- US June Qtr GDP hits 3.7%
- Commodity price bottom finally here?
- Sentiment says `Ring the Bell’ for all Resources
- The herding into Bonds is turning back
- Gold Sector earnings delivering the goods
- Exploration prospects providing tangible results
- Oil prices have probably bottomed
- Bank cash deposit levels still very high and climbing
- Buy gold stocks, BHP, S32 and oil and gas stocks
- Do it this time - call +61 2 9222 9111 or email to me at bdawes@psec.com.au
The S&P Materials Sector sentiment readings are at full pessimism. Awaiting that banking sector failure in the US that is going to be even worse than 2008 – or so we have been warned! And of course the collapse in China! And Greece!
I didn’t expect to experience in my lifetime, with so much data about, that the market place perceptions would be so at odds with reality. Fear abounds. Yet the world’s largest economy (US) reports 3.7% June Qtr GDP and the world’s second largest (China) reports GDP growth of 7%pa in June Qtr (oil consumption in China was up 7.3% in the June Half of 2015 for those who think it is all faked), so the US markets have a short panic and Harry Dent and Co are now screaming the Greater Depression is upon us! The correction in the Shanghai market was just reflecting a 150% index gain in less than a year after 65% decline in a seven year bear market. And these economy figures are nothing like any recession I have noted. More like a boom really.
|
2013 |
2013 |
2014 |
2014 |
2014 |
2014 |
2015 |
2015 |
|
| US GDP |
Sept |
Dec |
Mar |
June |
Sept |
Dec |
Mar |
June |
| % over pcp |
3.0 |
3.8 |
-0.9 |
4.6 |
4.3 |
2.1 |
0.6 |
3.7 |
And it would seem to me that some humans, especially those cautious souls associated with the financial markets, have charged headlong and mindlessly into cash and bonds for safety. Yes The End of the World has been flagged since the Subprime Crisis in 2007 and the GFC in 2008. The world now has about US$90 trillion in bonds priced for zero inflation and stable global politics for the next decade. Good luck.
Of course if the US equity market does weaken it is worth noting what happened after the US peak in 2000 from whence it fell over 40% and resources with BHP as a proxy just kept rising.
SPX and BHP
BHP vs SPX
Well anyway, I recently attended and presented at the Territory Resources Week Conference in Darwin. It was my second attendance there and was pleased with what I saw and heard after being most impressed with last year’s event, particularly on the oil and gas side.
Darwin is only 3300km from Singapore and 4300km from Hong Kong so it really engages with Asia far more than SE Australia. Sydney is 3151km from Darwin.
So the first slide focussed on this map.
Try to imagine Asia as centred around the Himalayas and the China Tibet Plateau with aprons of vast coastal flood plains from Pakistan, around India, Bangladesh, Myanmar, Thailand, Malaysia, Indonesia, Vietnam and to China. This is of course idealised and not strictly true but it does give an idea of what we are really looking at. The northern aprons into Russia, Kazakhstan and Siberia are too cold to support any large population so we will exclude them here.
Most of Asia’s 3300 million people live along this coastal fringe and just think of the trade between every river entrance port. Almost every river has a river mouth power station ( usually diesel or fuel oil), port and shipping facilities, construction, engineering shops, clothing, food production (from dried fish to noodles, fruit etc) and so on.
This way it becomes easier to think about trade boosting GDP growth in ways that Western city dwellers can’t imagine.
So focus on these population numbers, then think of low but rapidly growing personal disposable incomes. Every year people are becoming marginally more wealthy.
3,300 million people, all improving their incomes and wealth with official data still indicating 6-8%pa growth. (IMF data presented here.)
Think of the energy demand and just note that oil consumption in China grew by 7.3% in June Half 2105. The aggregates start to look very interesting as this BP data shows. Who is running and winning this race? Certainly isn’t old Western economies.
Non OECD is now 58% of total global energy consumption and with the higher growth in Non OECD it is clear that total global energy demand is therefore accelerating!
I hope I have made this clear enough.
It is incredibly important to understand the medium and longer term implications for energy (coal, oil, gas and nuclear) and especially for the global LNG trade and Australia’s massive onshore shale gas potential.
Bringing the two together says energy consumption is now accelerating. And note this updated graphic below:-
- Coal still king in Asia with 66% in China and 56% in India
- Oil consumption is still growing globally
- Gas growth potential is still massive in China and India
- Nuclear small everywhere but growing rapidly in Asia
When I first published these Energy Consumption by Fuel Type charts about ten years ago China had 70% of its energy from coal and just 2% from gas while global averages were around 28% and 22% respectively. The massive opportunity in gas was obvious and it is now 6% of a total figure 97% higher so that is an increase of 375%. Coal in China has been reduced to just 66% so it has only increased 100% in oil equivalent terms. Hydro is higher but oil’s share has actually fallen.
