WHAT S THE DIFFERENCE?

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Contents Introduction Gold Wave Analysis WHAT S THE DIFFERENCE?

tell me if you can spot the difference. The aesthetic difference is fairly obvious. One is round while the other is 12 sided.

If you were to take both coins to the shops here in Australia they are both legal tender and would each buy you 50c worth of goods.

1 Contents Introduction Gold Wave Analysis WHAT S THE DIFFERENCE? Volume 2, Issue 24, 17 March 2009 XAU Analysis API Analysis Australian Theoretical Gold Price Update Closing Comments Disclaimer Associated Products Take a look at these two Australian 50c pieces and tell me if you can spot the difference. The aesthetic difference is fairly obvious. One is round while the other is 12 sided. Aside from this they are both silver in color, they appear to have the same emblems and they both have Queen Elizabeth the Second on one side (all be it a younger version on the 1966 piece). If you were to take both coins to the shops here in Australia they are both legal tender and would each buy you 50c worth of goods. One difference less obvious is the c round is 80% silver and 20% copper, where as the 12 sided 50c piece is copper/nickel based. Subsequent changes in the silver price saw the c silver round discontinued in 1967, replaced by its 12 sided successor. It was the last coin with precious metals content placed into circulation. Each silver round has roughly 1/3 of an oz of silver and when I last looked on EBAY, you could buy or sell one for between A$7.50 and A$8.50 a coin (roughly its silver content). There are very few better examples of how precious metals preserve purchasing power than by comparing what these two coins of the same face value can buy you today versus 1966, when the Silver round was minted. Back in 1966 each coin would have purchased roughly: 250g of bacon rashers. A dozen eggs. 12 domestic stamps. 1 kg of lamb chops (loin) 2kg of bread 2kg of sugar The Global Speculator 1

2 Today the 12 sided 50c piece will buy: 25g of bacon rashers (10%) 1 egg (8%) 1 domestic stamp (8%) 25g of lamb chops (loin) (2.5%) 125 grams of bread (6%) 300g of sugar (15%) The c silver round sold on EBAY for conservatively A$7.00 (silver price A$20 21/oz) buys: 350g of bacon rashers (150%) 18 eggs (150%) 12 stamps (100%) 350g of lamb chops (loin) (35%) 2 kg bread (100%) 4 kg of sugar (200%) One of the biggest deceptions with inflation is that for the most part it tends to occur gradually with very few people bothered by the diminishing purchasing power of their money. If you are of retirement age and have savings in the bank earning you interest, chances are today s miserly rates are not protecting you against inflation (this is a global problem). As our western governments recklessly deficit spend via borrowing and monetize debt to keep interest rates low, they are accelerating this inflationary process and effectively negating the benefits of citizens who have started to instinctively save again. When governments borrow to spend, make no mistake we the citizens pay. The future interest and principal repayments will come from future taxes. If the government monetizes debt and effectively prints money, we pay via the accelerated decimation of the purchasing power of money (inflation). The question you need to ask is what checks are in place to ensure government does not abuse its money printing privileges (very tempting in today s troubled times). When the gold standard was abolished back in 1971 and replaced by a floating exchange rate system, the last of these checks was effectively withdrawn. The French demanded gold in exchange for the mounting US dollars they were accumulating. They were fully within their rights to do so. The US government under Nixon reneged on this agreement and the rest as they say is history. The Global Speculator 2

3 Gold Wave Analysis Update COMMENTARY The gold price, as expected, continued to demonstrate strength during February 09 breaking heavy resistance around the US$900 mark and rallying strongly to the next resistance point of around US$1,000/oz, where it encountered major resistance. The gold shares demonstrated noticeable weakness on the rally, indicating an unlikely breaking of this last resistance point. This was quickly confirmed with a swift fall back down to US$900/oz, which is now providing us with solid support (previous resistance). The gold shares have since consolidated, confirming we have found a low for the time being (see review of the XAU and API below). The Global Speculator 3

4 XAU The chart below highlights key points in time when the XAU is overbought (RSI 30) and oversold (RSI 70), relative to gold. Once the respective indicators trigger (blue vertical lines), it then becomes a task of following trends in the ratio looking for definitive breaks to signify entry (green vertical lines) and exit (red vertical lines) points. The gold price wave analysis above helps us get our bearings. Right now, with the commencement of a Wave 3 rally, we should expect to see precious metals equities outperform the gold price signaling further strength in the metal. GOLD/XAU LONG TERM PICTURE The Global Speculator 4

5 GOLD XAU RATIO Extreme Key Dates Gold/XAU XAU XAU Performance Gold Price 3/11/ Gold Performance Net Position 25/05/ % 276 4% 29% 02/08/ % % 2% 09/01/ % % 36% 27/05/ % 418 1% 25% 17/02/ % % 32% 7/11/ % % 72% Current (13/03/09) % % 18% GOLD/XAU INTERMEDIATE TERM The Global Speculator 5

6 COMMENTARY The Gold/XAU ratio failed to break the support of the consolidation pattern (6.95), whilst the gold price rallied briefly to US$1,000/oz. This spelt at least short term trouble for the gold shares and a temporary breather in the Wave 3 gold price rally. The Gold/XAU ratio, in the bottom section of the above chart, has since tested resistance of the consolidation pattern around Despite numerous mid week breaks, it has managed to close firm reinforcing the likelihood of the gold price holding US$900. Just to reiterate, a clear break of the support at 6.95 signals the gold price is ready to continue its Wave 3 rally where as a break the other way ( ), would provide us with a strong signal that there is more weakness ahead. AUSTRALIAN PRODUCERS INDEX (API) The Australian Gold Producers Index has a consistent format to that of the XAU. The relative strength comparison is with a USD gold price instead of an Australian dollar gold price. This is because Australian gold shares tend to be influenced more by the USD gold price. GOLD (USD)/API LONG TERM PICTURE The Global Speculator 6

