Can Gold Break $885 This Week?

By Neil Charnock
April 16 , 2007

Regular readers of my articles may have noticed I have become even
more bullish on gold, silver, the metals and ASX Resource Stocks lately. With good reason and a good call, this is happening right now… Gold is breaking out, supports are moving higher but it has to clear $885 before we look for a test of the May 06 high.
The ASX gold / resource stocks, mid cap and larger cap, are telling me we don’t have to wait long. It is profitable and exciting to watch for us gold watchers however a little disturbing on the fear front as trouble brews for the USD now approaching the 80 level yet again. Do not expect it to go straight through that level as I expect a battle of some degree. How long can it hold is the only remaining question?
Gold and silver may be about to embark on a significant rally after a 10 month consolidation period. The chances of this happening shortly are increasing daily; I still believe we are in the early stages now which are normally slower than the later stages. Back in early February I penned a Kitco article that stated where I saw gold going this year and I have no reason to withdraw or change that thesis… this was may comment at that time;
“My current take on things is still… that we see a flat top triangle form to just past the middle of this year and then watch out… we go off to the races from about August / September. This will include profitable rallies to US$730 or there “abouts” during this time and ever more shallow corrections. For now we need to break some resistance however we are most likely headed to about $730 by May. This is pure conjecture and not to be used as a trading bias, it is healthy to wait for the market to show the way so that our “need to be right” does not stand in the way of pure analysis and wise decisions.”
Now for the short term and precision silver traders out there - here is what Colin Emery had to say about silver back in our April 9th Gold Oz Newsletter…
“The moving averages crossed to positive bias pushing it above the sideways action it has had along the 13.35 area – this actually has built a fairly solid support here which should hold while silver tests a few resistances – the first one is at 13.78 of course and if breaks look for 2nd target (blue dot 2 on chart) at 14.06/10 - and I’ve added one extra resistance in between which may cause a bit of trading about from last week at 13.86. But we are looking at testing and breaking 13.78 and look for next target 14.06/10.
Above that of course we have target 3 at 14.46 and target of the previous highs on the descending top line – 14.65 on the right were it is formed from the previous high in May 2006 at 15.20. But the hard work is to be done in the coming weeks and don’t get greedy and don’t get too excited as these resistances are strong above us.”
In other words we have some resistance above us for gold and silver and I would suggest some creeping action upwards as we work at these price resistances for both metals. This would coincide with the opposite for the USD as it works hard to break below that crucial 80 barrier. I believe Colin is going to cover the AUD with some of his expert fundamental / technical commentary in this weeks Newsletter for our subscribers.
I am not going to labor this, Colin was a senior trader for major international banks around the globe for 20 years, and you don’t get to that level without reaching a high degree of expertise. The can hire the best and they do. The coverage in our Newsletter is by Colin and is nothing short of comprehensive, metals and ASX stocks covered with full technical analysis, visit our site if you wish, there is a special on at present for the early subscribers who get in fast.
Reasons to expect a strong gold stock rally on the ASX for the balance of 2007 are:
  • <LI class=fill>Breakout from AUD$580 gold only occurred in Sep 2005 so we have only had two short rallies to date in mid - lower cap PM stocks during the whole gold rally. <LI class=fill>AUD gold price has now consolidated at current AUD $800+ levels for 12 months now. <LI class=fill>Many smaller cap gold stocks have been building their projects and have raised significant capital for drilling or mill refurbishment, progress has been strong yet many have yet to break out, value has been overlooked. <LI class=fill>Low valuation multiples even in larger cap ASX resource stocks leaves room for further appreciation. <LI class=fill>The larger stocks led the way to start and now many smaller caps have already taken off. <LI class=fill>Low sovereign risk angle here, stable government and safe investment climate - recognition of ownership rights to become an ever increasing issue as the metals gain value in all currencies. Greed and need will drive some Governments to do the wrong thing by miners in their unstable countries to the detriment of stockholders - but not in Australia as our sovereign risk profile is amongst the best on offer. <LI class=fill>I expect the imminent gold rally to pull global gold stocks with it as stage 2 of this bull market attracts a much wider audience and greater capital flows. Many more mainstream investors are now noticing gold and realizing this is not a flash in the pan as were the price rallies during the long 20 year bear market post 1980.
  • The miners are profitable here at $820 so any price rise should leverage into greater profits and anticipated profits. Therefore a share price surge must follow.
Should we get another breakout in the AUD gold price (currently $822) the local gold stock rally will be even stronger and I believe this is now on the cards as gold will now shoot ahead faster than our currency - which needs a breather now. The AUD has just jumped straight up nearly 8.5%, from just under 77c to over 83c against the USD since March 6th this year.
The overall ASX has embarked on a 131% rise since the 14th of March 2003 low to a new high on the 11th April 2007 of 6,159.1. This far out strips the performance of the US DOW and SP500, two causes;
  • <LI class=fill>The ASX needed to play catch up after a far more subdued pre-2003 rally
  • The ASX is one of the most heavily resource weighted general stock indexes on the globe and commodities are in a raging bull market
Strong economic conditions in Australia have created strong share prices in the industrial sector, the P:E valuations are looking fairly expensive now. However this is not the case for the large cap resources as listed on our spreadsheet product (we only cover those that have any exposure to the PM’s) as they range from P:E 4.79 up to 12.32 amongst the better selection and I just counted 10 of these.
I will say it again - many of the resource stocks are still highly undervalued even at current metal prices. A classic example of this was illustrated last week when a local ASX listed gold stock valued at just over $100M sold off one of its key assets for $250M in a major restructure. I have just completed a major upgrade / update our popular spreadsheet (news, charts and data service) adding new producers and a few key developers and note that the big end of our market has a firm positive bias at present. 17 companies jumped, 8 corrected (some after a strong rise) and 28 were firm.
Market behavior and activity have been indicating a gold rally is due for some time on the ASX and the last week or two it has begun to change into 2nd gear. I say 2nd gear because there have been selective profits to be made for a few months now however amongst a more narrow range of stocks. This is still a mixed market however profit opportunities have eventuated right left and centre. Many setups also exist in a range of commodities and resource stocks so I see excellent conditions ahead. As this new rally heats up we will head into steeper and more general rises across the board.
It still amazes me to read research by brilliant analysis’s who believe euphoria is somehow influencing the current commodity prices despite the doom and gloom forecasts during the 4th quarter of last year on copper for instance. The world has changed, the goal posts have been moved, someone painted the lines in a different place now and commodities are being driven from the other side of the road now.
I have covered it well enough in previous articles; we are in a global growth boom, unprecedented conditions - a construction boom in China, India, Russia, and Brazil to name a few. The USA is experiencing a pull back in construction growth so it is using fewer commodities, OK but it is a mature economy (these are less resource hungry).
A last comment – how about those commodities?? At Gold Oz we have remained publicly bullish since August 06 and at times amongst a select few in the finance industry. A quick glimpse of price and stock levels courtesy of our friends at Kitco below…

