Category: Dawes Points

Getting so close to major market breakout #83

by Barry Dawes

Key Points

  • Gold still basing ahead of a surge in 2019
  • Australian resources sector ready for breakout
  • US Equities recovering
  • Emerging markets recovering nicely
  • BHP solid and near 4 years US$ highs
  • Brent oil price has bottomed
  • Many, many opportunities in ASX resources stocks
  • Contact me to participate

2019 seems to be shaping up for a strong year with robust demand for commodities and very constructive technical setups for many markets.

The selloff in the US Technology Sector may now have seen its worst so the outlook for the resources against a very pessimistic market place looks solid.

I still consider the evidence is extremely strong for the next leg in the Dawes Points Global Boom TM and for the Australian resources markets to start soon.

We are certainly HERE!

I continue to emphasise the time frames involved in this pattern (starting from Dec Qtr 1998 and extending into the ~2030s) and I need to add that the current market conditions (the rise of 3300m people in Asia) have never before experienced so this ~30 year pattern is unique in modern history and probably unique in all human history.

We incessantly bombarded with bearish opinion on China and the global debt position and now the next recession in the US is already underway.

Yet the markets say otherwise.

Sir John Templeton (1912-2008), one of the greatest investors, is credited with stating

    • Bull markets are born in Pessimism

 

    • Grow in Scepticism,

 

    • Mature in Optimism and

 

  • Die in Euphoria

That is the theme of the Dawes Points ASX Resources Sector Pattern.

The terms are modified to give a clearer picture of the first leg rising (from the Pessimism of the prior cycle) in Scepticism and then falling back to Pessimism before setting off into the Optimism Leg. Euphoria is still many years away.

These are also the three impulse legs in Elliot Wave terms.

This pattern can be seen perfectly in the ASX All Ordinaries XMM Metals and Mining Index.

Wave 1 (the Disbelief Leg) peaked in 2008, fell in the GFC Pessimism then rallied with Hope into 2011 before that horrific 50% 15 month decline of Despair (or Pessimism writ larger) in to late 2015.

ASX S&P Metals and Mining Index Weekly Close 2006-2019

Reviewing the contemporary commentary in Dawes Points over 2013-2015, it was clear that it was all sentiment driving the markets. That Wave 2 into late 2015 was pure sentimental Pessimism. And Pessimism only exists in a Wave 2.

The fundamentals of strong growth in China, record after record levels of consumption of metals and other resources commodities, declining terminal market inventories, growing resources sector earnings and a strong US equity market were simply ignored.

After that late 2015 selloff, the XMM rallied for over two years before spending most of 2018 in a sideways to down fashion.

Note that the various corrections set up Head and Shoulders reversal patterns that give targets for much, much higher prices.

The combination of the break of the 7.5 year downtrend and completion of a smaller Wave 2 (set up by the pessimism of the Wall Street selloff) is very powerful.

We are now at the 2011 downtrend and breaking this will lead to a strong market acceleration to the upside.

Very high targets are generated by this market action

The leaders will be the market leaders of BHP, RIO, S32, OZL, WPL, OSH.

Most of these are on +5% yields with additional special dividends and buyback benefits.

But as has been stated here previously, the ASX Gold Sector is leading the broad global resources market.

The Australian Gold Sector is even more definitive.

This Dawes Points unweighted index of the Terrific Ten Australian listed domestic producers is up almost 1300% from its June 2013 lows while the ASX XGD itself made its lows in November 2014. The XMM didn't bottom until late 2015.

Those Terrific Ten were up almost 13x and truly off this chart.

These S&P ASX Indices of XGD, XMM, XKR and XSR do not accurately reflect the true state of the health of the Australian resources sector.

We need something better.

So it is always important to focus on the US$ gold price.

Gold really is the driver of the Australian resources sector.

Gold continues to act constructively in US$ and over the next few months should be able to rally back up to US$1300 and then challenge the critical US$1370 level.

US$ Gold 2009 -2019 Weekly close.

As noted, the gold price in A$ has made a new all time high in 2019 along with gold in most other minor currencies but it needs to make new highs in Yen, Yuan, Rupees and Euros before we get too excited.

Copper is also looking constructive and the demand/supply position is still very tight. LME inventories are still very low.

Oil is oversold and demand just keeps pushing at supply. Games over Saudi exports, Iran, US exports and US imports can't hide the overall issue that there is not enough low cost oil supply.

BHP is also providing leadership as it is anticipating better copper and oil prices.

So this now becomes very interesting to look at the myriad of smaller resources companies out there.

I have examined dozens of these ASX Australian resources companies over the past couple of months and consider that we are now at the equivalent of the June 2013 lows for those Terrific Ten Gold Producers.

How about another NST (16x), GOR (16x), SAR (26x), SBM (10x) or EVN (7x)?

I consider I have dozens of them.

Many sectors.

Gold. Copper. Oil and Gas. Battery Metals. Rare Earths. Mineral Sands. Uranium. Zinc and Lead. Iron ore.

The macro environment is right.

The US markets are bouncing back.

The chaotic events in Europe aren't fazing the German DAX.

Emerging markets are rebounding in a spectacular technical pattern.

The Dawes Points Global Boom is now ready for the next up leg.

Call me to participate.

Barry Dawes BSc F AusIMM (CP)  MSAFAA

Executive Chairman
Martin Place Securities

I own or control in portfolios most of the stocks mentioned in this report.

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

20 January 2019

Bulls, Bears & Brokers: Barry Dawes from Martin Place Securities joins the lineup

by Alison Sammes

https://www.proactiveinvestors.com.au/companies/stocktube/11743/bulls-bears--brokers-barry-dawes-from-martin-place-securities-joins-the-lineup-11743.html

Barry Dawes, geologist and founder & executive chairman of Martin Place Securities, joins Proactive's Danielle Doporto as the newest contributor on the Bulls, Bears & Brokers lineup. Dawes emphasises that he is a bull, outlining areas of opportunity he sees for 2019 with a particular focus on Australian gold. 

Watch our full video interview for all of Dawes Points.

What’s in store for 2019? #82

by Barry Dawes

Key Points

  • Equity volatility to continue but global bull markets intact
  • Subsectors show key outperformance
  • US T Bond rally probably over
  • Asian markets still rising with growing economies
  • ASX Gold Index breaks 2011 &2016 downtrends
  • Other ASX Resources Indices to follow
  • Copper and iron ore still in uptrends
  • Uranium sector now very attractive globally but few local opportunities
  • Inflationary pressures to build
  • Exploration discoveries in Australia to blossom

Call me to participate 
bdawes@mpsecurities.com.au
+61 2 9222 9111

The recent tumble in US Tech Stock markets has brought out calls again for the end of the world as we know it.

This is all standard commentary from the perma-bears and we all know that global government debt and everything else is pretty horrible out there and Australian housing prices are about to collapse and we are all on our way to Hell. 

These issues have been obvious for over a decade now but we have had far too many inconsistencies in the performances of markets to conclude an overall negative outlook is to apply.

Hence the continuing DawesPoints bullishness.

Personal experience shows that real bear markets result from economic contractions that reduce demand at almost every level. Bear markets are caused by liquidity issues starting somewhere in the consumer - business chain. The negatives just snowball and affect everyone. At these times consumers have too much debt and corporates have too much debt. Everyone cuts back to rebuild balance sheets. These periods are typically deflationary.

This time however, the biggest debt issue for us is government debt.

And government debt, unlike corporate or personal debt, is repayable in printed fiat currency (or electrons) so whatever happens now will be inflationary.

So as ever, it is `heed the markets, not the commentators.'

So what are markets really telling us?

In early 2011, when investor sentiment was still really miserable after the 2008-09 GFC, my presentation to about 40 MPS clients highlighted that 15 of the 30 Dow Jones Industrial Index stocks were at or around all time highs. Audience response was one of truly dropped jaws of disbelief.

The general commentary at that time was still very bearish but 50% of the world's most important stocks were at all time highs. The great bull market in the US just kept going after that.

This episode indicated that that just following an index or the commentators can be dangerous.

The current US market has provided some serious volatility and the tech stocks took a real cold shower.

So let's look at what the markets are really telling us.

Firstly the Dow Jones 30 Industrials has had a 19% pullback from its September 2018 and found support on an intermediate channel uptrend. (The S&P500 fell 20% from its high.)

Interestingly, eight of the Dow 30 peaked early in 2018 with that strong run up to 26,000 but then ten made their highs in December 2018 just before the major late December sell-off.