China wants to go more into nuclear and gas.
The issues in the Middle East with ISIS and Saudi Arabia are not going away and the oil market place might just be telling us that US$40/bbl for WTI is going to be low enough to be the end of the decline. As noted, oil plays a big role in the CRB Index and that is certainly suggesting a low is forming
Now also think of steel.
China’s steel production is still looking for as much as 2014’s 813mt even though over 100mt will be exported but India will be higher and ASEAN still needs to import over 60mtpa for its rapidly growing >80mtpa requirements.
Iron ore is still a matter of >300mtpa of high cost Chinese domestic magnetite production and the level of inventories. It is far more complex than just the new supply from Australia and Brazil.
And for industrial metals it is again look at China. It typically takes about 50% of most metals so China demand growing at 1% still adds 0.5% to global demand whilst 5% is 2.5%. For copper, 2.5% is almost equal to half of a 0.9mpta Escondida in additional capacity.
The key points made in my presentation (The Australian Resources Sector Presentation ) were these ;_
- Capital flows determine sector asset prices
- The Resources Sector is underweight in all portfolios
- Producers have low debt and high cash
- Scores of stocks with market cap <5% NPV
- Many sub sectors for opportunities
- Exploration potential in Australia is not understood
- Major sub-cover State geophysical data programmes underway
- Gold Sector – cashed up and paying dividends
- Onshore shale oil and gas in NT, Qld, SA and WA
- Numerous industrial metals projects worth reviewing
- Fertilizer development projects have great potential
- Technology metals & graphite are gaining strength
- Mineral exploration activity might have fewer dollars spent but the quality is high:-
-
- Strlezlecki Shear WA
- Broken Hill Type deposits in SA, NSW and Qld
- New VMS concepts are developing throughout Australia
- Tennant Ck copper gold province looks interesting
- Macarthur River Basin opportunities abound
-
Barry Dawes
Executive Chairman
BSc F AusIMM MSAA MSEGFollow me on Twitter @DawesPoints
I own ABU, NST, TBR, BLK,CGN, SBM, MLX, STO, S32
Edition #40 
Investors should know that prices of stocks are supposed to be all about earnings, dividends and NPVs of cashflows so rising numbers here should support much higher stock prices ahead.
The PUGS stocks are now showing particularly attractive EPS, dividend yields and NPVs. And mine life extensions through recent resource increases. What is there not to like about the better gold stocks on ASX?
Of course Dawes Points has been saying this for some time and the November 2014 lows will probably prove to be the bottom in the bear market for gold stocks here on ASX. But this bottoming process will be anything but clear and understandable for a few months yet because of market crosscurrents and universal pessimism.
Have a close look at this PUGS matrix. Lots to like. Low PERs, cash building and production growth. And growing dividends.
Look at the global figures in the PUGS for the various price levels.
The market place remains very volatile but the Paradigm Dec 2014 portfolio (17 stocks from PUGS) is still up 34.7% for the unweighted portfolio and 44.4% for the weighted portfolio against the XGD which is up 23.5%.
Have a look at the performance of ASX gold stocks. The low was in November last year.
Look at where we have been. A real rollercoaster but there is a strong pattern here that suggests new highs are coming.
Don’t forget that gold stocks fell 80% against the A$ gold price from the April 2011 highs to the bottom in Nov 2014. And so now they are cheaper than when gold was US$250/oz in 1999-2001.
Market share of gross turnover is also bottoming for gold stocks. PERs and dividend yields are changing this. The numbers for some gold stocks are now far superior to most bank stocks (which we don’t own and which have also fallen almost 20% from their 2015 highs).
The operational aspects are coming together again and Australian gold production growth is resuming.
Source:BREE Paradigm Sec
North America has certainly ended any love affair with gold stocks.
The market sentiment is poor here in Australia but it must be just awful there. Bullish gold Investment participants are almost non-existent and the short positions in gold futures taken up by small speculators and hedge funds has been at near-record levels.
EFT gold holdings have barely changed at around 680-700t in the past year so it is not these investors adding to selling pressure.
And then we had that 700,000oz of gold that just had to be sold in 30 seconds. It certainly knocked the market but then a very large fund or central bank would find a US$billion or so just chump change and had no fiduciary duty to get the best price (or even the daily VWAP!!) for the client. Yeah, right.
