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Charts analysis: ASX 200, All Ords, BHP, GMI, ETF GOLD and Oil & Gas

October 11th, 2010 · Greg Atkinson · 5 Comments

The Australian stock market has been trading in a fairly narrow range since hitting a yearly low in late May, however over the last few weeks it has pressed above 4600 and we could see it move further towards 5000 in the weeks ahead.  In addition some interesting trends are emerging in terms of gold, oil and gas prices and and they might be giving us a good indication of where the market is heading next.

First of all let’s look at the technical candlestick chart for the S&P/ASX 200 Index over the last six months.

S&P/ASX 200 Index (XJO) – 6 months chart

asx-200-6-month-technical-chart-oct-10

The correction in April/May is fairly easy to see and was a result of investors selling on bad economic news coming out of Europe and the United States plus concerns that the authorities in China were ramping up efforts to cool their economy.  The market recovered somewhat but was then dragged down by worries about Europe again and the proposed mining tax in Australia.

We then saw a sustained rally in July and August before the market corrected once again mainly due to global economic issues but also somewhat due to the hung parliament outcome after the Australian federal election.

Since late August the market has been trending upwards and despite a few weeks of sideways movement the overall trend still appears to be towards 5000.  We now appear to be at one of those defining moments where the market will either push ahead and rally further or another correction will take hold and pull stocks back down once again.

To help us gauge the mood of the market let’s have a look at some chats which I believe indicate how the global economy is fairing.  First let’s look at some resources related charts.

Global Mining Investments (GMI) – 6 Months Chart

gmi-6-month-chart-oct-10

Global Mining Investments is an ASX listed Exchange Traded Fund (ETF) and because the fund invests in resources/mining related companies across the globe I feel it is a good indicator of how the commodities sector is faring.

It’s pretty clear by looking at the chart above that despite the daily talk of a global resources boom that GMI has basically been tracking along with the overall stock market.  This is because the demand for commodities from Europe, the United States and Japan does matter – China alone will not support commodities prices at current levels.

As I have been writing about for some months, once the economic stimulus money that has been tossed around globally starts to run out, commodities prices will soften.  I can’t judge exactly when that will happen, but we may already be near the top of the current commodities cycle in terms of prices. Remember commodities prices do move in cycles, they don’t just keep heading upwards forever.

The next chart that is interesting to look and is what I call the chart of fear and consumption.

All Ords, ETF GOLD, AMEX Oil & Gas – 6 Months Chart

all-ords-xoi-gold-6-months-chart-oct-10

The fear in this chart is tracked by the gold price and as usual I am using the Exchange Traded Fund GOLD to track gold prices in Australian dollars (AUD).  Looking at gold prices in U.S dollar terms at the moment is pretty pointless in my view as it simply reflects the weakness of the USD and not necessarily indicative of the strength of gold prices.

The consumption in this chart is reflected by the AMEX Oil & Gas Index (XOI) and to provide some point of reference I have included the ASX All Ordinaries Index (XAO).

Despite the almost daily headlines in Australian newspapers recently about gold hitting new highs the fact is that in AUD terms, gold prices are fairly flat and actually hit a peak earlier this year. What many so called financial experts are also not mentioning is that against the U.S dollar just about anything has increased in value including my collection of old beer cans.

What is on the rise on the moment are stocks and oil & gas prices.  If the global economy slowly sorts itself out then gold will fall and stocks will rise, they won’t both rise together for any extended period until the gap between the long term stock and gold valuation closes.

To make money from owning physical gold you need to sell it, it doesn’t pay any dividend while it sits in a vault or under your bed.  There will be investors who will make a tidy profit from trading gold and many of them are out and about talking gold prices up at the moment, but personally I don’t see gold  heading much higher from here in AUD terms and believe gold has been in bubble territory for months. (as I have been saying for months)

But the pro-gold crowd will tell you that gold has been the premier investment over the last 5 years or so, but that simply isn’t correct.  For example, if an investor had just held a stock like BHP  over the last 5 years rather than holding gold then they would have done quite well as the chart below shows.

BHP Billiton (BHP), ASX ETF: GOLD – 5 Years Chart

bhp-gold-5-years-chart-oct-10

Back in late 2005 if you had invested equal amounts in physical gold and BHP stocks then your investment in BHP shares would have treated you better. Why? Because of dividends.

Although ETF GOLD is slightly ahead of BHP in terms of unit/share price performance over the last 5 years the chart above does not take into account the income received by BHP shareholders via dividends. If you factor that in, then BHP turns out to have been the better investment.

Which one would I invest in now? Neither at current prices, they both look a little expensive to me but please remember that is just my personal view and I am not suggesting anyone listen to me.

Finally let’s study a chart which shows the big picture view of how the global financial crisis has unfolded. (so far)

All Ords, ETF: GOLD, AMEX Oil & Gas – 5 years chart

asx-all-ords-xoi-gold-5-years-chart-oct-10

The global market meltdown in late 2008 is pretty easy to spot and what a meltdown it was! It is also easy to see how the gold price has soared since late 2008 and how the gap between the All Ords (XAO)/AMEX Oil & Gas (XOI) indexes and ETF GOLD opened and has remained that way for the last 2 years.

That gap I believe will close at some point, sadly I just can’t say with any accuracy when that will happen.  My guess is that it two more years it won’t be as wide as it is now, that’s the best I can do.

As far as the Australian stock market is concerned it looks like the current market rally could run for a bit longer and that we may see the All Ords/ASX 200 touch 5000 again and even make a new high for the year.  But if that does happen, I reckon it is fairly certain that investors will start taking profits and that a correction will push the market down once again.


5 responses so far ↓

  • 1 Biker // Oct 11, 2010 at 11:17 am

    The comment on dividends (Gold vs BHP) is spot-on. We were stunned to realise how much Son#1 made, just on dividends, last financial year. (Shows you how little we know about indexed funds!~)

  • 2 Greg Atkinson // Oct 13, 2010 at 9:16 am

    Looks like the market is heading up today so maybe there is a chance stocks will end the week higher?

    As for dividends, yes they can be a good source of income especially when partially or fully franked.

  • 3 Biker // Oct 13, 2010 at 12:44 pm

    “As for dividends, yes they can be a good source of income especially when partially or fully franked.”

    But, as you know, buying just IFs, you get full, partial _and_ tax-hit! He’s happy… . In for the long term… .

  • 4 Senator13 // Oct 14, 2010 at 5:57 pm

    Anyone have a view on the QR National float?

  • 5 Greg Atkinson // Oct 20, 2010 at 8:11 am

    Senator I don’t have any specific comments regarding the float although I have noticed it is getting a fair bit of negative coverage in the press.

    Personally I am cautious about anything that assumes Australia is set for years of uninterrupted economic growth.

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