Times are as uncertain as they have ever been; this creates a fertile climate for a precious metals bull. As investors we have to study money flows, trends and sentiment in order to stay alive and prosper in this game. There are a number of things we can be certain about: 1. Inflation will continue (increase of money supply). 2. Global liquidity is MASSIVE. All this liquidity has to go somewhere. 3. Volatility including; price, sentiment and geopolitical issues will continue. 4. Chinese and Indian workers want a piece of the Western lifestyle. 5. Big market players (including Governments) do not have our best interests in mind. I suggest to you that the area of highest profit potential for investors during 2007 will come from second guessing where all that liquidity will go next so this is the purpose of this article. Let us examine which trends are over and which trends will continue. I have delayed this article and release / update of certain products while I have done my best to absorb the big picture in global economics and metals over the past few weeks. I have interest in precious metals and some in base metal stocks so I have been forced to step back and review the market forces in addition to fundamental and technical issues in the interest of offering a helpful essay to start the New Year. The intention is to offer a viable investment strategy to all and to exploit it as proficiently as I can as well. I have had my ear to the ground so to speak. This is an era of unprecedented uncertainty yet the masses, although vaguely cognizant, are yet to wake up to the degree of disequilibrium in our financial systems or the opportunities on offer. Now we need to work out where the money flow is headed next to it may be helpful to consider where it has been. Money flows In 2006 the money flows have been directed at China, infrastructure development in Asia, the general stock markets, base metals, uranium and new mine / smelting investment amongst some other sectors. The US housing and oil / gas bubbles popped in 2006. Gold and silver were fairly flat after their initial rallies as they absorbed new higher price levels. Interest rates are likely to rise in response to inflation or to attract foreign capital flows into the US. Alternately rates may remain fairly static at best as inflation continues to remain hidden and economic weakness prohibits rising rates so a bond rally would seem unlikely. The Fed remains in between a rock and a hard place. So, assuming bonds and property are poor investments in 2007, perhaps the general equities may also be topping… where is the current opportunity? The contrarian in me indicates commodities such as gold, silver, PGM’s and even copper may not be as poor as you would expect. If that was a top in copper it was the strangest top I have ever seen. Only copper and oil have dragged down the CRB index to date with aluminum, nickel, zinc and lead all near record highs. The resource sensitive Australian dollar is near record highs. Copper is being talked and sold down with gloomy US housing figures yet US housing is not the key to copper prices… China is. Sure copper prices are unlikely to reach the parabolic heights of 2006 however if energy and other cost pressures reduce as is the norm for this part of the commodities cycle the resource stocks, including copper equities may be far better investments than investors expect as well. Copper has run from 80c in 2002 to $4 per pound in 2006, a classic parabola is evident on the 5 year chart so it was more than a little overcooked. Sentiment drove the violent rise above real demand as supply was apparently hidden from the market to accentuate the supply deficit and price squeeze. Since the recent price collapse in copper, sentiment has now reversed and so a counter rally is on the cards, perhaps from somewhere near this level as it has re-traced to the Fib 50% area for the total rally and near the 61.8% mark for the recent leg. Precious metals are not a hot market either which bodes well for them through 2007; the current fractal pattern indicates more sideways action until the second half of the year. We are very close to the 300day moving average once again; it is currently just under $600 per ounce so we are near the bottom of this trading range. Gold has just completed the 50dma crossover above the 200dma which is a significant technical event called a “golden cross”. Selective resource share investment? I wish to share a very real opportunity that now presents itself. I penned an article about the beginning of the last quarter of 2006 named “Strong Historical Precedent in Resources Bourse”. This article examined the then current sentiment, the potential housing bust in the US (which had not as yet eventuated), global metal supply / demand outlook, cumulative mathematics… but most importantly, the historical evaluation of ASX resource stock behavior in times of post commodity price peak. This has turned out to be very important at this point in time as I shall now attempt to illustrate. At the time of that article the housing bubble had not popped, visible metal stocks were still falling and yet base metal prices were apparently topping out according to some self proclaimed experts. Here is an excerpt of the article; “ In the real world we have seen all this before… we have a strong precedent. Three separate examples in the last 20 years indicate a potential outcome in the near future… Let’s take a brief snapshot look at the 1985 to 2002 period. Base metals rocketed higher in the late 80’s and share prices lagged however as the higher earnings filtered through to the public the resources index rallied forward in a gradual uptrend, despite commodity prices continuing to fall off their highs. Smaller spikes in base metals ran through 93 and 94 with and then in 99/00 and the pattern was the same again… An initial hit on share prices as metals came off their highs (just happened) followed by a renewed uptrend in the resource equities on the ASX”. End quote. The paragraphs above have never been truer. Profitable companies that mine these high priced commodities have been selling their product into the late 2006 and current price spikes and the bulk of these results have yet to be announced. P:E ratios of under 10 are still evident so it is hard to conclude these stocks have topped just because the metals have. The strong precedent mentioned above will be very useful as we look forward and in order to make sane and profitable investment decisions in 2007. In Australia, during 2006 we saw our local currency appreciate 5% against the USD (which is still the key measure of commodities in global terms). Commodity prices in Australian dollar terms were a huge boost for Australian Stock eXchange (ASX) traded resource companies in 2006. In summary, many of our leading producers still trade at low P:E ratios; even though 2006 spike prices are behind us now these companies are very profitable and are also working hard to exploit market fundamentals. There have been numerous success stories as key producers expanded and many smaller companies raised money in order to advance projects in precious / base metals, uranium and rare earths. I see potential profits in many companies on the ASX short term and through this year; the trick is (more than ever) to select stocks very carefully. If anybody is interested we can now provide a leading broker “star rated” version of our spread sheet on request at our web site. The leading ASX PM stocks are covered. 