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History Never Repeats, Or Does It?Troy Schwensen The following is an extract from the March 06 issue of the Global Speculator which was released on the 6th of April 2006. It provides an update of the precious metals market as at the present time. Anyone that wishes to sign up for the free monthly newsletter can simply send me an email at the address below. Australian Theoretical Price of Gold Update (If you are unfamiliar with the Theoretical Gold price concept you may want to read the following article: http://www.gold-eagle.com/editorials_05/schwensen110205.html) The Current Scenario:  Since last reviewing these numbers the Australian Gold price has hit an historic all time high of just over AUD$820 an ounce as at the end of March 06. The month of February 06 saw very little movement, with the Actual versus Theoretical remaining unchanged. If we were to use the current March closing price of AUD$820 an ounce we would see this gap close another 4% to 38%. At this point I want to take this opportunity to go back in time and show you the same table as at the start of 1970. We can see the Actual versus Theoretical was a similar ratio of 38%. Looking at the official CPI numbers we can see inflation was still relatively tame at 3.73% (as government officials would have us believe it is today at 2.8%). A Snapshot of 1970-1980:  What follows (Indicated in
red) could be a prelude to what we can expect to unfold over
the next 5-10 years. If we look at the CPI numbers and watch
the actual gold price we can see the gold price rising at a faster
rate once the official CPI numbers start to reflect reality.
My theory is the gold price is presently rising in recognition
of an underlying inflation problem that has yet to be embraced
in public circles due to inadequate inflation measures. Once
the inflation becomes chronic it will start to be reflected in
the official numbers which, as we can see from the above data,
is extremely bullish for the gold price. This will be the point
when I believe the gold price rises could become parabolic, closing
the gap between actual and theoretical at a much faster rate.
As public awareness of the inflation problem improves, people's
confidence in fiat money starts to wane resulting in what we
saw the last time this occurred in the 1970's and 80's. Investment
demand for Gold increases to a point where demand significantly
exceeds supply and a fair inflation adjusted value for gold becomes
realized. In fact history shows the theoretical inflation adjusted
value can be exceeded by as much as two times. This occurred
in 1980 at the height of the last Gold boom and in today's terms
that would equate to a Gold price in excess of AUD$4,000 an ounce
(not something I'm personally banking on but conceivably possible
none the less). XAU Index  Source:
Quotes4USince last providing an update on the XAU, the XAU momentarily hit its 150 day moving average at about 121 during early March 06 and has since rebounded sharply to about the 143 mark. The XAU/Gold ratio has recently improved to the upside but is still significantly below the levels achieved when the XAU topped out at close to 155. As per usual there is a fair amount of debate going around at the moment as to whether this is the beginning of the next big move in Gold/Silver shares. I have seen some analysts literally change their views in the space of two weeks. I personally don't believe that it is and my reasons are two fold:
ASX:NEM 2003/2004  This first is the 2003/2004 chart showing the December 2003 peak at approximately $6.80, followed by some volatile behavior which eventually led to a correction resulting in a bottom late January, early February. At the commencement of March we saw a new rally that took Newmont back close to $6.30 breaking the down trend and looking like a new rally in the making. This break out subsequently occurred with Gold re-testing it's high of around US$426 an ounce and briefly saw a new high made at around US$427. I remember many reputable analysts at the time calling for a new rally in gold stocks and I for one must admit I believed them! The thing to note here is the gold shares typically lead the metal not the other way around, so if the metal is making a new high and the Gold shares are failing to emulate this feat (Newmont was still approximately 8% below it's prior high of $6.80), this at the very least requires caution and the prevailing of cool heads. You can see this ended up being a false break out which lead to a heavy decline along with the Gold price that dropped about 12%. The next chart I want to show you is the present scenario. ASX:NEM 2005/2006  Do you notice any similarities? We can see Newmont's share price top out at AUD$8.18 in early February before a solid correction which saw a brief bottom of about AUD$6.60 early March. What follows is a very similar sharp rally which has recently seen a breakout corresponding with Gold hitting a new high of close to US$590 per ounce. On this occasion Newmont is close to 7 % off its February highs despite the Gold price surging to new heights. Does this definitively mean that the present rally in Gold shares is doomed? Absolutely not!! This is just an observation and a warning that caution may be appropriate at this time. Only time will tell how it all transpires.
