It has been a hectic week here educating clients about global capital flows and debt cycles. One of the really interesting factors at play Down Under has been the unwinding of the carry trade which accelerated last night. The message it not always understood so I will be preparing a file to explain how this works as further education in the Members area of my site as soon as time allows.

I have been warning that the AUD is an exotic currency and this means that when risk aversion increases the AUD gets dumped. When I hit the office at 7am this morning it was down to US88.6c off approximately 3c. We have been waiting for this opportunity to start to unfold for our offshore clients and warning this would happen in articles like this one.

We have several negative influences in the markets at present. These are the Australian resource super tax proposal, global sovereign debt issues, the growing wild fire in the banking system in Europe and the unwinding of the carry trade on the AUD. Global appetite for risk is diminishing rapidly. To add further woes we have the end of Australian financial year sell off merging with the "sell in May and go away" seasonal factor and a potential explosion of margin loans which have built up here again since the 2008 debacle.

I have been pointing to a top in April and buying opportunity in the gold mining stocks here in Australia during May and June. This was forecast before any of these fundamental developments emerged. That is not to say I did not see Greece coming I have been warning about it for months. There was no way to really tell when it would hit the "reality" threshold and threaten markets sufficiently enough to see a reaction.

The crisis in Europe is still unfolding and at present the holders of Greek bonds can still go and borrow money against the asset from the ECB. That could be about to change however due to the looming refinance deadline. Therefore I have to warn investors that the credit conditions are potentially about to get worse not better. Banks in Europe either cannot get new capital or the price they are being offered is above the threshold of commercial viability. I heard 8.5% was the best rate offered for one European bank this week.

I have been warning that the cost of capital is going up and now I have to warn about this again in stronger terms. Cost of capital is going up sharply and this is emerging now. Here comes the next credit crisis (I wrote this yesterday and finishing off this morning).

We are therefore looking at producers with strong balance sheets and minimal or zero debt. Interest rates are on the rise in Australia and the unknown surprise to come here is that our banks have to go to the international credit markets to raise capital to lend. Therefore it will not matter if the local BA rate is held at 4.5% or not the banks will still have to keep raising rates.

You will have heard there is a new tax proposal on the table here Down Under which should never have seen the light of day. I am not getting involved in the public political debate however I have posted a major in depth response to the Governments Tax proposal for my Membership base. We also posted a list of locally listed companies with offshore projects that would not be subject to the proposed tax. This group of companies will have more flexibility to move their head office offshore and if necessary de-list in Australia if push comes to shove.

Investors may have temporarily lost confidence in our mining sector and I am not surprised. Remember though that this is NOT legislation and would not be brought into law until after the next Federal election later this year. It could be blocked by the opposition and it would also have to pass the Senate so this is NOT a done deal. I wrote recently that we had to see how this pans out as we did know the Henry Tax Reform Report was due for release. I was talking about the detail and now the cat is out of the bag the mining companies are assessing their options. I am speechless that the immense knock on effect is being ignored by the Government and will leave it at that for now.

What we have to focus on for now is the stocks that have offshore mines and are therefore not affected by the proposal. Canada also looks great now, even better than ever and we are shortly moving to assist our client base to understand opportunities on the TSX. The Canadians are sensibly offering sovereign protection at a tax rate of 25% as they are not the only ones that smell opportunity.

Emerging Opportunity

Previously I warned of a top area in April and have been suggesting that the gold sector would present premium buying here during May and June. We have been seeing a stock panic over recent trading days and weakness is the theme as profits are wiped off the board.

Level headed elite investors buy undervaluation and sell overvaluation to amass their fortune over the fullness of time. Many less experienced investors grow despondent as share prices fall eventually selling undervaluation. This latter group often get over excited by good news and buy overvaluation or tend to hold hoping for greater overvaluation at price tops.

Gold stocks Down Under were already undervalued in many cases and now I would suggest that we are likely to see a massive undervaluation develop in the coming several weeks. For US investors I would want to see the USD: AUD ratio rise significantly. This would enable you to send funds to your own Australian account here at a favourable exchange rate to snap up super low bargains.

The behaviour of gold overnight suggests to me that investors are buying paper gold at last and shunning paper notes that promise gold. This is both unallocated gold and it is also fiat currencies. Confidence is diminishing and I am so glad I have been getting my direct clients out of most stocks these past several days

The global conditions I have mentioned above are likely to cause this condition and immense opportunity. When the tax proposal fails in the coming months the temporarily tainted sovereign risk status of Australia would be reversed. This will not be necessary for excellent returns however it would be a significant benefit. I would rate the chance of this as quite high especially given the worsening of stage 2 global financial crises.

When I say some of these gold stocks Down Under are undervalued I am not overstating the fact. Just one example of this is the forward P: E ratio of an emerging producer that has no debt or hedge exposure. Working on forward projections brings me to believe this figure is approximately 2 at yesterday’s valuation. Their current valuation is not far north of assets plus cash valuing their gold at nothing.

The falling AUD is also a benefit as there is a strong possibility that our dollar will fall faster and further by percentage than gold. The AUD has fallen ahead of any major correction for gold so far sending the AUD POG to $1360 after a long consolidation around the $1250 level. This means that producers here are being marked down when their profitability is increasing dramatically.

Get aboard for your Gold Membership at GoldOz and get your homework done this will be an opportunity you do not want to miss.

Good trading / investing.