Also some interesting developments about sectors arise.

What do you think of this?

Could this be suggesting a change in leadership again from tech stocks to real economy companies. 

PG outperformed Microsoft for a decade then the roles reversed.  Is this another decade of PG outperforming Microsoft?

Another way of looking at this is a `Value Stock' ETF vs NASDAQ Composite Index.

Will `value' stocks outperform NASDAQ again for a decade?

I don't know where we will go from here in the US but employment figures are still rising strongly and I still consider housing the US is far from turning down.

Also with a sharp reversal in interest rates on Friday the counter trend decline in US bond yields is probably now over.

The next several graphics provide evidence that stocks may have seen their worst:-

Dow 30 Industrials – internal channel support.

S&P500 – support from major lower channel

NASDAQ Composite – internal channel support

Russel 2000 Small Caps - extreme sell-off to bottom channel

Russel Micro Caps – supporting on bottom uptrend channel

Look at the sub sectors:-

The US Banking sector is looking OK to me and has bounced off its uptrend line.

Consumer Discretionary Stocks ETF is continuing to outperform S&P 500. 

And Housing still has to make up a large inventory rundown and pick up in deferred demand.

Looking across these indices and sub sectors with some stocks at new highs and others at very oversold levels, I just do not see a further major decline that will break the uptrends since those 2009 lows.

If you have another opinion, please send the evidence from the markets.

Looking the Asian markets where 1300m people in India and 1400m in China are just getting along with their lives.

India is finally showing true strength with annual crude steel output exceeding 106mt and taking it past Japan to become #2 producer. 

The India Nifty Fifty is holding up well and matching its 6-8%pa GDP growth strength.

We are also seeing India quietly taking a stronger diplomatic and economic role in its region while the world is focussing on China-US relations. And we are painfully seeing a new assertive professionalism in the Indian Cricket Team. 

China has maintained a high rate of crude steel production and indicating that economic activity is still robust.

We need to note this rate of change model that the 6 month rate of change is declining but the 12 month is still rising.

Some negative data is coming from China but the Shanghai Composite has been declining for over three years, is at four year lows and is very oversold.

I am intrigued and fascinated by these two graphics of India and China vs the S&P500.

India breaking out against the S&P500.


And the Shanghai Composite suggesting its times of underperformance against the US over the past ten years might be over, at least for now.

The graphic for Emerging Markets overall still looks good to me. It is a massive ten year ascending triangle and the price is simply pulling back to the breakout line after a strong run in 2017.


Japan has suffered a sharp pull back and a breach of its uptrend line but we will have to wait for other signs before expecting further weakness or resumption of the uptrend.

And even Germany is oversold and should be bottoming. It has been leading the world markets for years.

Resources Outlook

The big news of 2019 so far for us has been the breaking of the 2011 and 2016 downtrends by the ASX Gold Index.

As pointed out last week, the Australian Gold Sector is performing well with its growing production profile and its improving financial position of earnings, balance sheets and dividends.

The Index has finally broken the 2011 and the 2016 downtrends and seems ready to push much higher over the next few years. The Index ran very strongly from the global precious metals lows in late 2015 with a 100% gain into July 2016.

30 months of consolidation should provide the Index with enough power to make a new high above the 8499 of 2011.

The strong performances of NST, EVN, SBM, RRL and SAR have been overshadowed by the very bulky NCM which was really following the Nth American markets and underperforming.

NCM has now broken its 2011 down trend so will have a very large impact on the XGD itself. 

NCM makes up ~38% of the ASX Gold Index and is almost three times the weighting of the next biggest company in this Index. 

This stock is a strong buy.

As stated here numerous times, gold is the key driver in the Australian resources market.

And the Australian Gold Industry is leading the world in the global reflation currently underway.

This leadership is through mining and operational activities which include extraordinary productivity gains through application of new technologies, processes and procedures.

It is also encouraging to see BHP's copper TV advertising to promote BHP as a technology company.

The Australian Gold Industry is well ahead here too.

The Gold Industry also has excellent operating margins, growing earnings and flowing dividends as has been reported.

For whatever it means, the ASX Gold Index has been trading at just under 3x the A$ gold price. In 2008 it was >6x.

At A$1800/oz and all up pretax costs of say A$1200/oz the gold Industry would have a A$600/oz margin or 33% pretax earnings yield.

At 30% tax rate this is a 23% earnings yield or PER of 4.3x!!!

Very cheap so 5x the A$ gold Price would be a sector PER of only 7.2X .

The major ASX resources indices have been moving sideways in draining 12 month consolidations that are completing the right hand shoulder of the massive reversal pattern with the lows in early 2016.

As the stocks break higher with gold as the driver, the upside becomes quite large.

XMM Metals and Mining Index

XJR ASX 200 Resources

ASX XKR 300 Resources

ASX XMR Midcap Resources (8 stocks only - Yet another garbage index!!)

And Dawespoints has already noted that BHP, RIO, S32, NST etc are `value' stocks so here is the best `Value" vs ~Growth' opportunity:- 

Australia's export volumes are rising as are US$ prices and with the A$ at low levels against the US$ the revenues and earnings for Australian based resources companies are very robust.

Copper looks strong with excellent growing demand and limited supply and with no LME inventory.

And ironore is likely to be on its way to new highs over the next few years. Another attempt on the 2011 downtrend line should do the trick. 

The LME industrial metals look firm and are heading for new highs into 2020.

And LME inventories are ridiculously low despite a modest recent rise in copper and aluminium while the rest just keep declining. 

The Uranium market is getting very tight and is ready for a substantial rise over the next decade. The price is still severely depressed on a long term basis but is now improving. 

Note that the U3O8 market has jumped 30% since May 2018 and should see much higher prices over the next few years.

New nuclear power stations are being built in China and India but the supply has not yet been found or contracted. Utility contracting in Mar Qtr 2018 was 24% uncovered for 2021 and 62% uncovered for 2025. Production has been shut in by Cameco to further tighten the markets.

Substantial shortfalls appear probable and inventory building is likely to create additional demand. 

Uranium market leader Canadian Cameco (US$ chart) is performing well and should see much higher share prices in this coming cycle. 

Australian Exploration.

While all these metals and resources have robust demand/supply positions we also have the added bonus of exploration activity.

The many excellent results over the past several years have generally not been rewarded by the market place and are often completely ignored.

The next couple of years are likely to change all of that. Work being carried out by many companies in gold, copper, nickel, all the other EV metals, iron ore, uranium and oil and gas has, is and will be finding important new resources. So keep watching.

Also, note that about 68% of Australia's bedrock landmass is covered by sediment of varying ages and thicknesses that hinders exploration efforts.

In consequence, the past decade has seen some outstanding advances in exploration procedures and technologies that have resulted in some important discoveries.

New geophysical tools are being developed and applied and the current Geoscience Australia A$100m AusLAMP programme is utilising the magnetotelluric (`MT') technology to find subsurface deepseated mineralised intrusive bodies that have fluid pathways to surface or near surface sulphide mineralisation. 

The results to date are very interesting and a nationwide programme is underway.

http://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=2ahUKEwjyifTUrdrfAhXXdN4KHZs_Ax4QFjAEegQICBAB&url=http%3A%2F%2Fwww.ga.gov.au%2Feftf%2Fminerals%2Fnawa%2Fauslamp&usg=AOvVaw3zsfFcc4ZFF5JfTSzIZV_w 

South Australia is embracing this technology with vigour.

DawesPoints has already mentioned the Big Three recent potentially important copper discoveries.

  • BHP – Oak Dam West 425.7m @ 3.04% Cu from 1063m including 180m @6.07% Cu.
  • RIO - `Winu' Prospect ( Estimates of 150-200mt @ ~1% Cu with high grade gold???)
  • NCM  -  EXCO Option Prospect South of Cloncurry 8 x 800m Diamond holes ????

These could have share price impacting outcomes even on these major stocks. 

Within all this DawesPoints is observing that an exploration boom is now developing for copper explorers and developers throughout Australia.

The Patterson Ranges in WA around Telfer will be very important with RIO, FMG and a few small stocks are well placed. 

South Australia will benefit from this Oak Dam West discovery through BHP and from drilling commencing on the Lake Torrens Project for AIS and ARE but also through important geophysical surveys that are utilising the MT method. More on this soon.

Queensland has considerable activity in the Mt Isa Block with Walford Creek (AML) and Cloncurry still providing good results.

Keep watching this activity.

Gold exploration, as noted in DawesPoints #81, hit a new nominal high in annualised expenditure close to A$1000m in the September Qtr 2018.