The negative commentary is still being unceasingly pumped out so the signalling of a massive short covering is quite near.
This last fall in the US gold indices is almost final capitulation but the fall has been so sharp towards the 2000 lows that there may need to be even more panic and bloodletting there before the short covering begins.
Can you believe that this index is down so much despite so much new capacity added and even the royalty companies Royal Gold and Franco Nevada have been beaten down. Have costs risen and debt expanded so much that this index has lost US$800/oz operating margin?
And the Unhedged Gold Index without copper producer Freeport has held up better. Expect the 100 level to be the spring board for a long term bull market.
And the GDX large cap gold stock ETF is bottoming on massive volume. Look closely.
Looking at the poor performances of the North American indices the conclusion is that the weakness is now assuming a parabolic decline that must soon end and should finally provide the low in this 4 year diabolical bear market.
Nevertheless it is a bottoming process underway out there and I am sure the upturn is now only a short time away but there is still sure to be a rocky road still in between.
Who knows, but buying when everyone is panic selling ensures value is at its best.
The underlying fundamentals of strong physical demand from India and China in that now well established flow of gold from West to East underpins everything so that much higher gold prices are certainly coming.
Asian demand with India and China the prime movers is very obvious from the available data and the combined demand vastly exceeds mine production.
And only modest mine supply growth is expected.
The weaknesses in Nth American gold stocks have been the most puzzling aspect and the reasons for this have eluded Dawes Points for some time but some answers are now becoming clearer to me.
Look at this. The weakness of gold stocks against gold (down 85% since 2007) is just bizarre. 
And against general equities, well, since 2011 it has been just diabolical.
Sure, Apple, Facebook and Google have done brilliantly but I had never thought of markets as selling gold and gold stocks to buy these companies. Maybe they just have.
But I think I have finally found the ANSWER to this bizarre behaviour!!!
I am fully aware that, despite the strong currency related surge in PUGS and other resources stocks since the November 2014 lows, Dawes Points has clearly been on the `wrong side of the market’ in the Bull Case for commodities.
In Edition # 37 on 6 June I reviewed what had gone right and what had gone wrong.
The economies had done far better than the Bears had forecast, as had commodities, but resources stock price performances were awful.
Gold was very disappointing despite the China and India demand and physical metal strength.
Clearly the market was thinking of something else.
We all shouted ` Manipulation’ as the sharp falls in 2013 and even the very recent last 700,000oz and US$2.8bn 30 second sell off showed.
The Banksters and the scamsters and whatever else were to blame. Of course!
But what if the Gold Bugs were right about everything but the rest of the market just didn't care?
Gold has a sort of hedge against inflation status. We would all agree there. I would say it is a currency protection asset mostly but that is splitting hairs.
So if the world’s wealthiest economy doesn’t have any apparent inflation then you have much of the active market against you. If this big market isn’t bullish and there is no inflation then gold is a BIG short sale opportunity. `Let’s just fill in all those gold bug cult loonies with COMEX paper futures because we can’t lose!’ And so they have and they have been winning. The short sellers probably can’t believe their luck in such an easy market.
The ANSWER to our misjudgement might just be here.
Have look at these graphics. You have all heard of the John Williams Shadow Statistics that take the US CPI inputs from the 1980s and 1990s and apply them to today. The graphics below show the US CPI is much higher than the official figures. For the 1980s basis it is 7% today vs the reported 0%.
The cumulative of about 5%pa for over 20 years is horrific.
Now the real impact is seen in official CPI numbers affecting COLAS (cost of living adjustments). Low inflation means government entitlement schemes and pensions have lower outlays.
Low inflation means low government interest rates.
Social democrat governments believe they can run deficits forever and the bond markets will give them all that free money at miserly interest rates.
And of course this is fine until you `run out of Other People’s Money’ as Lady Thatcher so clearly described it.
And so here is the ANSWER and the basis of the BIG CON.
Global bond markets have recently peaked after more than 30 years of Bull Market.
US 10 Year bonds peaked in July 2012 but the 30 Year T Bond peaked in 2015. European, UK and Japanese bonds peaked with insane ultra low yields in the June Half of 2015. Dawes Points has highlighted these moves over the past six months.
How could such low rates have been achieved? Because the markets believed there was no inflation.
Why do we still have 2.1% yields on 10 Year US T Notes and 2.8% on 30 Year US T Bonds?
Because the big players believe there is no inflation.
How can the US Fed have 0% Fed Funds rate?
Because the big players believe there is no inflation.
Why are gold shares and gold being beaten up in Nth America?
Because the big players believe there is no inflation.
