- Gold sector leading the market upturn
- Gold stock market action confirming new year long bull market
- Major players in gold physical market covering shorts
- Australian Gold Index up 46% since 1 December 2014
- Paradigm Portfolio is up 78%
- Resources turnover market share downtrends decisively broken
- Global economic activity still lively
- Global bond market continuing to roll over into bear market
- Further STRONG BUY signal for Australia gold stocks
- Preferred stocks NST, EVN, MLX, BLK, DRM, DCN, MML, RSG
- Smaller plays with TNR, TYX, PNR
Robust market action is signalling Australian Gold Stocks are leading the global recovery in resources stocks. Resources equities are also displaying non confirmation of the weaknesses in physical commodity prices and the underlying demand for resources raw materials continues to make new records in consumption. Continuing declines in LME inventories suggest physical demand is at odds with the negativity infecting futures markets and some sharp upside resolution may be at hand.
Furthermore, recent COMEX participation trends in gold and silver futures are showing massive short covering and new long positions being set by commercial traders while the general poor sentiment has encouraged speculators and hedge funds to increase their bearish bets.
A major change is likely to develop soon.
In the past 12 months since the important 6 November 2014 low at 1642 the ASX 300 Gold Index (XGD) has provided a 51% index gain and the Paradigm 1 Dec 2014 nontraded 17 company gold stock portfolio is up 72.3% unweighted (including 1.2% in dividends) and 78.6% weighted (including 2.0% in dividends) against XGD's 46% gain from 1 Dec 2014. XGD is up 21% from 1 January 2015.
The XGD is barely above the levels of 2003 and PERs and yields are now very attractive for this sector. Also the buybacks of so many Australian gold mines from the likes of Barrick and Newmont is actually giving domestic companies a more significant share of Australian gold production again.
The A$ below US$0.75 has provided an average gold price of around A$1,550 so far in 2015 and helped a large build up in cash for gold producers.
Dividends are flowing again.
Gold production in Australia is increasing and several new important expansions should see further growth over the next several years.
Source: BREE and Paradigm estimates
The action in the gold share market here in Australia is strongly suggestive of the bottoming process being mature and the real long term uptrend in gold and gold stocks is resuming.
As stated, this market action is very constructive and an improvement is being noted in market breadth, smaller stocks are running and investors are taking up capital raisings again.
I actually have my first gold sector IPO sponsorship since 2007 now underway with A$4.2m for Golden Eagle Mining coming soon.
The market action is very encouraging with XGD's share of All Ordinaries market $ turnover now well over 2% again and looking to double from here.
The prospects for earnings and dividends is what drives stock prices and gold companies always have also had the option value of a higher gold price or increased resources. The prospects in recent years have been quite the opposite so all option value has been squeezed out and value is now substantial.
The prospects now are greatly enhanced but sentiment is still very poor so the opportunity has ''once in a generation'' status.
The XGD is still 70% below the April 2011 high when A$ gold was A$1408/oz. It is now A$1550.
As always, it is important to put all market action in to perspective and to consider what the markets are really telling us.
Again, the adage, `heed the markets, not the commentators' has helped so much.
The markets are also saying that the physical demand from India and China is strongly underpinning demand and that, in great contrast, the record level of over 300 futures contract ounces sold for each deliverable ounce registered on COMEX says a serious mismatch might just develop along the way.
The current market is not a just a random point in time but a manifestation of the long term global outlook but coloured by today's sentiment.
Returning to my previously published long term themes we can note that the oil price bottomed at around US$10/bbl in Dec Qtr 1998 and then had almost 10 years of rising prices before peaking at US$147 in May 2008. The CRB index of commodities (itself highly skewed to energy) showed a similar rise.
The forces behind the commodity bull market were global growth and the remarkable entry of China and its voracious demand for raw materials. From the resource sector perspective, the rise of the steel industry in China to over 800mtpa and China being responsible for the consumption of around 50% of most industrial metals dwarfed anything in modern economic history.
