Watch These Signs for an End of the Commodity Bear Market

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Today’s Daily Reckoning comes to you from the Precious Metals Investment Symposium in Sydney. I’m scheduled to present later this afternoon…the last speaking slot of the day. Hopefully, at the end of two days of presentations, delegates will still be awake and receptive, and not eyeing the door for the post conference drinks.

Judging by the size of the crowd, the news is good for precious metals bulls. At the gold price peak in 2011, the crowd was probably two or three times the size of this gathering.

Which is a shame. Because as I’ll argue in my presentation, the new gold bull market is already well underway. Not if you’re a US dollar based investor though. I’m talking about the Aussie dollar gold price.

Financial journalists in Australia, either through laziness or ignorance, simply report the US dollar gold price each day. And it’s fair to say that US dollar gold is still wallowing in a bear market. It’s doing its best to reverse the trend, but you really want to see gold back above US$1,200 an ounce before getting excited.

The price of gold in US dollars is important, there’s no doubt about that. But if you’re an Aussie investor, with your wealth denominated in Aussie dollars, it’s of secondary importance.

What you really need to keep an eye on is the Aussie dollar gold price. It’s currently trading at just over AU$1,600 an ounce. For a local gold producer with costs around AU$1,000 an ounce, that represents a very decent profit margin.

It explains why gold stocks have performed so strongly over the past few years.

For example, Newcrest [ASX:NCM], the largest gold company in Australia, is up 100% from it’s low in late 2013. Evolution Mining [ASX:EVN], the next largest company, is up over 200% in less than a year. And Australia’s third biggest gold stock, Northern Star [ASX:NST] is up over 450% from its 2013 low.

And these are just the big players. The gains are even better in some of the smaller stocks.

I’m not suggesting it’s possible to pick the bottom and enjoy all of these gains. But the point is that these big share price moves are telling you something. The bottom is well and truly in. Aussie gold producers are making very good cash margins. The trend is definitely on an upward trajectory, and could still have some way to go.

Here’s one way of looking at it…

The Aussie dollar gold price is a leading indicator for the US dollar gold price. As the debt-soaked global financial system continues to lurch from one problem to another, always requiring central bank support, smaller currencies fall by the wayside.

Measuring gold’s performance in these smaller currencies is instructive. It gives you clues about the underlying purchasing power of the currency in question. The strength of Aussie dollar gold, which is only around $150 an ounce from its all-time high set in 2011, tells you a lot about the relative devaluation of Australia’s wealth.

Gold is a long term wealth preserver, and it’s doing its job as the Aussie economy continues to struggle under a massive debt load.

But because the US dollar is the world’s reserve currency, investors see it as the best of a bad bunch. The greenback will be the last fiat currency to come under attack. It stands to reason then that the US dollar gold bull market will be the last to take off.

So take note of the trend, fellow reckoners…all the evidence points to Aussie dollar gold being in the early stages of a big bull market. The next area to watch is the recent highs around AU$1,650. If the price moves past that it should quickly head towards the old highs of around AU$1,760 an ounce. After that, it’s daylight.

But as I said, judging from the crowd here today, only insiders, the well informed, or die-hard gold bugs are interested. That gives me confidence that we’re still only in the early stages of this move.

What about the Aussie stock market though? Yesterday, I mentioned that the market was still in a downtrend. Let me show you what I mean.

Have a look at the chart below. It shows the ASX 200 over the past 12 months.

Source: BigCharts

The first thing to note is the decent resistance level at 5,400 points. This area acted as support in the June/July sell off. But it gave way in August, and fell heavily. Once broken, previous areas of support become resistance, so the next hurdle is for the ASX 200 is to move through 5,400.

The next thing to note is the moving averages, the blue and yellow lines. These denote the 100-day and 50-day moving averages (MAs), respectively. While they have stabilised recently, the 50-day MA is still well below the 100-day MA. While by no means a fool proof indicator, this tells you that the overall trend is still down.

That means you need to be cautious about thinking the worst is over. Betting against the trend is a low probability game. My mate and Tactical Wealth Editor, Kris Sayce — who called the recent crash brilliantly — certainly thinks it’s still too early to say the correction is over. He’s sticking with his very effective market hedging strategy.

And I agree. Not because I think the Aussie economy has some major long term problems and no future growth drivers. No, I’m simply taking the market’s advice.

The market is telling you the trend is still down. While that shouldn’t stop you from buying individual stocks if they look good, it should stop you from thinking the worst is over. Because if the market doesn’t break through 5,400 soon, it will fall hard and fast.

Cheers,

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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