So we can point out all the pro gold facts and figures but the general market and the big players believe there is no inflation.
Dawes Points had failed to grasp this and has clearly been on the `wrong side of the market’.
So being on the wrong side of the market is a sentiment issue.
But what does misreported inflation really mean?
Economists have shown that technology has boosted productivity immensely and that declining TV and computer prices at a time of rapidly improving functionality and processing speed has cut the cost of living substantially. Never mind that road use tolls are rising at 4-6%pa, medical bills are rising, rents and housing are up and bananas are costing more this year. Most stock markets are up.
The qualitative gains in motor vehicles’ many technologies, HD TV and super fast computers unfortunately are only used by the same bodies, the same pair of eyeballs and the same typing hands. For a highly productive individual this can be wonderful but for many a 9-5 clockwatcher keeping up to date with complex systems and manuals diffuses the gains.
The cost reductions in the CPI are probably illusory even if they are not politically motivated. How can you really measure the true value of cost reduction when the operator’s wages are flat or rising?
So sometime soon the questions are going to be asked, when bond prices are really falling, about what is the actual true inflation rate. Answers are likely to be unconvincing and it will likely accelerate bond price weakness in skittish markets.
Again, what does misreported inflation really mean?
Firstly, impoverishment of pensioners and most workers as rising taxes everywhere and rising true costs cut disposable income and purchasing power.
Secondly, vast misallocation of resources into public sector bureaucracies and services that are funded by mispriced borrowings. Most programmes would never have been funded if borrowing costs were 2% over Shadow Stats’ 7% current CPI.
Thirdly, consumer activity is subdued because real net wages are too low to boost consumption and new capacity investment by companies is discouraged. Wages relative to corporate profits have been squeezed.
It has been a GREAT BIG CON that politicians have flaunted as expenditures have soared and as government debts have ballooned.
The peaking of the global bond markets now will help to show that the party is now over.
So coming back to gold and commodities.
The `Right side of the market’ has been to sell gold because there has been no apparent inflation.
The peaking of the global bond markets is heralding a change to which side is going to be the `Right Side’.
The facts are clearly there. The sentiment just needs to change.
Why would this be happening?
Because the big players believe there is no inflation.
All the conventional wisdom spiel says slowing world growth. China slowing yet oil consumption was up 7.3% yoy in June Half 2015. China Personal Disposable Income is up 11%pa. India is accelerating to >10%pa. ASEAN is growing better than forecast. Just sentiment.
This graphic is perhaps the kernel of the whole matter. June 2015 had the second highest ever figure for crude steel production in China. How many times have you heard China is slowing/has crashed/is dying and that steel production is falling and raw material demand has dropped? Iron ore imports surges 13.8% in 2014 when we were told demand had fallen. Imports will be over 900mt in 2015 and probably a new record. Steel output growth should still see 900mtpa in the next few years. Laughable really.
The Baltic Freight Index has been used as a pawn in recent years but I think vessel supply/demand is coming closer to balance again for dry cargoes.
Crude oil storage pushed up the prices for VLCCs but with the Iran blockade ending those rates should fall again as vessels are freed up.
The entire global picture is also showing inflation in stock and property prices.
Now look at US Housing Starts. They are not falling over and they need to pick up to at least 1.5m units pa to match population growth plus a back log. The Philadelphia Housing Stocks Index says the same thing. Property prices are rising.
But the CPI is not reflecting this.
I have also been intrigued by this graph for quite a few years. Velocity of circulation of M2 money supply. This has been downtrending for almost 20 years despite all the QE activity.
My assessment has been that the FED had provided liquidity to the major US money centre banks who just sold off some bad loans back to the FED and put the rest into US treasury bonds. No funds were lent out at all. With the US economy looking better we might see more capital being lent and then this indicator might turn upwards.
The rate of change has been negative since 2010 but the rate has been reducing. Maybe it will turn positive in the next year. Of course, a higher FED Funds Rate would provide higher bank margins and encourage bank lending. I can’t see the US economy turning down given all this data.
Dawes Points has often highlighted the resources sector highs of 2007 and the now 8 years of bear market following. The April 2011 gold equity sector highs have clearly now been shown to be a false breakout and one that that did not even provide new highs when the US$ gold bullion price later peaked at US$1923 in September 2011.
Market sentiment has just been poor.
As I review all the equity, commodity and bond markets that I know I keep coming back to the conclusion that
And finally the A$ tends to follow gold and gold stocks.