Exploration in the Yilgarn Block in WA continues to provide new styles of gold mineralisation that shows that even with currently providing almost 60% of Australia's gold the Yilgarn may still be only scratching the surface as drilling goes deeper and new host rocks are found.

The Pilbara Gold Conglomerates are getting more interesting and exciting by the month as the understanding of that mineralisation increases. Expect big things here.

The Pilbara is also getting a raft of new hard rock discoveries as this province has been under explored compared to the Yilgarn. 

Fosterville for KLA has changed the face of gold in Victoria and its 1.16moz @61g/t Swan Zone seems to just get better. CYL is looking for and has indications of another Bendigo but its drilling is also taking into account the technical input from Fosterville.

The Tanami in NT will also provide some excitement. 

Hydrocarbon exploration is also very active and the gas discoveries to meet the policy-driven disasters of gas shortages are there to be developed. 

The outlook then is for equity markets to stabilize, the US economy to continue to grow, Asia to continue to grow and commodities to perform extremely well.

The outlook then is for equity markets to stabilize, the US economy to continue to grow, Asia to continue to grow and commodities to perform extremely well.

Call me to participate.

Barry Dawes  BSc F AusIMM (CP) MSAAFA

Executive Chairman
Martin Place Securities

I own or control in portfolios most of the stocks mentioned in this report. 

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

7 January 2019

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

Gold Continuing Basing Action #80

by Barry Dawes

Key Points

  • US$ Gold price continuing basing action after breaking 2011 downtrend
  • Gold in other currencies showing strength
  • Australian Gold Sector operating very well
  • Australian gold mine production, resources and reserves growing strongly
  • New record gold mine output likely in 2018
  • ASX Gold stock prices firm and ready for further rises
  • A$ to remain firm and rise from these low levels.
Talk to me about resources bdawes@mpsecurities.com.au +61 2 9222 9111 Since the first publication of Dawes Points in 2013 the theme has been a global economic boom that would involve strong equity markets and commodities and weaker global bond markets and would lead to a higher A$ and a very much higher gold price. These projections were made against a backdrop of falling commodity markets, falling resources equity markets, a continual avalanche of negative commentaries on China and the `Greater Depression' unfolding in the US. This oncoming Dawes Points benign environment would simply support a very robust Australian resources sector with a strong A$ that would keep everyone honest and to increase the wealth of all Australians. The concept of a financial Armageddon was rejected and the driver of a strong US$ gold price would be demand/supply and not gold's role as the asset of last resort in some sort of collapse. It is pleasing to see that most of projections have come to pass.  The US, German and most major Asian equity markets have continued to rise and even managed to produce new rally and/or all time highs in this Dec Qtr 2018.  The recent correction should be just a correction. Economic growth is strong and commodities are rising from their previous lows as they achieve continuing record high consumption levels and limited new supply. Even iron ore seems to be on its way to the forecast (Dawes Points #51 July 2016) of new highs over the next few years. The Dawes Points Wave View is still looking very good although it is taking longer than expected. The impact of good economic data on the Australian resources industry has been mixed.  It has generally disappointed in share market performance and has suffered from low market participation and, in my view, from a complete misallocation of capital.  Why is it that the A$2800bn in superannuation money is so risk averse and unsupportive of new resource or agricultural investment in Australia? The market requires more participants and capital to more accurately reflect the underlying value generated by managers in the current commodity environment. The big companies have reported strong earnings, balance sheets and dividends but market interest has been limited. From my long experience in this Australian Resources Market it has been perpetually clear that it is truly a rising US$ gold price that really drives market interest. And we are waiting. Shortages in nickel, rare earths, uranium, graphite, cobalt, iron ore, oil or copper can provide short term fluctuations and excitement in a particular sector but it is the US$ gold price that brings in investors to expand the overall market participation. So hence the preoccupation with the meanderings in gold prices. So where are we now? The long term view for us here starts with the abandonment of the 1944 Bretton Woods Agreement in August 1971 when President Nixon shut the convertibility of US dollars into gold in August 1971 and thereby ending the Gold Standard. This allowed currencies to float and gold to determine its own level.  It also allowed politicians and bureaucrats to play and meddle with currency and bonds. This graphic says after the 1980 US$887/oz gold price highs, a 20 year pullback brought gold back to sub US$250/oz in 2000/2001 before resuming the bull run. The 2011 downtrend has been clearly broken but US$ gold has pulled back to retest that downtrend.  This action is very positive even if the 2001-2018 uptrend has apparently been broken. Notable here is that the time frames involved in gold moves are substantial and for many, patience does run out. It is now late 2018 so we have had a bullmarket that began almost 20 years ago, the most recent spike high was over seven years ago and we have had five years of trench warfare in the US$1050-1375 range. This five year base has been grinding and the trench warfare has discouraged many investors and followers. Nevertheless, as discussed previously, markets often exhibit a symmetry and in this five year base we had about 30 months from the July 2013 low to the important December 2015 low.  It was a further ~30 months from that Dec 2015 low until the August 2018 low. So to keep this symmetry we should see US$ gold meander but then move up to ~US$1370 for another test, then a short pullback and then hopefully much higher. Time frame is about 3-4 months, but, who knows.  The runups in 2017 were suggesting breakouts then but we saw no follow through then so we do have to just wait. Gold also broke the April 2018 downtrend after forming and breaking out from a wedge.  This is very constructive. When US$ Gold does break out of this trading range, the speed and the price level in gold, will, in my view be powerful and high. So what will be the drivers? The Dawes Points view has been that demand from China and India has been absorbing all available gold from the West leaving it underweight and `short'.  This demand is likely to continue and also grows with rising living standards so that there will soon be very little freely saleable gold left in the West and thereby this demand will be driving the US$ gold price much higher. The demand numbers are large. Above ground gold is generally estimated at around 180,000 tonnes being all the gold ever mined. The demand from China and India since 2008 has been 26,000 tonnes or 14% of all gold in existence.  Annual demand exceeds Western mine production. Source:GoldchartsRus Global gold mine production of gold is about 3300 tonnes of which China contributes around 400t and Russia about 260t leaving the West producing about 2650t. Recycled gold scrap is about 1200tpa. Western demand for gold in the form of bars, coin, jewellery, industrial demand is around 1500tpa and Central banks are buying about 500-600tpa.  So this is at least 2,000tpa leaving only 1700-1800t surplus. The data shows Asia is importing over 3,000tpa. With the transfer of so much gold to Asia the net market in the West has been in demand/supply deficit over well over 1,000tpa for the past few years with the drawdown of gold coming from Western inventories from wherever. Strong evidence of this is available in gold flows of 400oz London Bullion Market bars from the UK to Switzerland to be refined into 1kg bars for delivery to Asia.  Little evidence is available of the flow of these 1k bars back to the West. The overall market is now in Deficit on the basis of this supply demand model. So the gold market is in this Deficit position with gold buying being `met' by sales of futures contracts that have no real physical backing. Hence, seeing the net position as well as 3000tpa to China and India it is clear that the West has been running down its available gold inventory.  Who used to own this inventory and is there any left? Demand/Supply should soon lead to a short cover rally in gold that should bring prices up to US$1375 and then drive it much, much higher very quickly. Gold ETFs are expected to see rising holdings in a rising gold market so this will add even further price pressure.

Gold in Currencies

It has already been noted that gold in US$ has already broken its 2011 downtrend. Gold in Swiss Francs has also broken its downtrend as has gold in British Pounds. However, gold has not broken this downtrend in Euros (but it is certainly getting ready to do just that). Nor in A$, but also the trendline break seems to be very close. Australian gold mining producers have done very well. However, the gold price in various currencies is really relating to the US$ itself. Where are we going here with this US$ Index?  I really don't know. This DXY Index at 97.38 is still below the 2017 high of around 104 and the technical pattern here provides no real indication of future direction. However, there are several factors worth noting here that may influence future levels of the US$.
  • Treasury Bonds prices are weakening due to
      • Increasing deficits increasing supply of bonds
      • Inflation rising
      • Less need for safe haven for funds
      • The US Fed is allowing its T-bonds to mature and not rolling over
It is hard to see a strong currency when its bonds are falling.
  • Leveraged hot money inflows to the US$ from currencies with very low interest rates
      • GoldMoney estimates US$5tn of this inflow – some unwinding possible
  • The Euro makes up 57% of the DXY and debt problems from Italy et al may weaken that currency.
    • Note that the now-sub 113 Euro is making 17 month lows against the US$
  • A strong US economy will help all other economies and encourage capital outflow from the US
Whatever is happening it is more likely to be inflationary outcome than a deflationary outcome. The next few months might clarify these issues as well and take the pre-occupation with US issues and bring the focus back to the Australian mining sector.

