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Oil, gold, the Dow Jones and the ASX All Ordinaries.

July 29th, 2010 · Greg Atkinson · 8 Comments

Despite a fairly nasty stock market correction over the last few weeks the Australian market did not fall anywhere near the lows of March 2009 and as I have been saying for nearly a year, we won’t see those levels again for some time,  if ever.  So now that the market correction appears to be over, what are stocks, oil and gold prices likely to do during the next few months.

Since we are in the midst of an election campaign in Australia I will spare readers any spin and keep my analysis of the market very simple and straightforward.  This may leave me vulnerable to some criticism but sometimes I believe that we can all tend to over-analyse stock market related charts and miss the big picture view.

Firstly lets have a look at what gold and oil prices have been doing since they are both very important market indicators.  Gold prices help us get an insight into how fearful investors are and oil prices help us understand global economic activity so they are both worth watching closely.

ASX ETF:GOLD versus AMEX Oil & Gas Index 5 year chart


You don’t need to be a market expert to spot how oil/gas and gold prices went in opposite directions after the collapse of Lehman Brothers in late 2008.  Since that time gold prices have headed up in sharp bursts as investors become more fearful and then when people realise the global economy is not collapsing,  gold prices ease down again but have still  stayed quite high.

I am again using the ASX Listed ETF (Exchange Traded Fund) GOLD to watch gold prices since it seems pretty pointless to me for Australian investors to track gold prices in U.S Dollars and then compare this to how ASX stocks are performing.

In regards to oil & gas prices we can see how AMEX Oil and Gas Index (xoi) plunged in late 2008,  bottomed out in early 2009 and has since been basically trading sideways for a year with the occasional rally and correction along the way.  This suggests to me that on a global scale, economic activity is still fairly sluggish.

In a nutshell my medium term view is that oil/gas prices are too low and gold is trading much higher than it should be.  I know many people say gold will reach $2000 USD an ounce within the next years but I reckon that is complete nonsense.  As I said earlier this year I believe gold prices are in a bubble and I feel fairly confident gold prices will fall by more than 10-15% over the next 12 months.

The next chart which I think is interesting to look at is the Australian ASX All Ordinaries Index versus the U.S Dow Jones Index.  Why? Because despite the constant focus on the Chinese economy by most market commentators in Australia the fact is that the U.S economy is still the world biggest by a long way.

All Ordinaries Index versus the U.S Dow Jones Index 3 year chart.


It is pretty obvious that what happens on Wall Street has an impact on our stock market and as we can see the close correlation between the ASX All Ords (XAO) and Dow Jones (DJIA) remains very much intact.

Remember that the U.S is in the midst of a major recession and yet over the last 3 years the Dow Jones and ASX All Ords have pretty much traded in the same range.

This is a reminder of how our stock market is impacted by the flow of money across the globe. If the major global investment funds are not buying Australian  stocks than our market will struggle to rally.

One reason why the Resources Super Profit Tax (RSPT) dragged Australian stock market down was because many major global fund managers were worried about the stability of the investment environment in Australia.

So if U.S stocks can rally over the next few months then Australian stocks will follow.  Personally I think the stock market will have a good third quarter as signs that the U.S economy is gradually recovering become much clearer. If the mining tax debacle in Australia can also be resolved soon then our market will bet an extra boost upwards.

Now let’s have a look at the big picture and see what the All Ordinaries has been doing over the last 5 years.

ASX All Ordinaries (XAO) 5 year chart


On this chart I have marked with two red lines the range in which I expected the All Ords to trade within as I outlined about a year ago.  What has actually happened is that the market has been moving over the last 6-8 months in a range just lower than I anticipated, but all-in-all my call was pretty accurate.

I have also marked on the chart in green the 5500 level and the reason for this is because in September 2009,  I expected that by around September 2010 the ASX All Ords would be near 5500. (see: Australian stocks, house prices and the economy in September 2010

I am not hiding from that 5500 call although at this stage my chances of being correct appear very slim. But the ASX All Ords could easily get up to 5000 again over the next few weeks and I actually expect that is where the market will head in August.

Finally a quick look at the candlestick chart for the All Ords over the last 12 months will show us how the market has moved over the shorter term.

All Ordinaries 1 year candlestick chart


From the low of March 2009 the stock market rallied up above 4800  in October but since then has only briefly held above 5000 and in recent months it has struggled to get above 4500.