Barry Dawes
I own ABU, NST, TBR, BLK,CGN, SBM, MLX
9 August 2015
Edition #39 
Iron ore has seen a 50-60mt global stock drawdown while crude steel output has remained firm. Port stocks have fallen back to 80mt after reaching 110mt earlier in 2015 and steel mills’ stocks are well down. Some restocking is coming.
Then we look at some other simple data like Qtly annualised GDP growth and Indexed GDP. No economic collapse here.
Source: China National Statistics
And then something even simpler as average annual personal disposable income in China. At <5 RMB :A$ this is ~A$6,000pa in the cities and just ~A$2,000 in the country.
Source: Dongfang Prospectus
China is growing and its citizens are becoming wealthier.
Diets are changing. More protein. More fruit and nuts. And less cereals.
Source: Dongfang Prospectus
So demand for higher quality, unadulterated, clean healthy food is rising. So are prices - as demand can’t match supply and flows into imports.
Source: Dongfang Prospectus
You are all familiar with the 100m people moving from rural areas to the cities. Well you might like to imagine that farm food output suffered somewhat and led to rising food prices. The PRC government, eyeing their remaining 800m farmer supporters, reacted as true agrarian socialists by exempting agricultural food production from Enterprise Income Tax and personal income tax and VAT. At least until 2025.
So now you have a major market of 1400million people that just wants more and better food.
Having 800 million individual farmers means a lot of individual farms. Try about 10 million!
So lots of little inefficient farms. Fragmented industries I think is the term.
Now how to play it.
Here we come to Dongfang Modern Agricultural Company.
Could it get any better?
This company was set up in 2005 and in 2008 the current Chairman injected about US$6m to acquire an 89% holding.
This was the last capital injection to the company. No more equity and no debt at all.
The plan was to acquire as many plantations as possible and by 2012 it was 9 plantations over 4500 hectares and by end 2015 it will be 19 plantations over 9,000 hectares.
In calendar 2014 DMF earned RMB 315m ( ~A$56m) and in 2015 this should be over RMB 370m (~A$75m but over A$80m at the current exchange rate). How many Australian companies make this amount of earnings? And at a 43% margin? Without any debt?
The company acquires uncapitalised plantations from village cooperatives and manages them professionally. It then takes the products that were generally suitable only for local town markets and sells them in high volume premium markets in supermarkets and hotels for double the price.
Margins are over 40%. And no tax.
The villagers are happy. They get to sell or lease out their plantations and still get to work as harvesters.
The PRC government is very happy because plantation productivity is significantly better and output is rising. Food quality is improved. Food adulteration risks are lowered. Imports reduced.
Shareholders are very happy because the returns are strong and the risk and volatilities are low.
The returns on paid up capital of just ~US$10m are huge while the returns on shareholder funds which includes RMB 1,000m in retained earnings (~A$180m) are over 30%.
Can you find a better company track record anywhere? In any industry?
Taking the next step, DFM is the second biggest producer by revenue of citrus in China. Produces over 200,000t with just over half being tangerines (mandarins to us) - which is more than Australia’s total of mandarins.
It has about 1.1% market share in these very fragmented industries. Aims to have a much bigger share over the next few years. Wants to be the market leader.
So there. Market leader in the world’s largest and rapidly growing consumer market producing a consumer staple that is in rising demand.
High margins, PRC Govt support in almost everything it does, no debt, and 10-15 years of growth ahead.
What more do you want?
The Shanghai and Shenzhen markets are volatile but have a look at some more sedate alternatives. These ETFs might give you a better idea of listed stocks in China. Not overextended.
I can only conclude that those who gave us warning of the US Greater Depression in 2009 and the Collapse of the European Banking System (over 2009-2015) are just as accurate on the Collapse of China (2010-2015) and that over the next 12 months all those in the market places now sitting on vast hoards of cash (A$17.17bn here in Australia, >RMB 100Trillion (US$18tn) in China and so on all around the world) will be in buying all these stocks.
Stock markets have been climbing a wall of worry for years now and many investors are out.
Many funds are loaded up with ridiculously overpriced and very dangerous bonds or are sitting on mountains of cash.
Meanwhile, so many indices around the world are at or very near all time highs while the bears keep calling the next Crash.
And just think. Half the world is already sitting cautiously in these highly defensive investment positions and 10% has been (we in the Resources Sector)thumped by falling commodity prices. 40%, especially in Asia, is just having a great time. Corporations also have mountains of cash too.
And just like Sydney property sellers are finding, the supply is just not there to quickly get back into the market.
So think about China just beginning to hit its straps as hundreds of millions of increasingly wealthy consumers demand more and higher quality products. And as industry and commerce utilise all of China’s amazing new infrastructure that is assisting with the consolidation of its many internal markets. We are seeing the rise of hundreds of well positioned growing companies who are just totally unaffected by what Janet Yellen thinks.