2007 General Outlook We live in very interesting times, never before have we seen the modernization of such huge populations (Asia) in the midst of maturation of advanced economies at the end of massive debt cycles. The degree to which Governments and Corporations select and massage statistics has risen to a new high (or low depending on how you view it). We have never witnessed the attempted passing of a global reserve fiat currency system to a diversified fiat system either. This is the current balancing act and is subject to global market forces. We are seeing a very careful and measured diversification away from the USD and this will continue. Despite what government figures say we are in the midst of an inflationary period driven by currency debasement and now an increasing scarcity of certain resources, a world wide phenomenon. Bubbles form and pop with increasing regularity in this volatile investment climate. Technical indicators are an art form and can be (are being) manipulated by combinations of various and changing market forces in a series of price squeezes exacerbating massive bubbles. This volatility is both dangerous and an opportunity at the same time. At least things are not boring although a greater degree of honesty (read transparency) in financial markets would make for a more level playing field. Alas this is not in human nature or the interest of individual market players, whether it is a Central Bank trying to manage diversification of currency reserves, a Government trying to get re-elected or a commodity user trying to manage out of control cost increases. There are countless examples of this but one of the most disturbing issues for smaller investors is the OTC trade and speculative flows which never make it into “official” statistics and therefore obscure actual trend changes or maturation of bubbles. On the supply side we have seen a continued run down of most metal stocks, very thin supply now measured in days rather than weeks. New supply will only now begin to gradually swamp these stock inventories over the next few years as has happened in commodity cycles before. I have read that all the gold that was ever mined is still available however I consider that supply is actually very limited as all the gold ever mined is smaller than a 23 meter cube, estimations of silver supply run at less than double this. Silver is used in ever increasing industrial applications and has potential use as money particularly if popular sentiment wins the day in countries such as Mexico where only the Central Bank has blocked this natural right of Mexicans to use honest money (honest in the sense of “store of wealth” function). As a store of wealth and hedge against uncertainty and currency debasement / upheaval there are no comparisons to gold and silver. Australian economy: Australia is still experiencing inflationary conditions. A simple loaf of bread was 41c in 1975 and now costs $2.75 up 570% in 30 years. When I got married in late 1978 it cost just over $30 to feed the two of us. Now with two teenagers in the house we spend in well in excess of $300 per week, food has become one of the major expenses of the masses. The basics now eat up most incomes and two incomes are required to run most households. This has a social effect which is detrimental to the family; the housing bubble has not helped housing affordability pushing mortgages to absurd levels. Money is not the root of all evil it is a tool, however fiat currency is certainly a contributor as it is simply unethical in the extreme. The El-Nino (weather influencing ocean currents / temperatures) is showing signs it may be maturing and breaking up which may bring relief to drought conditions here. This has important GDP implications for Australia which relies on Agriculture and Mining. The current third test of the AUD: USD 80c level may succeed and head toward longer term highs of 90c last reached at the end of January 1989 but only if resource activity and demand remains firm. The converse is also possible, drought continues, physical base metal prices come off a little across the board and the AUD comes down with a dull thud which would be great for miners here. With the strength of the resource stock boom set to continue in “bumpy” fashion we should see another excellent year for our miners in 2007 . Selective investment in this sector was very profitable in 2006 and this is set to continue in 2007 however this is not a parabola situation. The current correction in stock, high metal prices and yet to be reported quarterly reports are producing some very useful investment opportunities. Gold and silver stocks will do even better than the other miners in the second half of the year in my opinion. Don’t get shaken out, get informed and buy while blood is in the streets. Metals: I expect to see strong zinc, lead, silver, gold and nickel prices continue, not necessarily higher though. I believe the correction in copper is maturing and as I have said before these are still boom condition prices for most copper miners so they remain attractive, more so since their price correction. Demand should remain strong for all these metals despite flat conditions in the US, should be more than offset by Asia, the Middle East and other smaller oil producing nations which spend higher revenues on infrastructure development. More general Australian resource coverage factors to follow next article. We still offer very useful products for the busy or under informed investor, full recommendation service now available. Purchases can be made via our web site www.goldoz.com.au. A belated Happy New Year to all Kitco readers, I hope you all have a healthy productive and prosperous 2007. Good trading / investing.
Regards,
Neil Charnock Email info@goldoz.com.au | 