Export volumes and market prices were very strong and the marginal increases in demand required marginal increases in output and often these marginal increases were from marginal projects.
So a slowing in demand growth created a change in the market momentum and sentiment and brought about a sharp fall in prices and over seven years of bear market since mid 2008.
The speculative blip was 2010-2011 but this has now been thoroughly squeezed out.
We can see this in the performances of the various resources indices in terms of price but we can see this even more painfully in the declining share of ASX market turnover.
Mining and Metals had 25-30% of turnover for 2007 to 2012 with spikes to 35%. Its down to just 13% now. Google, Apple, Tesla and banks have been far more attractive to investors.
But this downtrend has now broken and like the Gold Sector is attracting accumulation.
However, we should all note that the real reason for this improvement is what Dawes Points has been saying all along.
The Chinese economy is still growing and with the important One Road One Belt Silk Road concept the demand for raw materials will be maintained and will continue to grow.
Crude steel production has held up well against the calls for a major fall but surging steel exports to ASEAN and to the numerous China-sponsored infrastructure projects in many parts of the world have hidden weaker internal demand.
Nevertheless there has been a major drawdown of iron ore inventory on the part of the steel mills in China, a drawdown in the port stocks in China from over 110mt to under 90mt and all the major producers have run down their own mine and port stocks. Obviously the high cost exporters around the world have stopped and domestic magnetite concentrate production in China is falling sharply at last.
I had expected a short cover rally in iron ore in this half year as this inventory reduction is readjusted upwards but it hasn't eventuated.
Consumption of most metals however is still at record or near record levels and LME inventories continue their declines.
This is not the stuff of recessions and major declines in economic activity.
The GFC only spurred China onward but its 1,375m people have had a taste of a better life and this can only grow stronger.
China has also the long term goals of its westward-looking agenda that aims to link not only the 3,300 mi people Dawes Points referred to over the past few months but to Europe linking another 1,100m to East Asia.
In today's crisis with IS in the Middle East, the infrastructure quest through the `Stans might actually change the power base and outflank the extremists and lead to Islam's own Reformation. Who knows!
We still need to continually revise what we think of China. Those 1,375m people will be 1,400m very soon and the build of infrastructure will continue to change trade patterns.
The
Dongfang Modern Agricultural Holding Group IPO by Paradigm Securities also gave us a very important window into another side of China. (The IPO raised over A$39m and so far has reached a peak of 45% gain on the IPO price.)
China has so many important regions that have over 200m people individual economies that can be operating economically quite separately from each other so we should be wary of commentary from Guangzhou or Shenzhen close to Hong Kong when all the action might be in faraway Chongqing or Chengdu.
So China has this combination of 50% of global consumption on one hand and then the emergence and entry of so many new intermediaries with different trading policies and procedures. For the resources sector this really means numerous new players in the supply chains and the participation of these new traders with or without inventory. Who is long or short on anything? Who is a producer or user?
Extremely hard to know yet.
More new players are in the markets but many of the established groups elsewhere in the world are now holding back.
Could this be new but inexperienced players trading in the futures markets?
Following the sentiment and not the facts? Heeding the commentators and not the markets?
In my experience, all this is almost guaranteeing a return to robustly positive markets in the decade ahead.
In contrast, the market place is still extremely bearish and copper hit a six year low last week but some interesting things are taking place elsewhere.
Firstly here at home Australia is a major global producer of raw materials. The lower A$ has been very helpful in allowing A$ cost producers to recover and rapid changes have been made in the domestic cost structures as well. Some stocks are holding up well and like the Gold Sector, are leading the world out of the gloom.
On a bigger scale, the performance of commodities and the equities of those companies that produce and use them often give us clues to the sentiment of the market place.
Oil may be bottoming because major integrated oil and gas companies' stock prices and the US E&P indices are not confirming recent lower oil prices. Oil demand is still rising at 1.5mbopd each year and US tight oil output is declining.
