Watch These Signs for an End of the Commodity Bear Market

Today’s Markets and Money 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 Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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