Passed the Test

By: Neil Charnock | Mon, Nov 2, 2009
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Gold survived the first test of the $1,030 level and celebrations will be heard from gold bull camps everywhere. Gold bounced up with vigor from this newly formed, and not yet concrete, support level to reach US$1,047.40 and AUD$1,150 on Thursday night. Friday gold price action was not as negative as we might have expected given the heavy profit taking on the Dow and AUD sell off which pushed gold denominated in Australian Dollars to the highest level since mid October - back over AUD$1,160.

This is a cautious confirmation article. Confirmation that this essential test of support at the older high around US$1,030 has been completed successfully and that upside is more secure now than it was. One has to be aware and wary of false breakouts.

I have no doubts about the long term bull market in gold. A long strong trend is in place and running nicely. However I can now see short term seasonal and general fundamental factors coming into play for gold shares. This is increasing the short term risk substantially so please hear me out. I am not talking about a change in the trend, just the potential of a moderate pull back in gold equities which can be used by nimble traders to protect their capital and increase their share holdings.

Current Conditions

The major players that have been running the equities markets up have been the fund boys and they have done a masterful job. They will progressively close off their books throughout November and the liquidity driving these markets up will gradually dry up in the process. The last few trading days were an early warning sign of this and I believe the risk is increasing of more profit taking pull backs.

December is generally too quiet for the big players to remove meaningful capital from markets so this profit taking has to be accomplished throughout November. They should keep this orderly we hope. This will enable them to book profits for the year. After last year it is essential for these money generation machines to lock in a good result for 2009. The profit taking should be gradual at first building up as the next two or three week's progress.

Then the negativity is likely to build from these camps as they justify their exit strategies and go out shopping with their Christmas bonus in hand. Don't get me wrong I am not complaining about this I am just stating the facts as I see them in order to highlight near term risk.

Supporting this thesis I noted that share price behavior changed dramatically last week as we went into a whipsaw motion on markets. Good news on individual stocks I have been trading very successfully failed to produce expected follow through strength.

I was assisting a family member to lighten up on bank stocks and noted light buying and heavy selling patterns intraday. This is indicative of fund selling - it is hard to hide your footprint when you are an elephant. The moment before the open, on the close and several smaller examples of this phenomenon throughout the day showed highly skilled execution of increased volume selling.

The larger gold stocks have been showing a negative divergence of late. I have been watching these patterns form wondering if we would see the kind of action that transpired last week. These technical signals can deteriorate (gradually disappear) so it is not always wise to react to them while they are forming. This is why initial confirmation of any trend reversal is needed - because waiting a little longer gives you the clarity of the full technical picture. I have included a technical 12 month chart of NCM below to illustrate what I am talking about.

The upward price action will start afresh in the New Year and gold stocks should be well bid once again but for now I see short term danger. I utilize short term strategies to step aside from such risk and to enable me to purchase back more shares than I started with should the prices fall.

If I am right we will get a fantastic buying opportunity over the coming few weeks so I want all the cash I can lay my hands on. If I am wrong and buy signals do not form I will hold my protected capital in safe keeping. My bias is the former - huge buy opportunity over coming weeks and choppy action in the meantime.

Ever present dangers exist in the economy which could erupt at any time and are keeping investors nervous. It is useful to be aware of the dynamic forces that are competing at this time beyond the short term profit needs of the funds. When will equities turn south (2008 style) as the next bear leg rears its ugly capital destroying head?

Three Powerful Market Forces

  1. Debt securitization markets are still dead.
  2. The stimulus packages trillions are still in circulation working their way through the system.
  3. Banks, corporations and funds need to trade and build their balance sheets / books back up.

First of all the debt securitization markets will come back eventually - but who wants to stand there and buy bank debt in this economic climate? This remains the elephant in the room that nobody wants to look at. It is a major constraint to economic growth because the banks cannot "handball" the debt on and lend up to the maximum of their reserve allowance all over again.

Debt allocations from the lenders will be reserved for "A" list clients with strong cash flows and strong balance sheets only. The "B" list will go Begging when this current game of "bid up the hot potato" (rally) comes to a halt some time next year. That will cause a severe round of defaults and financial grief for the international financial markets.

The Governments will have the choice to let things run their course or to inject more stimulus by creating vast amounts of new money at that time. Given their past performance we are likely to see most governments printing all over again however some are getting more and more limited in this regard as their own balance sheets deteriorate.

Stimulus package money is still coursing through the veins of the international financial system - providing time and opportunity for debt reduction and rebalancing of the books. Funds and banks have been trading and booking profits - looking to poach clients with cash flow and gradually writing off some bad debts.

This process can only soften the fall and delay the inevitable but it does provide useful time. This time is only useful however if you are across the issues and able to reposition yourself for safety. The time that it takes for the vast amounts of stimulus money to circulate creating benefit is underestimated by most investors. It may take until mid to end 2010 for this to run its course.

In the mean time we can watch for equities to run and liquidity to stay in shares long enough for a meaningful gold stock recovery / rally in 2010. Sell off are necessary and inevitable too as a port of the process but the thing we have to be wary of is a serious contraction where anything with a bid will be sold. This will include gold and gold stocks at times when it is both profitable for funds and large investors to lock in profits and gain liquidity.

Many investors ride corrections out for lack of reliable methodology. Sometimes they even ride out giant corrections that last 12 - 18 months. Experienced investors utilize the medium and large corrections for powerful portfolio building growth. We see a fantastic buying opportunity dead ahead - get the intelligence you need without burning all your free time...

We running a special offer up to the end of November - bonus time for Gold Member subscribers and I hope you will join us - or at least join in the fun and make some money in the coming months. We are updating the quarterly news and investment tools at present.

Good trading / investing.




Neil Charnock

Author: Neil Charnock

Neil Charnock

GoldOz offers major points of difference to many services. We offer education for all levels of investors including a Newsletter, gold stock comparison tool, an educational portfolio and a running commentary on the gold sector. 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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