Sunday, January 2, 2011

Gold, Silver, Stocks & Property Predictions - 2011

Well it's been quite a year both personally and for the markets.

On a personal note I started in a new role at work, got married in October and almost doubled the net worth of my wife and I. I also started this blog in September to keep track of my ideas and opinions, it's really helped keep me grounded (which can be tricky given the emotional buy in that a lot of precious metal market commentary tries for).

My goal with precious metal investments is turn my capital into enough to purchase a house outright (no mortgage) and this year put me on well on track to achieving this in the near future.

Below is some reflection on how Gold, Silver, Stocks and Australian property fared over 2010 and what I think is instore for 2011.

Gold

2010

Gold had a great year in 2010, closing on December 31st 2009 at $1096, it has managed to close near all time highs at $1420. It was no slouch in Australian dollars and other currencies either, closing at AUD$1220 on December 31st 2009 and finishing 2010 at AUD$1388.

Here is a chart comparing it's performance against a group of world currencies:


With many central banks looking to competitively devalue their currencies and reduce the pressure of crippling debts, it's not a surprise how well Gold has performed.

2011 

In my opinion Gold will continue the trend and rise in 2011. For a repeat of the % gain we saw in 2010, Gold would have to close 2011 at over $1800. Whether we see Gold close 2011 at those sorts of prices I'm not sure, but would not be surprised to see Gold spike that high in the first half of the year. My prediction is that Gold closes 2011 at over US$1600, likely with a spike to US$1800+ at some point during the year.

All the fundamental drivers that pushed up the price of Gold over the last decade are still in place, so expect no change from it's upwards trajectory. With the IMF having finished their Gold sales it will be interesting to see which central banks are still looking to increase Gold as part of their reserves and whether the removal of the IMF sales overhang has any impact on the price.

Silver

2010

If Gold had a great year, then Silver had a spectacular year!

Silver closed 2009 at $16.84 on December 31st, dropped to a low of $15 (close) early in 2010, however finished the year at $30.85, more than 100% higher than the lows and around an 83% gain over the entire year.

Against Gold (measured by the Gold:Silver ratio) Silver did remarkably, well dropping from a GSR of around 65 at the start of the year (1 Gold ounce = 65 Silver ounces) to 46.


On previous spikes in the Silver price the ratio has dropped to this level and then bottomed and reversed higher, will it be the same this time? It's worth noting that during the last precious metals bull market the ratio dropped back to around 17, so there should be no question that Silver has the potential to continue rising faster than Gold.

2011
 
There has been a lot of hype building around Silver in the last half of this year following the magnificent rally and increasing public interest. We've got commentators calling for the public to "crash JP Morgan, buy Silver", we've got multiple  class action lawsuits being lodged against JPM and HSBC, we've got the CFTC to soon be imposing position limits in the metals, (and other markets) which some believe will reduce JPM's ability to "manipulate the price". It's hard to ignore the mainstream media attention this activity has been achieving.

From a technical perspective (as I pointed out in an earlier post) Silver above $30 looks to be a breakout past a resistance line that has been in place for some 7 years.


I would suspect the next major resistance will be at the 30 year nominal highs (around US$50). My prediction is that Silver will surpass and close the year above $40 in 2011 and possibly spike to over $50 at some point during the year (likely in the first half).

Stocks

2010

There has been some exciting activity this year in some sectors. Namely the precious metals sector and REE (Rare Earth Elements). While precious metal stocks continue to rise orderly with the price of Gold and Silver, many REE stocks have seen moonshots.