We can look at Exxon, Conoco, Chevron, SHELL, BP and BG Group to show constructive market action and the S&P E&P (Exploration and Production) Index may be indicating its 60% fall in 18 months is overdone. In Australia, Woodside, Beach/Drillsearch and Origin look better and Santos after its capital raising might just get by.
Iron ore stocks FMG and Rio are not confirming a lower US$ iron ore price although BHP and Vale are weaker and are carrying the weight of the SAMARCO tailings dam collapse. (We might ask what the Brazillian bureaucracy was doing about the standards they had previously laid down.)
All this is against a global economy that hasn't fallen over and the US, China and India may just get stronger. Even Japan with its stagnant economy is still cranking out steel at full capacity of 110mtpa.
So the outlook is looking even more encouraging and for us in Resourcesland this graphic below is speaking volumes in clear data.
Our basic livelihood of emerging resources companies (XSR) is showing another clear break in the decline of market share of All Ords turnover.
The market for small resources is improving. This is hard evidence here but the signs are everywhere.
Interestingly, while the XMM and ASX200 Resources were breaking to new lows the XSR has been assisted by the XGD and has held up well.
Dawes Points also knows this from recent capital raisings for small resources companies.
THE BIG PICTURE AGAIN
The major trend assessments for investment markets have to start with assessing the direction of the bond markets.
It is so clear that the growth figures in the US with record sales levels in many markets sectors and declining unemployment that interest rates must rise.
US Housing Starts are still well below replacement levels of 1.5m units pa and the Philadelphia Housing Stocks Index looks to want to surge soon.
So the US bond market is looking very toppy with the 10 year having its peak over three years ago. It is taking a long time to roll over but the result is inevitable. The downward adjustment could take place at anytime now and the raising of short term interest rates may be the trigger.
The world has invested almost US$90trillion in bonds.
Even a tiny flow into hedges could be massive in commodity and resources stocks.
Stocks to think about
The recommended Gold stocks noted above are for Core Positions that should be held for years and not really traded.
Stock | Price cents (AUD)
More speculative plays are
I own DRM, NST,MLX, RSG, TBR, GOR, BLK, MML, TNR, TYX and PNR. STO, BHP, DFM, BPT.
Edition #43
Source: Ipsos Report - Dongfang Modern Agriculture Holding Group Prospectus
China and India populations are also buying more gold and silver.
So who now owns the gold and who will be making the rules?
The demographics of the West are strongly influenced by the Baby Boomers who grew up in a rapidly changing world that was actually a slipstream sucking them in behind a World War II-depleted generation of cold-reality shaped stalwarts and but then the BBs also graduated into a generation of the Lyndon Johnson Great Society of publicly funded under-achievers.
The initial gains were spectacular but the aging hippies and their uninspiring Generation X progeny gave us all massive government spending, Budget Deficits and the Welfare State. And generations of reactionary bureaucrats.
For us unreconstructed Baby Boomers, the 1960s and 1970s were a time of revolution in thinking after the conservatism from the Great Depression of the 1930s and the upheaval of World War II in Europe and in the Pacific. The Depression said money was hard to come by and your savings were hard to hold on to and then WWII said that your life and personal safety, as well as savings, were hard to hold on to.
Lord Keynes in the1930s with his Deficit Spending backed up by some US attention seekers announced to the world that `Government’ knew better and it could invest OPM (Other People’s Money – yours, as the Taxpayer) better than the people who earned it, i.e., you and corporations you might have invested in.
The Revolutionaries of the 1960s and 70s are now the Reactionaries. And their children too. Governments and quangos and NGOs all wanting to tell you what to do and how to do it. Using your tax paid dollars of course. Groupthink and consensus overruling facts and natural evidence.
