Why I’m Banging the Drum on Gold Stocks

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It’s nearly the end of another week and there’s still no resolution on Greece. Both sides think they have the trump card. Both sides are playing a very dangerous game.

The market doesn’t care anyway…it thinks there will be a compromise. If not, the fallout from a ‘Grexit’ will be contained. There is nothing to see here!

Closer to home, it’s the same problem in a difference guise. You may have missed it, but our northern neighbour Indonesia isn’t just making headlines for its determination to execute drug smugglers…reformed or otherwise.

On Tuesday, it executed an interest rate cut, joining Australia, Singapore and India in the Asian sphere of the currency wars. You can throw China into the mix too, if you want to view the recent cut to its reserve requirement ratio as a form of easing.

That’s right, dear reader, the currency wars are heating up…again. But China doesn’t exactly have all the armaments at its disposal to fight this war. It’s currency, the yuan, is pegged to the US dollar. That means it’s hostage to US monetary policy…unless it breaks the peg.

There are increasing concerns China will do just that in order to try and curb its economic slowdown. If it does it won’t be pretty. Reuters, via The Financial Review, reports that:

‘…analysts reckon things would get ugly only if China makes some kind of dramatic move, such as shifting its mid-point sharply weaker or moving away from shadowing the dollar to tracking a more broad basket of currencies.

That could spark currency volatility and weakness, massive capital outflows and force them to raise rates.

Are you following the logic, as twisted as it is? That is, in an attempt to boost the economy, China could dramatically weaken the yuan, which would lead to massive capital outflows and cause an increase in interest rates!

It’s a crazy argument. But it just goes to show how delicate the currency war game is. Because if you lower rates too much it can lead to capital flight, which means you have to turn around and raise rates again.

That’s why China is in trouble. Not only is it trying to manage a deflating credit bubble…it’s also trying to deal with a currency pegged to the greenback…the strongest currency in the world right now and likely to keep getting stronger.

It’s not something the US is entirely comfortable with. A recent Bloomberg article asks, ‘Did the Fed just enter the currency wars?’ This followed the release of the Fed minutes, which showed they are concerned about the strength of the Greenback…concern which may see them hold off on interest rate rises.

Even Warren Buffet is joining in the debate about the currency wars. The same Bloomberg article says that,

The currency’s strength makes it “very tough” for the Fed to lift interest rates this year, Buffett, the chairman of Berkshire Hathaway Inc., said this month.

–The message is that every country wants a weaker currency. They’re all trying to steal an ever diminishing amount of demand from rival countries. That’s why it’s called a ‘war’.

But if every country wants to devalue their currency against everyone else, who benefits? That’s the thing…there are very few winners in an all-out currency war.

This is why I’ve been watching gold lately. More specifically, it’s why I’ve been watching gold denominated in Aussie dollars. Thanks to tumbling commodity prices and an increasingly incompetent government, the Aussie dollar is under pressure.

Let me show you a chart and you’ll see what I mean. As you may know, gold in US dollars, which is the ‘price’ of gold that nearly everyone watches, has been lacklustre. After running up to US$1,300 an ounce in January, it’s fallen around US$100, sending the mood towards gold bearish again.

But check it out in Aussie dollar terms…the price action is very bullish. In fact, there’s an increasing probability that you’ve seen a major change in trend in Aussie dollar gold. This trend change occurred in early December.

Let me explain…

Earlier this week, I asked my colleague Jason McIntosh to write something for Sound Money. Sound Investments. subscribers to help them understand and identify when a change in trend is underway.

I hope they won’t mind if I let you in on the discussion, because it’s important to see what’s going on with Aussie dollar gold right now.

Jason is a veteran trader and wrote the code for the Quant Trader program. He knows a thing or two about price trends. Since launching Quant Trader in November 2014, this trading service has received rave reviews from members.

One of Quant Trader’s indicators, along with a bunch of other proprietary indicators that go into the mix when the system generates buy signals, is a moving average crossover.

Specifically, Jason looks at the 50 day and 100 day moving average. When the 50 day MA crosses above the 100 day MA, it’s a decent indication that you’re seeing a change in trend. As you can see in the chart above, that happened with Aussie dollar gold in December.

In fact, Jason’s Quant Trader program generated a buy signal for gold around that time…when nearly everyone else was bearish on the metal or focusing on bank stocks or something. It was a great signal, because gold subsequently advanced strongly.


(By the way, if you want to trial Quant Trader for 30 days or find out more about how it works, click here)

The point to note here is that gold is potentially putting in a major long term bottom. That’s why I think it’s time to sit up and take notice of the trend change, and see how you can make big gains from it in the years ahead.

I want to point out though that this indicator is not fool proof — no indicators are. To see what I mean, check out this longer term chart of Aussie dollar gold below. As you can see, there was a very brief crossover of the moving averages in mid-2013…and again in early 2014.

On both occasions the rally stalled and the moving averages crossed back down, confirming the downtrend.

But this time around, the strong initial rally only had a brief pause. The gold price then shot higher again. It’s correcting some of those gains now but you can see from the moving averages that the trend has turned.

That’s why I think this is a perfect opportunity to take a closer look at the gold sector. Many Aussie gold miners are now showing similar characteristics to the gold price chart above. That is, the price action looks bullish.

–This is why I’ve put together a special presentation on gold for you. I’ve annoyed a lot of people in the office this week to make sure it hits your inbox this afternoon, so keep an eye out for it and check it out.

The presentation includes five gold stocks that look good from a fundamental AND technical perspective, as well as one speculative play that could deliver massive gains this year if I’m right about the change in trend in the gold price.

It’s only a short presentation, but it’s well worth your time. No one else is really taking about this right now, and this is the first time I’ve banged the drum about gold in years.

I hope you get something out of it.

Regards,

Greg Canavan+
for The Daily Reckoning

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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2 Comments on "Why I’m Banging the Drum on Gold Stocks"

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scottoftheantipodes
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Greg,

I think you are over complifying things a little.

Gold is valued in USD, the AUD is valued in USD.

When the AUD goes down in value in USD Gold goes up in AUD. The increase in the Gold price in AUD is nothing more than a reflection of the weakening AUD.

As for buying Gold shares. My view is that shares are becoming Fiat the same as money. There is simply too much counter-party risk, if you can identify which counter-party that is.

Scott

Mark Martucci
Guest
Greg, I believe in this topic as you have discussed and doubled down my investments in Australian Gold miners in early December. Since December I have had nearly 40% increase in some of my Stock prices. Looking forward the currency war will heat up and this will have a positive affect on the gold price. I am still a stickler on fundamentals of the firms I invest in and there are quite a few junior miners who’s all in production costs are well below there sell price. As the price of gold starts to go up and the Aussie weakens… Read more »
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