Australian Gold Sector

The A$ gold price has averaged above A$1600 for a number of years and has helped the Australian gold sector to mine profitably again. There is also a renewed vigour in the Australian Gold Mining Sector that is a testament not just to a higher A$ gold price but also to the entrepreneurial skills of the sector and the recognition of the still substantial potential of the Yilgarn Archean Greenstone Belt in WA that produces over 50% of Australia's gold mine output. The activity is most impressive and gold mine production is increasing. Australia's gold mine production will exceed 300tonnes (~10moz) in 2018 and looks set to climb further in the next few years.  Quarterly data up to June 2018 shows this clearly. In addition, several new mines in 2018/19 will add significantly to output with Kirkland Lake's Fosterville likely to bring as much as another 300,000oz in 2019 from the Swan Zone (1.16moz @ 61g/t!) alone with stope ore grades of over 70g/t and average mill grades close to 30g/t. 2018 should also see record gold output and exceeding the previous high of 3012 in 1997. Dawes Points also sees considerable potential in WA coming from the Pilbara as well as the Yilgarn. New important hard rock resources have been established by De Grey Mining, Callidus and Kairos that are showing the Pilbara can deliver orogenic gold. The Pilbara Gold Conglomerates also have very great potential and I am a believer here.  Novo Resources may actually have three mining operations underway by the end of 2019. The use of ore sorters is likely to significantly lower processing costs by reducing the tonnage to be treated.  Conglomerate grades of even 1-2g/t can be significantly upgraded for mills having to treat just, say, 15% of the ore feed and yet recover 70-85% of the gold. Don't rule out another 1-2mozpa coming from the Pilbara conglomerates at very low operating costs into 2020 and beyond. I made a presentation on the Pilbara Gold Conglomerates at the Precious Metals Investment Symposium in Perth last month. The data is compelling.  Copies available on request. The key gold producers on ASX have also been providing an impressive growth trajectory with a selected group of 21 companies providing 4.5moz production in FY18 giving a 13% CAGR since FY14. Northern Star, Regis, Evolution, St Barbara and Saracen have provided most of the growth. Australia's biggest gold producer Newcrest has had a few technical issues that have limited its production growth but have produced another 2.3moz from its mines in Australia and elsewhere. The pace of exploration is also picking up with nominal exploration expenditures likely to make new highs during 2018. The commitment to exploration and development has seen the JORC Resources of these 21 key companies grow by 30% over the past four years to 135moz at an average CAGR of 7% with the share of Measured and Indicated rising from 63% to 70%.  This is net growth after annual production which is now over that 4.5mozpa. Newcrest hasn't been so fortunate but has one of the world's largest resources base with very long mine life at Cadia and Lihir and its time will come soon. This resources growth is almost always extending mine lives, not just adding new projects. Reserves have risen faster and for these 21 key companies are now 70% higher at 50moz than in 2014 with a 14% CAGR. Over the past four years, these 21 stocks in this sector have added almost 40moz give a net increase of 20moz after producing over 19moz. Again Newcrest is consolidating its resource and reserve base but has numerous exploration plays that should add significantly to resources and reserves over the next few years. These companies have reported excellent earnings and balance sheets are now in extraordinarily good shape with cash levels unheard of in the Australian mining industry over the past 30 years. CRA, MIM, NBH, WPL,  STO etc never had these cash levels in the 1980s, 1990s and 2000s.  It was usually debt that was the key feature of their balance sheets. Strong cashflows and good balance sheets allow continuing capital reinvestment and also a robust dividend stream. The dividend flow has been steadily rising as EVN, NST and RRL have paid out an increasing share of earnings and SBM, OGC and NCM have returned to the dividend paying list. The very profitable East Kundana Joint Venture between NST and TBR/RND has resulted in some very good earnings numbers and shareholder activism has forced a special dividends of a gross A$250m (before TBR/RND cross shareholdings).  Many MPS clients received TBR dividends in excess of their entry prices for the shares! Investors who picked up on Dawes Points mantra that `gold stocks will be better dividend stocks than banks' have done well. The ASX S&P All Ordinaries Gold Index has performed well since the Nov 2014 low but it has failed to properly reflect the Australian Gold Industry. The 2011 downtrend has been broken here as well and has done a good retest of the downtrend and is now ready to head higher again. Australian Gold Stocks have been leading the world in the current reflation after bottoming in November 2014 and after the pull back from the July 2016 highs the XGD is moving up to test the 5300 level again. This has been a very volatile market so getting the timing right is very important. A break through 5300 should signal a strong push through with the Gold Sector being well backed by production growth, resources increases and earnings with good balance sheets and rising dividends to further help drive this market. However, a strong US$ Gold Price makes it all happen much faster. This Correction Graphic shows that this XGD Gold Index is still playing catch up to the previous highs in 2011. As noted, this ASX S&P XGD Index does not reflect the Australian Gold Industry and the large weighting to major gold producer Newcrest together with some irrelevant companies like Alacer distorts the true picture further. It also gives no relevance to exploration companies or smaller companies. This unweighted index of ten important Australian based companies with predominantly Australian production has totally outperformed the XGD Index but also Australian based companies with offshore gold production. Being on board the Terrific Ten led by Northern Star has been the place to be but many stocks outside this Index have performed worse than even the offshore producers. Ask me about the stocks that might be best for your portfolios. The Australian gold sector is certainly outperforming its North American counterparts where the XAU is really struggling. This graphic suggests (who can really tell here!) a further test of the downtrend but it seems constructive. Nth American Gold Stocks are pretty well despised and ignored by investors there and are at horrendous lows against the S&P 500 general market.  A wedge is forming so there might be some strength showing through over the new few months. Don't forget this long term relationship between the XAU and the US$/A$ rate. And then what this looks like with the 1913 105 year downtrend only ~US$0.05 away at a time when calls for a lower A$ are ringing. And you might to ask yourself what does this mean for the world if the A$ against the Euro breaks this wedging and jumps up sharply? And here, also wedging against the British Pound? It probably means gold's strength will soon be showing. Call me to discuss Barry Dawes  BSc F AusIMM (CP) MSA AFA Executive Chairman Martin Place Securities I own NST, TBR, KLA, BLK RIO, BHP mentioned in this report. +61 2 9222 9111 bdawes@mpsecurities.com.au 13 November 2018

Fake News for Gold Sets up Low – It’s buying time #79

by Barry Dawes

Key Points

  • Needless fake-out for gold
  • New highs in US equity market
  • US economy roaring ahead
  • Sub-Sector evidence strong
  • Inflation picking up
  • US Bonds look vulnerable again
  • Emerging markets picking up after pullback
  • China doing just fine
  • No reason for current price of gold and gold stocks
  • Still like the best  in the big stocks  – BHP RIO WPL OSH
  • Gold stocks are so cheap
  • Massive cash build ups in NST, EVN, SBM, RRL, OGC, SAR, PRU, PNR
Talk to me about resources bdawes@mpsecurities.com.au +61 2 9222 9111
This 2018 year is passing very quickly and the middle of the September Qtr is now behind us. What an extraordinary year so far. News on the economic front is frequent and strong as US consumer and business confidence rises and all sorts of economic indicators are moving into hyperdrive. This is indeed a US boom that is now truly global and pointing strongly to the Dawes Points Global BoomTM thesis. Heed the markets, not the commentators. The US equity markets rightly get the attention of the world with Apple becoming the first company to have a trillion $ market cap but so much in the US just seems to be getting better. Look at these:- The S&P500 is working its way higher and has just made new intraday and closing highs. As is the Dow 30 mega stocks. This channel analysis allowed us to call that Dec Qtr 17 sharp upmove and also to see the support in the correction and now a probable new high is ahead soon too. And the Russel 2000 looks ready to burst higher into its next channel. Expect the microcaps to do much the same. The basis for the higher share prices is well founded. Earnings are good and profit margins in tech companies are high and rising. In addition, this group of US economy graphics from World Economics and the Wall Street Journal are confirming boom and inflationary pressures. > These graphics are also highlighting the ever tightening labour market in the US but other data is showing that labour is even tighter in Japan (no immigration there!) and Germany. Inflationary pressures could just be much stronger than you might be imagining. The performances of some old fashioned sectors are are doing very well – retailers:- Dow Jones US Food Retails and Wholesalers Index And consumer discretionary stocks are out performing the S&P500. Consumer Discretionary ETF vs S&P500 And the transports led by airlines are hitting new highs. Dow Jones Transportation Index The 4.1% June Qtr growth is unlikely to be a flash in the pan that so many are flagging. The bears are still growling 9 years into this massive bull market. Still growling!! It was interesting to note that Warren Buffet's Berkshire Hathaway is also still aiming high and could soon move into its next channel to further new highs. Interest rates are rising to better reflect borrower risk and inflation. You will recall this from Dawes Points #78 where the CPI is equal to the 3% on 10 and 30 year Treasuries and the 4% on Finished Goods PPI is higher. And bonds in my view are readying for another major fall in 2018.