And calls for an inquiry on iron ore. For heavens’ sake. Dawes Points set out precisely in early May what was happening within the iron ore market. The expected short cover rally is now underway. How far will it run? The bureaucrats are wanting to be heard now but the horse has bolted. Yet another thought bubble.
But perhaps the people overall have their own special way of responding to the uncertainty . Building up cash deposits. It is truly fascinating how people everywhere have taken to building up savings. Inventory of Money. Conserved labour. Private Savings. (And in contrast, Public Profligacy). This Inventory of Money has come up often in these Dawes Points. As does flow of funds. These funds will need to flow!
Now with that flows of funds. Recall that we have gargantuan annual expenditures in USA (US$3tn), Europe (Euro 2tn) and here in Australia (~A$430bn(US$320bn) Federal Budget Expenditures) with deficits that add annually to the debt burden. Funded by bond sales. Government bonds now have higher yields than corporates!
Dawes Points has been talking about the bond markets for some time now but I hope you have noted what has happened in the major bond markets over the past couple of months? A volatile top and then carnage! The bank shares are following.
Just think about bond prices. The lower the coupon the higher the volatility. Doubling in yield. Halving in price? Well, not quite but horrible anyway. And much more pain to come.
Germany 10 years are now 0.88% after falling to below 0.05%! And the UK has blasted through 2.0% after seeing 1%.
This next one has to be one of the great technical graphics in my investing life! US 10 Year Treasury Notes by price. The peak in 2012. The break of the break of the uptrend in 2013. The rally in 2015 back to the trend break line for the `goodbye kiss’ then a sell off! A break through about 122 (but probably 125!) might just put the fear of God into the `safe haven’ believers. The falls this past month have been truly horrendous. No wonder banks stocks are weak. Keep watching this key indicator because it is not yet “oversold”!
US$85-90tn in useless overpriced global sovereign debt. And more coming every year. These graphics on US, German and UK bonds should be telling YOU something LOUD and CLEAR. Disinflation is over. The central banks want some inflation and I just think they are going to get it. Maybe bigger than they expect.
And what does Dawes Points think of rising bond yields?
Good news!! All time highs in equity markets! Almost everywhere but here in sleepy Oz. A nation of bureaucrats chasing bank shares.
Funds will be flowing out of these bonds (and bank shares) now. Where will they go? General equities of course, then resources shares. Then gold and commodities. Let’s just watch this play out.
The oil price as expected has decided that low is no use to anyone and China’s 5.4% pa June Half 2015 gain means another 0.5mmbbl per day consumption. The glut might just be over in the Dec Half and oil prices could be higher.
And while we were talking of the build up in bank deposit holdings we can also already see the build up in gold holdings. Certainly underway in China and India.
Do you go along with that rising interest rates will sink the global economy? Possibly that might happen, but the markets are telling you differently. The US$ may have a last gasp rally and the fraudsters on COMEX may try to hit gold and commodities again but it will be futile.
Recall the LME metals graphics in the last Dawes Points. Consumption growth rates that even surprised me with their strength. And no LME inventories. Thank goodness we are going into Northern Hemisphere Summer otherwise the commodities would be surging already.
Just come back to LME inventories. Other stocks do exist but LME stocks are a helpful indicator. The composite is at just one week and some of the individual metals are below. Copper, lead and tin are down to just one week and zinc is less than two and falling rapidly. Stocks of Nickel metal are at an all time high but this is disguising a major shortage developing in nickel-rich iron ores in China.
And China crude steel production is still confounding the doomsters. 838mtpa in April 2015. Up just marginally on 2014 and the second highest rate ever! Iron ore inventory movements will be so important to watch and will strongly influence iron ore prices. Expect a rally to US$80 by year end.
There is just so much more to come here. I hope you all have an understanding of the significance of the Chinese Silk Road Infrastructure programme and the Asian Infrastructure Investment Bank. No slowdown in China and acceleration in ASEAN and India.