The 5000 level looks to me as where the stock market should be at and so I am expecting a rally over the new few weeks or months to take us back up to that level.  I also think that below 4600-4500 looks like the area where the market appears to be oversold.

So at this stage my simple view of  the investment outlook is that oil prices are set to rise,  gold is set to fall and stocks will probably rally in Q3.  But the chances are I could be wrong with all three calls so please don’t base any investment decisions on my ramblings!

8 responses so far ↓

  • 1 Biker Pete // Jul 29, 2010 at 3:31 pm

    Interesting insights, Greg. You may right on the money with gold and oil predictions. Hope you’re also right about the ASX, as both our sons are very much committed to indexed funds.

    Getting our eldest son’s mail while he’s travelling in Europe.
    He has a very hefty tax bill! I must try to figure out what he’s actually doing… and exactly _how_ he’s doing it!!~

  • 2 Plornt // Jul 29, 2010 at 4:59 pm

    Good analysis Greg.

  • 3 Greg Atkinson // Aug 2, 2010 at 11:25 am

    Knowing my luck gold will rise and stocks and oil will fall 🙂 But my old friend the BDI is still rallying and getting up near 2000 so it is looking like a Q3 rally across the markets might be brewing.

  • 4 oil/gold // Aug 10, 2010 at 4:13 pm

    All look ready for a small pullback or some sideways price action.
    The Dow closed lower, while the market absorbed another run higher for crude oil prices.
    Global oil and gold prices ended the week on a positive note mainly on rising
    thanx for oil,gold

  • 5 Biker // Aug 16, 2010 at 1:28 pm

    “Biker your 20% entry and exit foray into the XAO last year probably outperformed about ~80%? of people in the markets atm. Buy and hold forever is gambling.”

    Perhaps even higher than 80%. Only one of my mates decided I was right… and followed me in… and out. (His wife didn’t.)+
    Too early an exit, as Greg has noted. I called the low, set a sell… and bailed when it came. My Super fund initially tried to dissuade me, from bailing at 6250, BTW. It was still gambling!~

    You may recall my eldest* is doing just that- buying and holding- in indexed funds. Not really ‘holding’, I guess, in that he sells pre-dividend…. then buys back post-dividend. He has accumulated a _lot_ of shares in the last couple of years. He is a brilliant mathematician. Says he’s there for the long term, perhaps two decades. Maybe he knows what he’s doing… .

    + Mine did.
    * 28

  • 6 Plornt // Aug 16, 2010 at 2:09 pm

    “He has accumulated a _lot_ of shares in the last couple of years. He is a brilliant mathematician. Says he’s there for the long term, perhaps two decades. Maybe he knows what he’s doing… .”

    Alot of people say they have the patience to stay for 2 decades but I think thats a very rare quality. Hopefully your son is one of them, wish him well.
    The only person I’ve seen who can handle severe swings and still not be dissuaded to panic sell is Greg. He seems to have the right mental makeup to handle very long term holding.

    All posts by this poster is not financial advice or a reccomendation to do something. Can change my mind quickly on any decision I make, given markets always change. Have positions in instruments discussed unless otherwise indicated.
    Be sure to seek and take personal professional advice from someone familiar with your circumstances and needs.

  • 7 Biker // Aug 16, 2010 at 2:39 pm

    “The only person I’ve seen who can handle severe swings and still not be dissuaded to panic sell is Greg.”

    In some respects they’re very similar, Plornt.

    What really astonishes me is how much our son has in Super.
    I think he is applying Einstein’s other theory:
    “The most powerful force in the universe is compound interest.”

    Being in the Uni Super fund, he’s protected from exorbitant fees and commissions. We think he has also looked closely at our Super balance and has come to the conclusion that he probably _wasn’t_ adopted. 😉

  • 8 Ned S // Aug 16, 2010 at 10:03 pm

    The world is actually a bit of a mess Greg – Lots of issues but taking the long term view (20 years), a pretty big lump of the population in the developed world is going to retire. And they will start drawing down on their assets. Which pretty much says to me that no asset class is safe. Unless it’s in a country that has a growing and/or especially frugal and productive population perhaps? But even then, if the big financials can keep feeding dough into them and then ripping it out, I wouldn’t expect them to do overly well.

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