The US$ - Where to now?

The US$ is very strong because of……… you can fill this in because I don't know. The emerging markets crises in Venezuela, Argentina and Turkey with US$ denominated debts might be a key feature but I don't consider higher interest rates to be the dominant factor in the long term level of the US$. I have been agnostic on the US$ over the past few years and whilst this DXY US$ Index is remaining firm, it is well off its highs and lower than it in early 2015. So much bullishness at lower highs? Might be just some more of that fake news against gold. US$ Index – downtrend broken but not with real conviction Now whilst the relentless torrent of bearishness over Emerging Market economies is OK for Turkey, Argentina and Venezuela the rest of the world's emerging markets are just pulling back to the breakout line. This graphic is telling me that China and India markets are in buying country for uptrend that will last a decade or more. Morgan Stanley Institutional Emerging Markets Portfolio This analysis of Emerging Markets from Oxford Economics paints a very different picture than that from the Commentariat. But look at Shanghai from this graphic. Just pulling back to a 26 year uptrend. Many years of upside ahead. Shanghai Stock Exchange Composite Index India is just surging along as an important long term global leader. No Emerging Market claptrap here. Just more new highs. India's Nifty 50 Index

So what does all this have to do with gold?

Stating the obvious, as people feel wealthier, so they buy more. For much of the world's population in China and India it is buy more gold as you get wealthier. These countries together with most of Asia, Africa and Eastern Europe have already seen currencies debased and debauched by inappropriate rulers so gold is very important. While some commentators might be concerned at gold priced in US$, just think of gold making strong new highs in the currencies of Turkey, Venezuela or Argentina. Just like Zimbabwe a decade ago. The demand for gold is still strong out of Asia and it is stronger than the ability of gold mines in the West to produce. Deficits run to market tightness and then to shortages. And then to squeezes. The fake news for gold has focussed on the US$ but stories of margin calls on Chinese speculators in gold and copper and a hundred other reasons were trotted out as to why some commodities had a pullback and that after a US$200 15% fall from US$1365 to $1165 gold should now collapse for another decade. Dawes Points bullish expectations on gold have not been met so far and the 15% decline wasn't quite what was expected. Ouch! Well sentiment as shown by this gauge has reflected that 15% fall and I have seen other gauges at even lower levels. Gold Miners Bullish Percent Index Gold itself has come down to test the 2011 downtrend again. And has bounced back over US$1200. Daily US$ Gold Price > The long term graph broke its uptrend but more importantly it has bounced off that 2011 downtrend line in a very important manner. And the RSI is very oversold. Long term US$ Gold Price 1980-2018 US gold stocks have been savagely hit and the XAU Index sent back to the 2008 lows giving a decade of nothing. This is definitely buying country. Philadelphia Gold and Silver Share Index Gold stocks against gold bullion have provided another round trip but this too is screaming BUY!. Van Eck GDXJ Gold ETF vs US$ Gold But this seems to be very positive in the symmetry that has been created. Surely there is some major upside developing here. This is now a typical reversal pattern extended over five years. Resolution of this to the upside would produce a powerful upmove. US$ Gold 2008-2018 Stepping back is possible to see here a very oversold market pulling back on the flimsiest of fake news to a major long term buying opportunity. Do keep in mind that today's PESSIMISM is high and that pessimism ONLY occurs during Wave 2. Pessimism and Wave 2s represent the building up of cash by investors and build up in value in stocks. Wave 2 pullbacks are followed by Wave 3s which are major surges and lead into that Optimism Leg. We are there right now! In Australia we have been much more fortunate with strong gold production growth, earnings and dividends boosting our key gold stocks. Dawes Points favourites NST and CYL made new highs in the weeks before the sad scene in North America where gold stocks made lows equal to 2008 and that great performer Kirkland Lake, with its Fosterville 1.1moz @ 61g/t masterpiece and its bold investment in Novo Resources' Pilbara Conglomerates, also made a new high. With clients having their NSTs and CYLs rising, it was hard to be bearish. RRL, SBM, EVN, OGC, RSG and SAR have done well although these have been caught up with the malaise despite many recently reporting outstanding operating and financial results. And major cash builds. I have never seen so much cash on the balance sheets of important mining companies. Never during the 1980s or 1990s did the leading mining companies CRA, WMC, NBH or NDY ever have this much cash. It was always a matter of how much debt! This cash is likely to make these good companies into great companies. Site visits have recently been made to NST's Jundee and KLA's Fosterville super mines and I can assure you there will be much more coming out about these two great mines. Many smaller stocks however have been savaged so bargains exist all along here. Why have stocks like PNR, BLK, GOR, GCY been treated so badly? The gold price in A$ has held up reasonably well and the 13 year uptrend from 2005 is holding nicely so it looks ready for a bounce and resumption of the uptrend. Another break through A$1700 should lead to much higher A$ gold prices. Gold in A$ 2000-2018 It has also been apparent that silver has been behaving in much the same way as junior gold stocks. I see it as an important weather vane to closely follow. It has been threatening to move higher against gold for a few years now. It could be emboldened to advance quite soon. 20 Years of Silver Vs GolD Well known silver bug Ted Butler has credibly concluded that JP Morgan actually owns about 800moz of silver bought cheaply by continually keeping the price down and also has bought multi million oz of gold. Waiting for the squeeze to come. Copper has been brought back on similar concerns out of China with speculators and also copper-backed loans getting margin calls. China consumes about 50% of all copper and also other metals so whatever happens there is important. However, the longer term issues of consumption growth and the lack of new supply and a very small inventory buffer still says copper prices will be higher. Long term Copper Price 1980-2018 Even platinum is back at important support. Dawes Points has highlighted the long term strong relationship between Nth American gold stocks (and also gold) and the A$. Also I have been a bull of the A$ vs the Euro and Sterling. This is what these look like. A$ vs Euro 1999-2018 A$ vs Sterling 1999-2018 And of course against the US$ itself. We are close to breaking the 18 year 2001 uptrend in a very oversold position but the 105 year downtrend is now at only US$0.78. A$ vs US$ 1999- 2018 So it seems that the past few months has provided loads of irrelevant fake news like the continuing decline of China, the peaking of the US economy (the recession bears just seem to ignore the data shown here in this issue) and the collapse of the US equity market just because it has gone up (most of these people have been short since 2009). This has brought about a four month correction in a major long term bull market for gold that has been consolidating for five years. The outlook is just as positive as ever and extraordinary opportunities are here for resources stocks of all sizes and sectors. Barry Dawes BSc F AusIMM MSAFAA +61 2 9222 9111 bdawes@mpsecurities.com.au I own BHP, RIO, WPL, OSH, NST, CYL, RSG, PNR, BLK, GOR 22 August 2018

