988 so let's have look.”

Excerpt from same commentary – “The short term daily shows a very overbought RSI at the bottom at 77.68 but note the longer term trend line 1 at the bottom is up and is currently at 0.8250 – coinciding with the line 2 on the Monthly chart – so that's a very solid support area. Now although I don't think we will see it you never know what may happen to get that target reached – for example a change of Government? I have two other support lines 2 and 3 which I think are more likely the targets for the pullback 0.8550 and 0.8410. But remember the longer term the trend is up and I have a target of 0.9250 for Xmas. A few interest rate rises will ensure that but I think you will see the AUD consolidate between 0.8950 and 0.8550 for the bulk of the year.”

Next week Colin Emery is going to provide a review of the direction of the US Dollar and interest rates for our US friends and note that Neil Charnock at GoldOz can now assist US investors with an impartial reference to an online broker that has just opened up trading of the ASX to you all over there in the land of the Red, White and Blue .

This, along with the AUD analysis above will assist you with any timing of investment funds transfer to Australia - to assist you to hedge some of your wealth and capital outside the US if this is what you seek to do. I have two full service brokers I can refer you to if you qualify as a senior client (min $AUD100k) and wish me to do that for you. The last few discount Gold Oz Weekly Newsletter specials at big discounts will probably run out fast as everybody seems to wait until the last minute these days so - first in best dressed as they say.

Should you wish to participate in the Australian Resource boom and make money here you should consider a visit to www.goldoz.com.au and to purchase a subscription to our Newsletter.

Good trading / investing.
Regards,

By Neil Charnock
www.goldoz.com.au

Copyright 2007 Neil Charnock. All Rights Reserved.
REGISTERED ADVISOR – WHO THE ADVICE COMES FROM IN THE GOLDOZ NEWSLETTER: Colin Emery is currently a Branch Manger and Senior Client Adviser of a Stock Broking Company in Queensland Australia. Prior to his work in Share broking he spent nearly 20 years in Senior Management and Trading positions in Treasuries for major International Banks such as Bank Of America, Banque Indosuez, Barclays Bank, Bank Of Tokyo and Deutsche Bank AG. He spent a number of years as a Senior trader in New York , London , Singapore , Tokyo and Hong Kong with these institutions. He also was Global Head of emerging energy, emission and commodity products for the leading Energy and Commodities brokerage firm of Prebon Yamane Ltd – Prebon Energy for four years before moving to Cairns in 2003 to focus on the Stock market and Private consulting work. The private consulting and advisory work currently undertaken is with companies involved in Resources, Energy and Renewable Energy and Forestry.

Neil Charnock is not a registered investment advisor. He is a 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 my current opinion only, further more conditions may cause my 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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