Copper has recovered nicely. On January 10th I released an article and spoke about copper and how it had to rally. This is what I had to say…

“The contrarian in me indicates commodities such as gold, silver, PGM’s and even copper may not be as poor as you would expect. If that was a top in copper it was the strangest top I have ever seen.”
“Copper has run from 80c in 2002 to $4 per pound in 2006, a classic parabola is evident on the 5 year chart so it was more than a little overcooked. Sentiment drove the violent rise above real demand as supply was apparently hidden from the market to accentuate the supply deficit and price squeeze. Since the recent price collapse in copper, sentiment has now reversed and so a counter rally is on the cards, perhaps from somewhere near this level as it has re-traced to the Fib 50% area for the total rally and near the 61.8% mark for the recent leg.”
Nickel on a tear, simply not enough supply… enough said.

Take a look at zinc stock levels, what does that tell you about supply / demand to date? Colin had this to say last week…
“ZINC – Got this one spot on last week – ZINC broke up and out and had two solid days up –
should have had the same faith I have in Zinc in copper – But as you can see Zinc zoomed.”
I am not going to give away his analysis on zinc but you should find out how he views it and what zinc stocks he really likes down under.
I don’t have time to add any trading strategies this week and I will not be able to answer any emails or send product for 24 hours over Monday so please be patient. I am arranging a merchant account and automated systems at Gold Oz over the next 4 weeks. I am going to Canberra for an exciting lunch with none other than Bill Murphy who has come out to Australia to meet some like minded souls.