Of course this hasn't been without good reason with China reducing their export quotas it has meant a sharp rise in the price of some of the raw materials, rises up to hundreds of percent for some of them. This has seen some very speculative rises in REE stocks, in some cases  even for companies where they won't have an ability to dig their resource out of the ground for years. Whether the rise seen in these stocks will continue is hard to say, it's starting to get very speculative in REE and although China controls a majority of REE mines/ouput, rises like we've seen could get some companies along to production perhaps much sooner than otherwise anticipated, it will bring deposits otherwise not economic to mine to be profitable, increasing sources for REE outside of China. Further to this if we see a drop in economic activity this could affect the demand for REE and drop the prices of the raw materials (where as it's my opinion that Gold and potentially Silver could continue to perform well as a monetary metal should economic conditions worsen).

In late 2010 we saw the HUI break out of a 2+ year consolidation. However it performed only marginally better than Gold itself (only around 3% better over the year).


The GDX performed similarly to the HUI, however the GDXJ (junior stocks) broke away in the latter half of the year.


The general markets in my opinion are a waste of time at the moment. I just don't see room with the present economic conditions for a buy and hold (blue chip) strategy to do well. Why tie yourself down to under-performing assets?

The XGD, an index tracking a group of Gold stocks on the ASX performed very well over 2010, recording a 38% increase, much higher than the 13% increase seen in the price of AUD Gold.

XGD closed 5856 December 31st, 2009
XGD closed 8099 December 31st 2010

Seems that it was following the sentiment of the US price of Gold and stocks, moreso than the sentiment of the metal priced in local dollars.

While I didn't have the blog operational at the start of 2010 I did perform some stock picks (ASX Listed) for 2010 on Hot Copper forums. Here is how they performed over the 12 months:

A1 Minerals (AAM) - .37 to .11 (- 70%)
Silver Lake Resources (SLR) - 1.06 to 2.37 (+ 123%)
Cobar Consolidated Resources (CCU) - .235 to .575 (+ 144%)
Troy Resources (TRY) - 2.39 to 3.98 (+ 66%)
Gold Anomaly (GOA) - .038 to .036 (- 5%)
Average Gain = +51.6% (not including TRY's dividend)

A pretty respectable performance.

2011

I expect the general market will continue to underperform specific sectors so don't see much reason to comment on it. I do expect that the Dow:Gold ratio will continue to fall (e.g. the Dow will fall when priced in Gold), currently sitting at around 8:1 I would expect to see it fall to 6:1 or lower during 2011, ultimately on it's way in the next couple of years to 1:1 (if only briefly).

Here are my 5 picks for 2011 (not  a recommendation to buy):

I have written blogs on each of the above stocks and you can click the above names to be taken to the write-ups. I will keep track of these stocks on the blog regularly to see how they perform over the year, but am expecting to see at least a 100% increase across the board (average gain).

I expect that the HUI and other Gold indexes will continue their rise and will outperform the metals themselves. I think the juniors will continue to outperform the majors. My prediction is we will see HUI over 800 and the XGD over 10,000 at some point during 2011.

Australian Property (Residential)

2010

In all honesty I did not expect Australian housing to hold up this year the way it has. Although housing in many cities has now started to retreat in price I think many bears where taken back by some of the large price increases early in the year (especially in Melbourne). While we had first home buyers stepping back after reduced stimulus (removal of First Home Buyers Boost, FHOB), we had investors step up to the plate and continue the buying at these ridiculous prices. With yields as they are in Australia one has to assume that investors were buying with the expectation that we would continue to see strong price growth, because it sure isn't for the rental return, a higher return can be achieve currently with cash in a term deposit.


We've had 4 rate rises this year and the banks increasing their rates even more than the official moves. This has put additional pressure on mortgage holders who were paying interest rates 30% lower only 2 years ago in early 2009 (with variable rates at just over 5% instead of just over 7% as many are today).

2011

Christopher Joye has suggested we will need to see further interest rate rises in 2011 for house prices to fall, but I suspect this will not be the case. As I pointed out in my blog "Australia's 2009 First Home Buyer Bubble" there was a large increase in honeymoon rate home loans (at the same time as record numbers of first home buyers), most of these would have been 1 and 2 year products, so we could very well be in the middle of a lot of resets from rates as low as 4% to rates over 7%, that would be a 75% increase in interest costs!