You have seen how the probable iron ore short squeeze as suggested in the last Dawes Points is materialising. It might be one of the largest volume global markets but it is still a very thin market for traders.
The inventory shift highlighted there has seen China port inventories down over 25mt (~20%) to <85mt.
So the basic fundamental supply/demand data is overwhelmingly positive and a commentariat environment has been created that is overwhelmingly negative.
I am seeing dozens of small resources stocks attracting good volume and recovering stock prices. The opportunities are many. Companies with decent projects trading at a few % of their NPVs and are just awaiting funding. Producing companies trading a low single digit PERs. Explorers with some outstanding results. Technical geological and geophysical evidence is building up for the most extraordinary decade of new major discoveries in Australia in oil and gas, copper, lead-zinc-silver and gold.
The indefatigable Kerry Stevenson and her recent Symposium at Broken Hill has just delivered a focussed insight into the massive potential for new discoveries in central Australia. Knowledge and technology that begets new knowledge and then great wealth. The mining and exploration sectors provide some of Australia’s most dynamic Intellectual Property.
Hats off to the staff from the universities and Geological Surveys of NSW, Sth Australia and the Northern Territory. The base that is being laid out before us is truly exhilarating. Australian exploration will be having a vintage decade.
I hope I have the time to cover this in more detail in the next few months because the implications are vast.
So here is your chance to do very well on most resources companies.
I know dozens of these companies with outstanding operations and projects and there are scores more that I don’t. Many are already up 100s of % in 2015.
Most are too small to even fit within the ASX 300 sub indices but I am seeing improving volumes, increasing market breadth and the rising prices that go with them.
Participation by a broader section of the market place is still not with us, reflecting the fear and pessimism but this has been a very long period of bear market so it will take time to bring this back to normal. That means this bull market will last a very long time too!
Call me if you want to make some real money in the year ahead!
But now however, the evidence can be best seen in the actual performance of ASX the Small Resources and Gold Sector Indices.
Market share of ASX turnover is picking up and the four year-long downtrend declines have been broken. The momentum is now with the Resources Sector.
Have a close look at these graphics and I haven’t done them because they look colourful.
Each one suggests major changes are coming in the markets.
There is a downtrend trend break for the Metals and Mining.
Small Resources had its bottom in June 2013 which is my `low’ for this cycle and many stocks outside the XSR have done very well indeed.
The XGD is showing leadership after bottoming in November 2014.
Gold sector turnover is rising as breadth and participation increases. Appreciate that the ASX Gold index is still down 70 % from its high and is now turning up.
Certainly the weakness of the A$ in late 2014 helped kick the market and some people might have thought it was just an A$ gold adjustment that would soon peter out. Nice jump. Take profits. Now what?
Well it has held its ground and then moved marginally higher.
In my view, the XGD is readying itself for another major move up. Perhaps mirroring the bond markets that seem to be expecting an even bigger thump to come there. Timing suggests mid to late June so you may not have much more time to dilly dally.
This looks very interesting and a break above 2800 could see a sharp rush to 4400 (up 64% from here). Will we get it?
Looking at this index more closely there is much to like.
It is showing intra sector rotation as some stocks have weakened, some have moved sideways and some others have surged.
Dawes Points has its favourites. NST, MLX, TBR, BLK, SBM, OGC, NCM, EVN, BDR, MML, GOR, DRM and CGN.
XGD Gold stocks against A$ gold had fallen 80% from April 2011 to the Nov 2014 low! A$ gold at the low was the same as at peak in April 2011!!
Other sectors are moving up and the takeover of Sirius by Independence Group along with the consolidation in the gold sector should be giving everyone confidence.
And I do like the oil and gas sector. Oil is holding up well with strong demand from Asia and the US output is stabilising or falling.
The thesis in Dawes Points hasn’t changed these past two years even though some things have gone terribly wrong in the A$, the iron ore price, the oil price and…… oh yes, resources stocks themselves.
But the rest of the scenario of:-