Global Economy maintaining strong growth mode #78

by Barry Dawes

Key Points

  • US providing key market drivers
    • Economy exhibiting great strength
    • bonds prices seem ready for another sell off
    • CPI and PPI heading above 3%
    • Equity markets seem still robust
  • China crude steel output may be heading for 1,000mtbpa in 2018
  • ASX Resource Sector indices ready to advance strongly
  • Global energy consumption accelerating again
  • Gold sector pessimistic sentiment should fuel reversal
  • Recommended stocks BHP RIO WPL OSH NST CYL
Talk to me about resources bdawes@mpsecurities.com.au +61 2 9222 9111
The Global Economy seems to be maintaining a strong growth mode with some impressive figures from the USA with its 4.1% June Qtr and some remarkable numbers from China The Trump Administration is continuing to surprise conventional economics and the Establishment Bureaucracies with his efforts to reinvigorate the US economy and remove distortions in international trade.  This latest tariff arrangement with the EU is a remarkable feat with the intention of zero tariffs and removal of non tariff barriers in the trade between the US and the EU.  We can only expect more of this, especially with China, and perhaps the outcome will be just as positive. The activity in the US is clearly positive with the formal data at new highs:- US industrial Production And indirectly with stocks related to consumer discretionary spending outperforming the S&P500 general index. Additional confidence is being shown through the US Banking Sector Index which is performing well although not as strongly outperforming the S&P500 as in 2017. The banks were the main beneficiaries of QE and are now lending out that capital. US interest rates are continuing to rise and it seems that bond prices are lining up for another bout of weakness. This is not surprising given that real returns on bonds are negligible to negative now that the CPI and PPI are creeping up. The last two months (May and June 2018) have seen 2.72 and 2.80% yoy increases in the CPI and 3.9% for both May and June for the Producer Price Index. With 2.9% yield on a 10 year bond and almost 3.1% on the 30 year then these are arguably negative real returns. Importantly, the velocity of circulation of money (GDP/M2 money stock) is now strongly positive:- So with the 4.1% GDP figure yet to feed into this formula it should now rise even faster. The bearishness over the US equity markets still appears strong but I found this very long term (120 years) graphic worth looking at.  The trend still appears to be your friend. Source:@jatkinson33 Whilst the current move up from 18,000 in 2016 might seem overstretched, the shorter term suggests this is probably not the case. The strong steel production figures in China reinforce so much of the commodity bull market thesis that Dawes Points has been continually been presenting:- The commentary on China’s vigour in improving air quality by maximising Fe units (1 unit = 1% = 10kgs Fe (iron) per tonne) in iron ores by severely discounting prices on lower grade ores is well known but it is also having stronger impact on its own remaining domestic ore production.  China iron ore production is almost entirely lower grade magnetite ores requiring considerable beneficiation and often is accompanied by titaniferous magnetite(low grade ilmenite) and also some vanadium.   Alumina and silica as impurities are also attracting larger demerits for China sourced Fe units. Closure of these mines will make both low grade ilmenite and vanadium that much tighter markets. China’s iron ore imports can only increase and with global freight rates on the rise again, Australia’s attractiveness for better quality iron ores can only improve. BHP, RIO and FMG all reported strong June Qtr iron ore shipments to give record annual figures. The pricing of iron ore is still robust although higher freight rates are eating into the delivered price into China ports. The MPS commitment into Magnetite Ltd (MGT.ASX) with many billions of resource tonnes of high purity low mining cost magnetite ores remains firm although the timetable on achieving its merger has dragged on considerably. The outlook for industrial metals remains firm despite the sharp falls during the Trump tariff issues. The price falls appear to be now overdone and no impact is notable on the still-prevailing decline in LME inventories. These graphics of the ASX S&P resources sector indices show that technical breakthroughs have been achieved, retests made and the uptrends should continue. XMM  Metals and Mining  2006 -2018 ASX S&P 300 Resources  2006-2018   ASX S&P Small Resources  2006-2018 The Mining Sector of the Australian Resources Industry is doing well but the Energy Sector has a very robust global backdrop. The 3300million people in China, India and ASEAN have shown the world an insatiable demand for energy and now Non-OECD makes up 59% of global energy consumption.  China has well exceeded the US in energy consumption and now takes up 23% of all energy. Faster consumption growth by Non-OECD with 60% of total energy demand means global demand is now accelerating. As has been pointed out on numerous occasions this graphic on energy consumption by fuel type gives a useful pointer to future energy demands. The key features are the very small share from `renewables’, the massive future gas requirements of China and India (mostly LNG) and the renewed interest likely in nuclear energy. The uranium market is now showing strong signs of a major demand surge, a tightened supply availability and much higher uranium prices. Ask me about the opportunities in uranium stocks. The significantly reduced universe of ASX Oil and Gas stocks offer outstanding value. Oil is in excellent shape with record consumption at a time when OPEC is now capacity constrained and Iran and Venezuela have sharply declining exports. Prices have rallied nicely and a period of consolidation is likely before oil prices move much higher in 2019. Gold has been very frustrating for all but the CPI/PPI issues and the bond market positions could be the trigger that turns this market higher.  Pessimism on some indicators is at near record levels as is the level of short positions held. A sharp reversal is possible.  Seasonally it is time but we just have to wait for the markets to confirm. Northern Star (NST.ASX) made a new all time high last week and it is well on its way to probably becoming a 1mozpa producer by FY21.    This stock has over A$500m in cash and remains a Strong BUY. Our other favourite Catalyst Metals (CYL.ASX) is also up near its highs and is extremely well placed to make substantial new highs in the coming year. It should discover another Bendigo (22moz past production) and current drilling north of Kirkland Lake’s extraordinary Fosterville (Swan Zone 1.16moz @61.2g/t within 1.70moz @ 23.1 g/t) is well worth closely watching. Catalyst Metals’ extensive tenement holdings in Victoria.
  • Excellent high grade results along strike from Bendigo.
  • Greenfield gravity based drill targeting North and along strike from Fosterville  (EL006507)
Technically, CYL looks very positive. Barry Dawes  BSc F AusIMM MSAFAA +61 2 9222 9111 bdawes@mpsecurities.com.au I own BHP RIO WPL OSH MGT NST CYL mentioned in this report. 30 July 2018

Very positive Outlook – 15 years of Global Boom? #77

by Barry Dawes

Key Points

  • US equity market steadying to move higher
  • NASDAQ Composite at new highs
  • Small caps in US at highs and readying to rise further
  • Global equities confirming positive outlook
  • ASX small caps likely to follow suit
  • Technical revolutions underway
  • Resources to do very well
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111  
What extraordinary times we live in! In amongst the most bearish sentiment in decades the past few years have provided some of the most stunning equity market and economic performances of a lifetime. And it can only get better. Yet so many around the world are still on the sidelines. Long time readers might recall the references in Dawes Points a couple of years ago to the cabal of politicians, bureaucrats, financiers, welfare activists and recipients and the fawning media that feasted on the spinoffs from around the raising of almost US$100tn in bonds issued at `free money' rates to accommodate worried capital seeking refuge from the coming `Greater Depression'.  Bonds reached 35 year lows in yield (including bizarre negative yields) and highs in price but that was just a great confidence trick because the quality of the issuers was probably never poorer and the prospects of investor getting the `return of their money rather than a return on their money' (Samuel Clements) was never riskier. That game is now over and reality is that the refuge for capital was never really necessary and that the needs of individuals globally are rapidly confirming that rising living standards for at least 3300m people in Asia are more important than short term US or ECB Monetary Policy. The demand for capital to invest in basic infrastructure of accommodation, energy, transportation, food production and water together the myriad of new technologies that are now extending well beyond web-based applications to include transportation, energy, manufacturing, robotics and domestic technologies is very robust.  This demand will be funded by the vast reservoirs of cash bank deposits and redeployment of funds in bonds that are not being rolled over. An additional factor has emerged in the disruptive actions of one Donald Trump who just happens to hold the position of the chief executive of the world's most powerful nation. Like him or loathe him but `Cometh the time, cometh the man'. The markets themselves have been anticipating this disruption through their actions over the past few years and through the application of technologies such as mobile phones (are they really just phones anymore?), global reach media and the numerous goods and services that can be supplied or ordered online the disruption is here. They have also been suggesting a far better world is developing for so many people despite the problems of global debt, Islamic imperialism and the Axis of Evil being Iran and North Korea. Mr Donald Trump may be unwittingly (or quite deliberately – who can really tell) be the catalyst that removes the Iran-NoKo threat to global order and ushers in a global boom of major historic proportions. Readers might recall this from graphics from an earlier DawesPoints of how the Sth Korean KOSPI was by making new highs and anticipating reunification quite some time ago in Sept 2017 and how it ignored the missile launching hysteria earlier in 2018. The internal uprisings in Iran may be pointing out the end of another oppressive regime there.  Likewise for Venezuela. So many people have been reluctant to spend because the outlook was so forbidding. With markets up so much around the world, who's sorry now? Just look at the massive reduction in unemployment in the US as confidence is restored. In the US, which is just one of the leading economies, the strong performances of the NASDAQ Composite and the Russell 2000 have been overshadowed by the those of the S&P500 and the Dow Jones 30 which all the doomsayers and handwringers delight in telling us that a recession is imminent and a market crash is inevitable. Australian investors seem to like to listen to these doomsayer dummies which along with poor performances by the finance and banking sectors here have allowed the All Ords to be a chronic underperformer.  Nevertheless, it is reluctantly joining the global bull market. In contrast, the Dow has confidently bounced off its breakout line and is now ready to move higher. The implications of this, the commentary above and the graphics below are pointing strongly to the Dawes Points Global Boom ™. The NASDAQ Composite has ignored the bears and has made new highs and the recent successes of Apple, Microsoft, Amazon and Google  with growing global sales (Apple had 65% of March Qtr revenues from non-US sources !) give strong indications that there are many years left in this extraordinary bull market in equities that will bring commodities along with it. The channel analysis is indicating much much higher levels for many sectors as new technologies like Artificial Intelligence, VR/AR, Robotics, Electric Vehicles, Medical Technologies, High Speed Rail, Space Technology and new energy sources create important new industries. Note that despite the all time highs, many of these indices are at within the lowest of the uptrend channels ! This graphic for Apple is extraordinary.  It is at all time highs yet stiil within the lowest uptrend channel. This is not bearish ! And Warren Buffet recently purchased 75m shares for about US$13bn at around US$170per share to take his holding to 170m shares.  He wanted to own the whole company ! Apple with 5bn shares at US$190/share is closing in on US$1,000bn market cap and is just 14x EPS! This strong performance is not restricted to the mega caps. The Russell 2000 Index for small caps is doing well and also making new highs as stocks here embrace these new technologies. This index and the following Russell Microcaps Index are showing the spirit of entrepreneurship that these new industries are reflecting. This newly discovered Russell Microcap Index is also making new highs. The pressure on the upper trend channel line to get into the next channel is strongly reminiscent of the early September 2017 position of the Dow before that fabulous 4000 point run. Look at this company and its performance. Edwards Lifesciences There are many more like this. Not your usual widows and orphans conservative go nowhere dividend payers stocks. The doomsayers and handwringers can't even be bothered to look outside the S&P500 Index itself to see the lay of the land. In addition, while the tech sector may be leading, bricks and mortar in the pentup US housing requirement as the Millenials finally enter the market and raw material demand in Asia will ensure the commodity sector will also do very well. New Privately Owned Housing Units Started 1960-2018 So while the doomsayers are watching in the rear vision mirrors, the new waves of entreprenuers are globally changing the landscape and creating vast value while disrupting the old order.