Dongfang Modern is one that the ASX is lucky to get and I am sure there will be many more quality Chinese companies offering ASX investors an eye and a dividend link into China.
So don’t delay. Fill in that application form or contact me - 
The comparison of the Shanghai index against the FT 25 Index shows the top 25 hardly overextended at all. The pull back is classic. Off to new highs. These blue chips are doing just fine.
China Globalx Financials Index
This says bull market only just starting and still on <10xPER.
China Globalx Industrials Index
Only just starting here too.
China certainly is an immature market with high volatility but look at the Hong Kong Hang Seng.
Hong Kong Hang Seng Index
And for a bit of history and volatility just see what happened when Shanghai opened in 1991.
Clearly an immature market.
Up 1300% then down 73% before running 300% to new highs. All within 24 months.
And how are the other major markets round the region coping with China’s supposed meltdown?
Japan? Yawn. India? Cruising.
Japan’s Nikkei
India’s National Exchange Nifty Index
And China’s steel industry still hasn’t collapsed.
Steel consumption in China has been lower but exports to ASEAN and now India are rising and should exceed 100mt in 2015.
And China port iron ore inventories have been down more than 25% from the highs.
An apology here on incorrect comments about the low volumes in the iron ore futures markets. The data on the Dalian Commodity Exchange gives stupendous volumes of over 1,500 million tonnes per month which is about the same volume as annual seaborne trade. It seems everyone trades in it.
So the outlook on these simple indicators is not one of collapse but probably a bottoming and resumption of world growth.
Don’t forget that Dawes Points has highlighted the current or looming deficits in most LME metals and the continuing declines in their LME inventories.
Australian resources stocks are so cheap and the latest production data pre the formal June Qtr Reports show some cash laden gold companies on very low single digit PERs.
More on this next time but for the moment let’s just focus on China.
So coming back to Dongfang Modern Agricultural with its 200,000 tpa of citrus and camellia fruit produce generating A$175m revenue and A$75m forecast earnings and looking for another twenty years EPS growth, what is there not to like?
The IPO roadshow starts this week and include presentations through Wholesale Investors (
Dongfang Modern will be available through ASXBookbuild so if you do not have an account with Paradigm you can apply for shares through your broker.
14 July 2015
Edition #38 
Source: Ipsos Report - Dongfang Modern Agriculture Holding Group Prospectus
China and India populations are also buying more gold and silver.
So who now owns the gold and who will be making the rules?
The demographics of the West are strongly influenced by the Baby Boomers who grew up in a rapidly changing world that was actually a slipstream sucking them in behind a World War II-depleted generation of cold-reality shaped stalwarts and but then the BBs also graduated into a generation of the Lyndon Johnson Great Society of publicly funded under-achievers.
The initial gains were spectacular but the aging hippies and their uninspiring Generation X progeny gave us all massive government spending, Budget Deficits and the Welfare State. And generations of reactionary bureaucrats.
For us unreconstructed Baby Boomers, the 1960s and 1970s were a time of revolution in thinking after the conservatism from the Great Depression of the 1930s and the upheaval of World War II in Europe and in the Pacific. The Depression said money was hard to come by and your savings were hard to hold on to and then WWII said that your life and personal safety, as well as savings, were hard to hold on to.
Lord Keynes in the1930s with his Deficit Spending backed up by some US attention seekers announced to the world that `Government’ knew better and it could invest OPM (Other People’s Money – yours, as the Taxpayer) better than the people who earned it, i.e., you and corporations you might have invested in.
The Revolutionaries of the 1960s and 70s are now the Reactionaries. And their children too. Governments and quangos and NGOs all wanting to tell you what to do and how to do it. Using your tax paid dollars of course. Groupthink and consensus overruling facts and natural evidence.
And calls for an inquiry on iron ore. For heavens’ sake. Dawes Points set out precisely in early May what was happening within the iron ore market. The expected short cover rally is now underway. How far will it run? The bureaucrats are wanting to be heard now but the horse has bolted. Yet another thought bubble.
But perhaps the people overall have their own special way of responding to the uncertainty . Building up cash deposits. It is truly fascinating how people everywhere have taken to building up savings. Inventory of Money. Conserved labour. Private Savings. (And in contrast, Public Profligacy). This Inventory of Money has come up often in these Dawes Points. As does flow of funds. These funds will need to flow!