7 GOLD (USD) API RATIO Extreme Key Dates Gold/API API API Performance Gold Price 25/07/ Gold Performance Net Position 10/10/ % 372 9% 15% 08/07/ % % 9% 05/05/ % % 125% 19/12/ % % 59% Current (13/03/09) % % 21% GOLD (USD)/API INTERMEDIATE TERM The Global Speculator 7

8 COMMENTARY The Gold/API ratio (bottom section) has continued to fall over the last 6 weeks, demonstrating gold shares have outperformed the gold price. The consolidation pattern, as expected, broke support as the gold shares put on an impressive 16% in quick time. The ratio has now found the support of the longer term uptrend. This is the next break we need to see to signal a continuation of the rally. The reverse head and shoulder pattern, on measurement (roughly 400 less 250), indicates a likely target of 550 (400 plus150) for the API or another 15%. The RSI (top section) for the Gold/API ratio is getting closer to 30 but has yet to break, supporting our theory that there is still more upside over the coming weeks. AUSTRALIAN THEORETICAL PRICE OF GOLD UPDATE Date 10 Year BB Interest Rates Headline CPI M3 Aggregate Money Supply Rate of Australian M3 Change Gold Production Av Annual Increase (1.73%) Australian Theoretical Gold Price Actual Gold Price (AUD) Actual as a % of Theoretical Jun , % 0.14% 3, % Jul , % 0.14% 3, % Aug , % 0.14% 3, % Sep , % 0.14% 3, , % Oct , % 0.14% 3, , % Nov , % 0.14% 3, , % Dec , % 0.14% 3, , % Jan , % 0.14% 3, , % 5 Year Performance Snapshot 2008/09* 2007/ / / /05 Actual Gold 49% 26% 16% 18% 8% Theoretical Gold 9% 17% 14% 16% 6% M3 Growth 10% 19% 16% 17% 8% CPI 3.7% 4.5% 2% 4% 2.5% * This financial year so far. COMMENTARY M3 growth for 2008/09 continued to moderate during January 09, resulting in the annualized rate decreasing to 16% from 17% the previous month. The theoretical gold price edged higher to A$3,517, with the actual at the end of January 41% of the theoretical. The return for gold, in Australian dollars for 2008/09, has been a staggering 49% as the Australian dollar continues to slide. The RBA left rates on hold during the month. This was quickly followed by news of a shrinking Australian economy, signaling the recession is upon us. The RBA is worried and their decision to leave The Global Speculator 8

rates on hold would have been an attempt to support the ailing dollar. With the economy sliding into recession, expectations are for more rate cuts. An Aussie dollar sub US$0.

9 rates on hold would have been an attempt to support the ailing dollar. With the economy sliding into recession, expectations are for more rate cuts. An Aussie dollar sub US$0.60 seems a matter of when and not if. AUSTRALIAN GOLD PRICE (EFT: ASX:GOLD) CLOSING COMMENTS Monetary Inflation is a destructive force. It took 42 years for money to lose the purchasing power we saw demonstrated in our earlier example. The direction we are heading could see purchasing power lost at a much faster rate. When you consider that many of the alternative asset classes (property, shares) are falling in value using the dollar as a common measuring unit, this only serves to magnify these losses. Measuring property or stock market indices in terms of gold ounces, which is a unit of currency that preserves its purchasing power, provides a much more accurate appraisal. Less than 2 years ago it took approximately 8 oz of gold to buy the All Ordinaries index here in Australia. Right now it will cost you just over 2 oz. That s a fall of over 70%. In nominal terms, the All Ordinaries index has lost 50% from its highs (bad enough). The 20% difference we see here reflects the losses most people fail to recognize and acknowledge. As baby boomers retire and rely on every cent of their savings and investments to live off, make no mistake, this difference will be very real and it will hurt. The Global Speculator 9

10 Gold is taking a breather for the time being and it is probably too early to tell whether this correction is the beginning of something more sizeable. We will have a better idea next issue, with the consolidation pattern for the Gold/XAU ratio holding the key. If we are in fact in a wave 3 rally, this correction will be short term in nature and the gold price will resume its rally with another attempt at the US$1,000 dollar mark very soon. The Australian side of things continues to look stronger, but it is important to note that it was slower to get moving with the API lagging the XAU by over a month. Troy Schwensen Research Analyst Editor wwww.goldnerds.com.au ww.goldnerds.com.au DISCLAIMER This publication has been prepared from a wide variety of sources which the editor, to the best of his knowledge and belief, considers accurate. The editor does not warrant the accuracy of the information and forecasts contained in this publication. This information is provided for educational purposes and nothing written should be construed as a solicitation to buy and sell securities. The Global Speculator 10

Capital Expenditure Clouds Profitability

Capital Expenditure Clouds Profitability Contents Introduction Gold Wave Analysis XAU Analysis API Analysis Australian Theoretical Gold Price Update Closing Comments Disclaimer Associated Products Volume 2, Issue 29, 26 August 2009 Capital Expenditure