The swamp IS being drained of the cabal alligators.

Commodities are doing very nicely now and the big picture is for much more to come. The prices of the traditional LME metals are rising and nickel is rejoining the party. Price index Most of these metals have demand profiles that should exceed supply for some years yet. And look at China crude steel production in May 2018!  Up 8.9% on a year ago.  China recession ??  Where are those China bears ?  Stand up please and just leave. And who has been saying Global Boom TM ?? And whilst commodities themselves are good, this sort of thing where the producers are generating so much cash is much better! Whilst this is all good fun and is making money for the early adopters there is an express train running in many of the small to mid cap resources stocks. The Mining Boom of A$440bn of investment in iron ore coal and LNG is really paying off with strong earnings being reported by the major key players and Australia's resources sector export revenues are surging as well. But resources are far more than this. I have been a great supporter of the entreprenuerial sector of the Australian Resources Industry. The results have been very impressive and can be best seen through the gold industry. Exploration is up And Australian gold production is heading for a record in 2018. The appalling and totally unrepresentative ASX.XGD Gold Index has maintained its uptrend, broken its 2011 downtrend and has broken above the critical 5000 level. And look at this seasonal pricing structure.  That's 30 years of data saying June often provides a low ! The opportunities in small gold stocks are numerous.  The EOFY Sale opportunities are extraordinary ! But those in the copper, battery metals, oil and gas have been busy as well. Exploration data figures are now flooding in with many impressive results announcements in such volumes that are difficult to absorb. This is indeed a boom. So just think about those hundreds of ASX small cap resources that are remarkably cheap.  Gold, battery metals, oil and gas, industrial metals, mineral sands, uranium, rare earths, iron ore and coal. It is all there and reflecting the resource sector and its special brand of geotechnical entrepreneurs. ASX Small Resources is ready to fly! Make sure you take advantage of the current End of Financial Year Sales !! Value is remembered long after price is forgotten but those low price purchases early in bull markets are never forgotten. Could you forget CDU at A$0.40 on its way to A$10, or MMX A$0.25 at A$6.40, SMM at A$0.046 to A$6.47, CMR from A$0.10 to A$6.25?  Custom Mining from A$5 to A$105 plus MacArthur takeover?

Where will these be in five years time ?

PSA MGT HPR CTP RIO BHP MLX WGX IMA BLK ARV DEG ASP NST Sitting and growing richer. Will you be there with me? Call me to participate +61 2 9222 9111 Barry Dawes BSc FAusIMM (CP) MSAA I own all the stocks mentioned in this report. 21 June 2018