Now with that flows of funds. Recall that we have gargantuan annual expenditures in USA (US$3tn), Europe (Euro 2tn) and here in Australia (~A$430bn(US$320bn) Federal Budget Expenditures) with deficits that add annually to the debt burden. Funded by bond sales. Government bonds now have higher yields than corporates!
Dawes Points has been talking about the bond markets for some time now but I hope you have noted what has happened in the major bond markets over the past couple of months? A volatile top and then carnage! The bank shares are following.
Just think about bond prices. The lower the coupon the higher the volatility. Doubling in yield. Halving in price? Well, not quite but horrible anyway. And much more pain to come.
Germany 10 years are now 0.88% after falling to below 0.05%! And the UK has blasted through 2.0% after seeing 1%.
This next one has to be one of the great technical graphics in my investing life! US 10 Year Treasury Notes by price. The peak in 2012. The break of the break of the uptrend in 2013. The rally in 2015 back to the trend break line for the `goodbye kiss’ then a sell off! A break through about 122 (but probably 125!) might just put the fear of God into the `safe haven’ believers. The falls this past month have been truly horrendous. No wonder banks stocks are weak. Keep watching this key indicator because it is not yet “oversold”!
US$85-90tn in useless overpriced global sovereign debt. And more coming every year. These graphics on US, German and UK bonds should be telling YOU something LOUD and CLEAR. Disinflation is over. The central banks want some inflation and I just think they are going to get it. Maybe bigger than they expect.
And what does Dawes Points think of rising bond yields?
Good news!! All time highs in equity markets! Almost everywhere but here in sleepy Oz. A nation of bureaucrats chasing bank shares.
Funds will be flowing out of these bonds (and bank shares) now. Where will they go? General equities of course, then resources shares. Then gold and commodities. Let’s just watch this play out.
The oil price as expected has decided that low is no use to anyone and China’s 5.4% pa June Half 2015 gain means another 0.5mmbbl per day consumption. The glut might just be over in the Dec Half and oil prices could be higher.
And while we were talking of the build up in bank deposit holdings we can also already see the build up in gold holdings. Certainly underway in China and India.
Do you go along with that rising interest rates will sink the global economy? Possibly that might happen, but the markets are telling you differently. The US$ may have a last gasp rally and the fraudsters on COMEX may try to hit gold and commodities again but it will be futile.
Recall the LME metals graphics in the last Dawes Points. Consumption growth rates that even surprised me with their strength. And no LME inventories. Thank goodness we are going into Northern Hemisphere Summer otherwise the commodities would be surging already.
Just come back to LME inventories. Other stocks do exist but LME stocks are a helpful indicator. The composite is at just one week and some of the individual metals are below. Copper, lead and tin are down to just one week and zinc is less than two and falling rapidly. Stocks of Nickel metal are at an all time high but this is disguising a major shortage developing in nickel-rich iron ores in China.
And China crude steel production is still confounding the doomsters. 838mtpa in April 2015. Up just marginally on 2014 and the second highest rate ever! Iron ore inventory movements will be so important to watch and will strongly influence iron ore prices. Expect a rally to US$80 by year end.
There is just so much more to come here. I hope you all have an understanding of the significance of the Chinese Silk Road Infrastructure programme and the Asian Infrastructure Investment Bank. No slowdown in China and acceleration in ASEAN and India.
You have seen how the probable iron ore short squeeze as suggested in the last Dawes Points is materialising. It might be one of the largest volume global markets but it is still a very thin market for traders.
The inventory shift highlighted there has seen China port inventories down over 25mt (~20%) to <85mt.
So the basic fundamental supply/demand data is overwhelmingly positive and a commentariat environment has been created that is overwhelmingly negative.
I am seeing dozens of small resources stocks attracting good volume and recovering stock prices. The opportunities are many. Companies with decent projects trading at a few % of their NPVs and are just awaiting funding. Producing companies trading a low single digit PERs. Explorers with some outstanding results. Technical geological and geophysical evidence is building up for the most extraordinary decade of new major discoveries in Australia in oil and gas, copper, lead-zinc-silver and gold.
The indefatigable Kerry Stevenson and her recent Symposium at Broken Hill has just delivered a focussed insight into the massive potential for new discoveries in central Australia. Knowledge and technology that begets new knowledge and then great wealth. The mining and exploration sectors provide some of Australia’s most dynamic Intellectual Property.
Hats off to the staff from the universities and Geological Surveys of NSW, Sth Australia and the Northern Territory. The base that is being laid out before us is truly exhilarating. Australian exploration will be having a vintage decade.
I hope I have the time to cover this in more detail in the next few months because the implications are vast.
So here is your chance to do very well on most resources companies.