It is important to be aware that these indicators are not infallible. This is why I strongly encourage people who have a long term precious metals portfolio in place, to always keep a position in the market (50% +) no matter what. Taking some profits in the heat of the market I believe is prudent and frees up cash to add to your positions when we get the inevitable sell offs. Over the coming 1-2 weeks I would not be surprised to see the XAU rally in the short term, perhaps back to the 145-150 mark, only to break back down again and finish somewhere around 105-115 with a sharp pull back in the Gold price (10%+). This correction is likely to be severe and brief (Somewhat like the correction in June-August 2002) and will see a lot of late comers panicked out of their positions. The Australian Mid Tier Producers Index (AMTP)  Source: Internal ChartThe AMTP index, like the XAU, is also presently surging higher. Despite healthy increases in the Australian Gold price, we can see looking at the top section of the chart that the shares have largely underperformed the metal. Whilst the Australian Gold shares look relatively cheap against their North American cousins, I am going to hold off on recommending any companies until we see the index move closer to the 150 day moving average which will now be in the 175-185 range (165-175 last month). I don't believe the Australian Gold shares will be completely immune to the correction I am expecting in the North American miners but believe that the correction will be much shorter and the recovery a lot swifter. I still maintain Australian Gold mining companies are likely to outperform the North American miners for the remainder of 2006 as per the performance in 2002. The Australian Gold price is now trading at levels that should translate into some pretty useful profits for the local gold miners. The Australian dollar, which is obviously an important component of the Australian Gold price, I believe is going to continue to struggle due to the continuing narrowing of interest rate differentials. My longer term target for the AMTP is still in the 270-300 range over the next 9 to18 months. I don't expect the underperformance of Australian Gold mining companies to last much longer and have consequently focused a lot of my attention on this market. The Canadian Developing Gold Juniors (CDGJ)  Source: Internal ChartI have added the above index to the newsletter so we have a yard stick to follow as far as our Canadian model portfolio goes. Looking at the chart we can see the CDGJ is trading well above the 150 day moving average and appears to have peaked within the broadening pattern we have it trading in (Denoted by the blue lines). Given the stage the index is in I remain very cautious about adding positions at the present time. We will leave that to the bravados of the market. I expect a pull back of at least 25-30% taking us back to the 400-420 mark before considering adding positions. Closing comments In my experience sitting on your hands whilst watching the resource sector ebb and flow in a volatile fashion is one of the hardest things to do. The effects of fear and greed influence the market participant in many ways. If you are fully invested there is the risk of losing objectivity and adding to positions in the belief that your good fortune will continue unabated. On the flip side you have the market participant that exited out of a large portion of their position early on in the piece or doesn't have a precious metals portfolio (late comers). These people become paranoid about the market leaving without them. They enter the market now out of fear of being left behind. Having at least 50% of your portfolio in the market at all times regardless of the circumstances gives you a sense of objectivity. I must admit I envy the short term trader that can successfully negotiate these week to week movements and capitalize from them. At this point in time your humble editor much prefers to play a waiting game and let the market come to him, before adding to positions. I have witnessed similar market conditions before and have burnt my fingers (namely early 2004). It is much better to wait until the risk reward is more in your favor which comes when the market momentarily turns its back on the precious metals sector and the panic button is hit. If you are fortunate enough to have a precious metals portfolio in place, these are excellent times to continue to do some profit taking into the strength as your financial objectives are achieved and wait for an inevitable correction. Troy Schwensen CPA Troy Schwensen
is a full time investor/Trader who spent 8 years in the Accounting
and Finance industry which included roles with blue chip Australian
companies such as Goodman Fielder and Fosters where he spent three
years as a Senior Business Analyst. He made a decision to leave
this industry in 2002 after discovering a long term opportunity
to invest and trade in the precious metals market where he has
since used his analytical skills to build a sound working knowledge
of the sector and its comprising companies. 321gold Inc |