National auction rates (weighted average) slipped under 50% towards the end of the year.


As I've pointed out previously, national clearance rates under 50% tend to point towards falling prices.


We're heading into 2011 with:

- Stock on market almost double what it was heading into 2010
- Clearance rates under 50%
- Mortgage delinquencies on the increase
- Increase in days on market and price discounting (Brisbane, Perth)
- Interest rates higher than 12 months ago and increase further
- New home sales looking weak
- Prices falling nationally with prices back to May 2010 levels

I think 2011 will bring house price falls with or without further increases in rates. That is provided the government doesn't step in once again with stimulus like they did in 2008 by doubling/tripling the First Home Owners Grant (e.g. the FHOB).

Without changes to interest rates I suspect we will see nationwide falls of 2-4%. With at least 2 increases to the cash rate I suspect prices would be more likely to fall 4-6% or greater.

Conclusion

The above analysis and conclusions are just my own personal thoughts on how things might play out over the next 12 months. There are many potential black swans waiting in the shadows to take the markets (either stocks, metals or property) by surprise, so it's difficult to say with any certainty what will happen.

I wish you all well for 2011 and look forward to continuing to provide information and my thoughts about Gold, Silver, Stocks and Property.


BB.

Disclosure: Position held in Gold, Silver and some of the stocks mentioned. Not investment advice. Do your own research.

6 comments:

  1. Thanks BB. Good post and wishing you well for the new year. Thanks for pointing out ARD. Wandering about your attitude to holding physical bullion, do you have a percentage that you hold physically?
    My aim is also to buy a house outright due to an aversion to debt, so here's to both our dreams coming true this year.

    Best wishes
    BN

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  2. dear BB. I saw a post on HC: why I will take my full entitlement in CCU. I bought into it intuitively on that alone.It has paid back handsomely....as have other of your recommendations or rather comments.....lol.Thank you so much.

    In fact, I have never made so much money in my life. I am 71 years old.

    Chatzyboy (on HC)

    Holding DRA, SVL,CCU,DRK, PGMO,CGT

    ReplyDelete
  3. Thanks for the comments guys.

    BN - Physical only makes up around 20% of my portfolio these days, but I was sure to be set in this regard before moving into the stocks. You have a similar goal to me (turning PMs into somewhere to live mortgage free). Assuming you are also in Australia we have both housing and metals working in our favour if things play out as I expect (PMs rising, housing to fall).

    Chatzyboy - Glad you've got some value from my posts. Many of my buys (including CCU) have come from tips on HC as well. It's a great resource if you can learn to filter out the rubbish. CCU is a 10 bagger for us that bought at 6c and I suspect there is a lot more to come. Never too old to make some good $ from a bull market, good on ya!

    Cheers

    BB.

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  4. 3 bits.

    I assume HC is www.hotcopper.com.au ?

    I've bought into ARD to get the complete set of 4. Thanks.

    And - would you know where to find an up-to-date chart of M1 in Australia? Seems like Wikipedia stops in 2007 http://en.wikipedia.org/wiki/Money_supply#Australia - conveniently before the M1 spike in the US. Did our M1 spike the same, but it's been hidden like the US reporting of M3?

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  5. Hey Anon. Yes HC refers to Hot Copper Forums, I post there under the handle 'hobo-jo'.

    Australian monetary information can be found on the RBA website, here is a link to the most recent data:

    http://www.rba.gov.au/statistics/frequency/fin-agg/2010/fin-agg-1110.html

    There was no large spike like in the US, infact the M1 actually dropped in the first few months of 2008.

    Hope that helps.

    Cheers

    BB.

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  6. Thanks Baron aka hobo-jo.

    And the M1 is in the downloads, got it.

    M1 did indeed drop - I wonder why - and then got back on it's merry way in a seemingly exponential growth curve. Ah well.

    ReplyDelete