Gold is now poised to rise #76

by Alison Sammes

Key Points

  • Australian Gold Sector leading global reflation
  • ASX XGD Gold Index pushed through 5000 and breaks 2011 downtrend
  • A$ Gold Price at ~ A$1750 also breaking 2011 downtrend
  • Australian gold production reaching new record in 2018 >310tonnes
  • Australian gold resources rising
  • Exploration and development increasing
  • Gold sector earnings rising
  • A Corporate M&A rush likely to unfold
  • Global macro outlook outstanding for gold
  • Large cap golds well ahead of minnows – time for catch up
The past few years in gold have been fascinating for those who can take a longer term perspective beyond the weekly and daily gyrations in the markets and see that the time has come for gold to reassert itself in the market place and for the value in gold mining and exploration companies to become better recognised. The key longer term undercurrents come down to supply & demand and for gold, with that unique position of having all its historic output of around 180,000 tonnes still available, it is the what and the wheres of gold inventory transfers that are most important. The price itself of gold may be an important driver in stock valuations in this sector with movements due to US$, interest rates and wars etc but to me the most important matter is the transfer from the West of most of newly mined gold and freely tradeable gold bullion inventory to the East being India and China predominantly but with Turkey, Russia and the Middle East also as key gold purchasers A time will come, and soon I expect, when the rundown of the this freely tradeable physical gold in the West will actually be felt.  The tightness in gold will become unprecedented. Looking at the overall market place it is clear that the gold bull market thesis has not yet been embraced as indicated from the generally weak performances of gold equities around the world and in particular in North America. The important Philadelphia Gold Index (XAU) bottomed in early 2016, had a rapid 6 month 200% surge and has spent the last 18 months causing emotional stress to the bulls and nothing clear for the bears.  The TSXV has been a Blockchain and Cannabis sorry story where small resources have been all but ignored. That is also obvious from the broader ASX gold sector because many quality gold stocks are still quite friendless and the ASX XGD Gold Index has also been going sideways for over a year. But that is not quite the reality. The A$ gold price and a rejuvenating Australian gold industry have generated some outstanding returns from Australia’s geotechnical entrepreneurs. This graphic shows the strength of the Australian Gold Mining Industry over the past five years with my unweighted index of ten Australian gold producers (ex Newcrest) with operations in Australia. This index made its low in June 2013 and is almost 500% higher today. In contrast the ASX All Ordinaries Gold Index didn’t make its low until November 2014 and is up ~200% from that time but it is just 150% from June 2013. This graphic presents a wholly different view of gold sector in Australia. The Terrific Ten have been wonderful with earnings and dividends flowing and are a great credit to the Australian mining industry. These figures on growing cashflows and cost reductions from Evolution are typical of the results from NST, RRL and SBM so far. Evolution Mining Ltd operating results FY2013-18 But the ASX XGD only looks like this. Importantly however, the 2011 downtrend has now been broken and the 5000 level has been breached again in this latest surge. This should lead to a rapid move in the XGD and is likely to be leading the US$ gold price higher. These Australian gold producers have been leading the whole global economic recovery since their lows in June 2013. From these contrasting graphics, the ASX XGD has failed abysmally in providing a proper picture of the true state of the Australian Gold Mining industry. A gold index undiluted by pointless inclusion of foreign companies with no Australia assets would be a start. The underperformance of Newcrest over this period, particularly since early 2015 has held back the Index but it has been the woeful makeup of this index. The index has simply not reflected the remarkable gains made by the likes of NST, EVN, SBM, RRL, GOR and SAR. The numbers look like this
Low + from 2013 + from 2014 low
MPS Terrific Ten stocks(ex NCM) Jun 2013 498% +390%
Eight dom-based with OS assets Nov -49% -13%
ASX XGD Gold Index (25 stocks) Nov 2014 +149% +205%
The Australian gold industry has been severely handicapped by this Index. But looking at this performance it is the Australian mining industry at its best.  Entrepreneurial geotechnicians who have found new deposits, reopened old mines, revitalised existing operations and earned cashflows that have built excellent balance sheets and rewarded shareholders. And done it quickly and efficiently. WA has been the leader with the services and infrastructure well in place. The reinvigoration of Kalgoorlie, Leonora and now the Yandal-Wiluna Belt is providing excitement. Western Yilgarn from Boddington and Katanning and out East to Gold Road’s Yamarna Belt are also providing new resources and new output. Kalgoorlie has had the Big Pit, Kanowna Belle and the Zuleika Shear and NST and EVN are key players in this reinvigoration. NST has two milling hubs to treat ores from all around the Kalgoorlie region. Leonora has the most impressive Gwalia Mine. And now with the rejuvenation of Jundee, reopening of Wiluna, action at Bronzewing and new management for Darlot, this Northern Yilgarn Wiluna-Yandal region can only get more exciting. The net effect of this has been a remarkable recovery in WA gold production, producing around 70% of Australian output, such that a new quarterly record is likely to be set in 2018 and 2018 exceeding the previous high of 312t in 1997. It is ironic that WA did not really participate in that US$250 to US1032/oz rally in 2008 as its output plummeted 48% over that decade but the recovery is well underway.  The sharp increase in Australia’s gold output in Mar Qtr 2018 to 317tpa is a promise of more to come in 2018 and 2019. This Dept of Industry graphic provides a useful summary of the distribution of the Australian gold industry and outside of WA. The rising A$ gold price has also stimulated exploration and discoveries, brownfields and also some greenfields and we can expect more discoveries over the next few years.  We are seeing the opportunities and the results now on a daily basis. Despite these strongly upbeat numbers we have a true dichotomy of the likes of the Teriffic Ten and a few hundred smaller companies that are still doing it tough. This graphic contrasts the Terrific Ten with 15 smaller stocks closely followed by Dawes Points. Clients have strict orders (wisely) not to sell any NST EVN SBM RRL etc but the pressure of the difficulties some of the smaller stocks are facing purely because there is insufficient capital committed to the sector and trading liquidity is still low. The market has clearly not yet embraced the big gold bull market thesis here in Australia. The excitement over 2015-16 was strong for all types of gold stocks but since the highs in July 2016 the dichotomy has been strongly pronounced. The reluctance of fund managers, financial planners and investors in Australia to embrace the now very obvious Dawes Points Global Boom TM and invest in Australian Resources Stocks has meant that this has been a much delayed bull market but much delayed markets have a habit of catching up quickly and running for much longer. The picture for Dawes Points has been very clear for some years and it is all unfolding as suggested although the time table for the general resources market has been longer than anticipated.  This has been unfortunate for traders in the markets but those with an investment approach these past few years in the better quality gold stocks have been outstanding. Coming back to ASX XGD Gold Index while we can be critical that its 25 stocks is unrepresentative of the Australian gold industry it still is a published index and can be interpreted accordingly. The ratio of the Gold Index to A$gold is probably meaningless overall but it does seem to have some meaning to the marketplace because it has provided support and resistance over the past 16 years or so. < The market happily played 4, 5 and 6 times the A$ gold price previously. The numbers for the ASX XGD Gold Index become:
A$ Gold Price 3X 4X 5X 6X
A$1750 5,250 (now); 7,000 8,750 10,500
A$2000 6,000 8,000 10,000 12,000
Interesting thoughts. Keep in mind that over 2000-2008 the earnings of the Australian gold stocks would have been almost non existent.  Most of the action was in Africa and Sth America and with loads of overseas stocks listed on ASX for……(?) what reason? Gold itself in A$ is creeping up and has also breached the 2011 downtrend line and A$2000 is quite realistic target. Gold in a number of currencies is also above their respective 2011 downtrend lines so the the move in all currencies can’t be far away now. Gold Sector turnover as a share of total ASX All Ords turnover is still a respectable >3% and likely to move higher along with the better A$gold price. To better appreciate the overall mood of the current market place it can be seen that only a handful of gold stocks are up in 2018 with the Terrific Ten figuring prominently. The average is only 7.5% whilst the XGD did 4.3%. The past four quarters have been very tough for most of these stocks. Amongst 53 other stocks monitored by Dawes Points, less than 40% were higher in 2018 and the average was -14%. There was a lot of volatility in these stocks over the past four quarters but few were through true operational disappointments and most were trading liquidity issues. A lot of gold resources have been discovered or delineated by dozens of these companies. How many will become like the Terrific Ten?  With the Australian mining sector entrepreneurial spirit there will be many winners here and given the strong difference in market ratings of the big stocks and these it is certain that M&A activity can only increase.

The Macro Scene for Gold

The Dawes Points official view is that demand from China and India et al is tightening up the gold market to an extent that physical gold will be relatively difficult to come by in the West. This drive for gold comes from rising living standards amongst 1400m people in China, 1300 m in India and another 600-800m in ASEAN and the like. The rising living standards are also driving economic activity and the attractive economies and equity markets are reducing the need for capital safe refuge in US TBonds. The conclusion is that long term gold prices will be much higher and probably driven by a tight squeeze on available gold. Gold in US$ is hopefully completing the very last stages of its basing and reversal from the decline from the US$1923 in September 2011 and the next move up that passes through US$1370-80 should produce a powerful surge. The long term shows the rapid and powerful from the 2000 lows around US$250 to US$1923 in September 2011.   Completion of the 6-7 year pullback and resumption of the bull market gives very high technical targets. Bond prices and yields need to normalise to properly reflect a true market and so higher bond yields are necessary to match risk and it is likely that bond prices will continue to fall for years yet with occasional bear market rallies. Total Global Public Sector debt is US$61trillion in this World Data graphic and growing. The issue is complicated and exacerbated by the whole debt matter of bond issuance by governments to fund current social spending. Current refuge capital parked in these bonds is likely to leave for better opportunities as the bonds mature. Who will buy the new issues?  Pension funds will still have a growing need for income to match obligations and central banks will buy the rest.  But even US$2-3tn leaving and going to property, equities, commodities and gold will send up prices here. This graphic is disturbing for Europe.  France has 30% of GDP as spending as public social spending. Its total budget is now 52% of GDP. As interest rates rise, so will government budget interest payments. Note this yield for the US 1 year Note:- The last maturity schedule for the US Treasury bond portfolio that I have seen was 2016 and the overwhelming majority of the portfolio was less than 7 years.  Very little had locked in the low 20 and 30 years rates when they were well under 3%. Most of the portfolio was taking advantage of the low short term funding rates. This is likely to have been a dangerous gamble as these yields rise and new bonds need to be issued at higher yields and coupon costs. Let’s say US$1tn of theUS$21tn was for 1 year bonds. In mid 2015 this 1 year rate was 0.4% so the interest bill was US$4bn. Today, that 1 Year money will cost US$22bn. At 5% it is US$50bn. Across US$21tn of mostly short maturities a 2% interest rate rise is US$400bn.  Good bye Budget. In Europe and Japan where yields have been lower than in the US and bond maturities generally shorter then the impact will be greater on budget interest expense outlays. So this issuance of bonds will need to accelerate and so bond prices will continue to fall – for many years yet – as supply increases. Some swamp draining will be required but it is probably already too late. The rise in rates at the longer end of the bond maturities will just continue and at a faster rate than at the short end. While this is all happening we are finally seeing an expansion in the velocity of circulation of money as the banks increase their lending of all their previously hoarded QE funds into a booming economy. The impact on the economy will be positive and the Trump tax cuts, capital repatriation and technological revolutions will be inflationary. The banking sector is now outperforming the S&P500 so there is not yet concern about failing banks here. And so when we see strong housing in the US as the MIllennials finally make that housing commitment and that 6 million dwelling shortage becomes really visible, the result is clearly inflationary demand for housing and housing raw materials and furnishings and appliances etc. At this stage individuals and funds everywhere will be looking to buy gold. Will they find it? May be in China or India.  Or perhaps not. This combination is likely to lead to much higher gold (and silver) prices than you had imagined. Do you have enough of the Terrific Ten or those ridiculously cheap minnows? Call me to discuss +61 2 9222 9111 Barry Dawes BSc FAusIMM (CP) MSAAF I own many stocks mentioned in this report. 7 May 2018 bdawes@mpsecutities.com.au +61 2 9222 9111 I own or manage in portfolios I control: NST EVN SBM NCM GOR DCN PNR CLY WGX