ASX Gold Sector Finally Breaks Out #81

by Barry Dawes

Key Points

  • ASX Gold stocks leading global reflation
  • ASX Gold Index breaks above 5400 and 2011/2016 downtrends
  • Newcrest finally joins the party
  • Australian Gold Production heading for new annual high >310t
  • Australian gold exploration expenditure hits new high
  • Gold is breaking out in many currencies
  • NCM, NST, KLA, EVN, SBM, RRL, SAR, RSG, OGC, TBR/RND are BUYS
  • Numerous small gold companies are seriously mispriced and cheap
  • The signs here are strong and we are just waiting for the US
  • Outlook good for an excellent 2019 in gold and gold stocks

Best wishes to all readers for a Happy and Prosperous 2019.
Call me to participate bdawes@mpsecurities.com.au +61 2 9222 9111


The performance of the Australian Gold Mining Sector has been remarkable since the Dawes Points low of June 2013 and even more impressive since the November 2014 low in the ASX S&P All Ordinaries XGD Gold Index.

The key growth stocks of NST, EVN, SBM, RRL, SAR and TBR/RND have provided outstanding returns and have accurately reflected the Australian Gold Industry and the changes in gold production, resources expansion and cost reductions.

This gold industry growth has provided strong earnings, cash-rich balance sheets and a growing stream of dividends.

Dawes Points considers that the Australian Gold Industry is actually leading the world in mining and exploration activity and in share price action in a major global reflation that will take commodities, and of course resources stocks, to major new highs in a bull market that will run for many years.

The global QE has been unleashed and it is steadily working through the global economy and predates any QT. Inflationary pressures are building. China and India are still growing strongly.

As has been pointed out previously, the ASX XGD Index has failed to truly reflect the success of the Australian gold industry due to the large weighting of Newcrest(38%) in the Index itself and to the inclusion of offshore or irrelevant companies. It has shown no growth since July 2016 despite the great successes of NST, EVN, SBM and RRL.

The XGD has now finally broken both its 2011 downtrend and also the downtrend from the July 2016 high and should now start to motor along strongly in that global leading role.

These two 2005-2018 graphics show the time frames and the significance of these trend breaks.

Do understand the time frames and that the resulting positive moves will be measured in years not months.

Here is XGD ASX Gold Index over 2005-2018.  The 31 Dec 2018 close of 5465 is above the key 5400 resistance.

Newcrest (NCM.ASX) at A$16.7bn market cap and 38% of the XGD is almost 3x the size of the next largest at A$6bn (EVN 14%) so its non-performance since mid 2016 has strongly infuenced the performance of the XGD.

NCM is now joining the party as a rising participant stock and so will have a major impact on the XGD as NCM moves higher. Its weighting in the XGD is also likely to increase. With 2.5mozpa plus 80ktpa copper and a raft of new growth projects NCM is a very different company today compared to 2015.

The XGD is following the A$ Gold Price and the break above A$1,800/oz is very positive. Higher A$ gold prices are likely and hopefully not just because of a lower A$.

On a relative basis ASX gold stocks are still historically cheap against A$ gold and are likely to be rerated from 3.0x the A$ gold price to perhaps 5x.

The XGD Index today is different to 2008 (only 24 vs 52 companies) and the companies are different but the quality is far superior and the PE ratios are far lower.

A rerating would be greatly deserved.

The production growth of the major gold players (21 companies plus NCM ) were highlighted in Dawes Points #80 and the activity within the non-NCM gold industry is likely to be able to maintain that 13%pa CAGR.

The A$ gold price has risen over A$100 since November and that would have added about $A450mpa to pretax earnings to the 21 key companies and about A$250mpa to NCM.  

Australian gold production reached a new annualised high in June Qtr 2018 (adjusted higher on previous published figure) of 324tpa giving a likely 310 tonnes minimum in calendar 2018 and almost 320t for FY19. Kirkland Lake’s Fosterville will be adding another 10 tonnes to Australia’s gold output in FY19. DCN, GCY and GOR will also be adding in FY19 so 320t might be too low.

The exploration spend on gold also reached a new high of A$959m pa in the Sept Qtr so new resources, new deposits and increased gold production will be coming.

All this data indicates the Australian Gold Industry is in excellent shape to provide further outstanding returns to shareholders.

The big stocks are still great BUYs – NCM, NST, KLA, EVN, SBM, RRL, SAR, RSG, OGC and TBR/RND.

Make sure you have some of these stocks in your portfolios.

As noted many times previously, these gold stocks will give better returns than you will get from the banks. Dividends, special dividends and capital returns are coming here too.

Great performances here but why is the overall gold sector performing so poorly?

The 38% weighting of NCM has ensured the XGD has shown no net growth since July 2016 so the Index has provided the marketplace with a clear ‘don’t bother, nothing happening here’.

An extraordinary outcome. Massive outperformances from NST, EVN, SBM, RRL.  NCM going nowhere.

And underneath, there are so many small producers and wannabees that have been ignored and represent extraordinary value.

Talk to me about some of them.

GOLD in US$

The main Dawes Points thesis is that China (1400m people) and India (1300m) will continue to grow their economies and that rising middle classes will continue to absorb all the available gold produced in the West.

Gold will become a very tight market.

Gold is still priced in US$ but over time the gold price in Chinese Yuan and Indian Rupees will become more important.

So the current focus is on US$ pricing.

The technical breaks of the 2011 downtrend in gold vary with individual currencies.

Here the US$ gold price had broken its 2011 downtrend in 2017 but has fallen again to test that downtrend and now seems to be moving up to test US$1300-1320.

Attention must be still focussed here.

The downtrend in A$ appears to have been broken as we have seen and maybe also in Canadian $.

Gold has broken the 2011 downtrend in Sterling, Rupees, Sth African Rands and also in Swiss Francs but not yet with the Euro nor the Japanese Yen.

The 2011 downtrend also still exists with Nth American gold stocks.

The 2018 sell off brought the XAU Index back to the levels of 2008 and provided an excellent long term turning point but the 2011 downtrend is still well above the market so the immediacy in this sector is not as strong as in Australia. 

Nevertheless, markets have leaders and Barrick is the market leader in capitalisation and gold production (before and after the Randgold merger).

It is leading the market and is close to breaking its 2011 downtrend.  A weekly close above about US$14 would confirm the break.

The recent sell off in the US markets led by Tech Stocks may be over for now but gold is unlikely to rally strongly just because of stocks falling.

Do note that many non-tech ‘value’ US stocks were making new highs in late Nov- early Dec 2018 so it certainly wasn’t an end of the world event.

A better indicator of future market action to follow might be silver.

Most small gold and resources stocks have been performing in line with US$ silver.

A pretty miserable sight for the past seven years and for now but just look at the next graphic.

Silver is at extremes against gold and very oversold.

Any snap back could be very powerful.

Could we get this happening and also spilling over to ASX small gold stocks?

Gold is the leader in all this so upward resolution to this 7 year downtrend will have immediate impact on gold stocks but it will also attract major new investment into resource stocks and commodities.

BHP, RIO and S32 are standouts but so many opportunities will be presented.

And I do particularly like copper.

Call me to participate

Barry Dawes  BSc F AusIMM (CP) MSAAFA
Executive Chairman
Martin Place Securities

I hold or manage in portfolios most of the stocks mentioned here.

+61 2 9222 9111
bdawes@mpsecurities.com.au

2 January 2019

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