I know dozens of these companies with outstanding operations and projects and there are scores more that I don’t. Many are already up 100s of % in 2015.
Most are too small to even fit within the ASX 300 sub indices but I am seeing improving volumes, increasing market breadth and the rising prices that go with them.
Participation by a broader section of the market place is still not with us, reflecting the fear and pessimism but this has been a very long period of bear market so it will take time to bring this back to normal. That means this bull market will last a very long time too!
Call me if you want to make some real money in the year ahead!
But now however, the evidence can be best seen in the actual performance of ASX the Small Resources and Gold Sector Indices.
Market share of ASX turnover is picking up and the four year-long downtrend declines have been broken. The momentum is now with the Resources Sector.
Have a close look at these graphics and I haven’t done them because they look colourful.
Each one suggests major changes are coming in the markets.
There is a downtrend trend break for the Metals and Mining.
Small Resources had its bottom in June 2013 which is my `low’ for this cycle and many stocks outside the XSR have done very well indeed.
The XGD is showing leadership after bottoming in November 2014.
Gold sector turnover is rising as breadth and participation increases. Appreciate that the ASX Gold index is still down 70 % from its high and is now turning up.
Certainly the weakness of the A$ in late 2014 helped kick the market and some people might have thought it was just an A$ gold adjustment that would soon peter out. Nice jump. Take profits. Now what?
Well it has held its ground and then moved marginally higher.
In my view, the XGD is readying itself for another major move up. Perhaps mirroring the bond markets that seem to be expecting an even bigger thump to come there. Timing suggests mid to late June so you may not have much more time to dilly dally.
This looks very interesting and a break above 2800 could see a sharp rush to 4400 (up 64% from here). Will we get it?
Looking at this index more closely there is much to like.
It is showing intra sector rotation as some stocks have weakened, some have moved sideways and some others have surged.
Dawes Points has its favourites. NST, MLX, TBR, BLK, SBM, OGC, NCM, EVN, BDR, MML, GOR, DRM and CGN.
XGD Gold stocks against A$ gold had fallen 80% from April 2011 to the Nov 2014 low! A$ gold at the low was the same as at peak in April 2011!!
Other sectors are moving up and the takeover of Sirius by Independence Group along with the consolidation in the gold sector should be giving everyone confidence.
And I do like the oil and gas sector. Oil is holding up well with strong demand from Asia and the US output is stabilising or falling.
The thesis in Dawes Points hasn’t changed these past two years even though some things have gone terribly wrong in the A$, the iron ore price, the oil price and…… oh yes, resources stocks themselves.
But the rest of the scenario of:-
Of course higher steel production means more iron ore needed so steel mill ore stocks may actually be quite low. Finished product stocks are also well down over the past 18 months.
And there is nothing here that suggests a decline in imports has happened or is likely.
This is a take on China Port Inventories as a % of imports. 89mt of port stocks is only 32 days at 1,000mtpa imports.
See any oversupply here?
Certainly the world has new iron ore capacity coming on stream over the next few years and you might ask yourself why would that be? Could it be that demand will be increasing and finally Chinese domestic production is sharply declining?
Or is it that the mining companies and their bankers are stupid and just want to blow shareholders’ funds?
We can accept that Chinese steel consumption growth rate declined in 2014 to just over 1% and the increase was the lowest for many years and that China maintained steel output by exporting about 90mt of steel products. But there are many aspects to this equation.
Firstly, iron ore imports at record levels displaced Chinese domestic magnetite production then greater Asia shared China’s steel output. India has complained about dumping of steel but with its own archaic capacity of only 85mtpa and steel demand growing at almost 8%pa then it must be welcoming the opportunity of gaining access to new steel. Per capita steel consumption there is only one tenth that of China. India’s own forecasts are for 140mtpa by 2017 with imported iron ore to figure prominently.
Secondly, East Asia (including China) and India consume over 1,000mtpa of which ASEAN consumes about 80mtpa whilst producing only about 20mtpa.
India wants 150mtpa domestic steel capacity quickly but I am sure it would take lots of Chinese steel now. Chinese steel anyone? Yes please!
Overall ASEAN with its 700m people has a steel use per capita of about one fifth of China. It will take a lot of Chinese steel in the immediate term and then build its own furnaces. More iron ore needed.
The inventory adjustment that has taken place in iron ore into 2015 will probably have added 40-50mt to supply. We have already seen 20mt rundown from China ports. Probably 10mt from the steel mills. Fortescue and other Australian producers have had mine cuts to give another 10mt port reduction. Now that has gone will it be rebuilt and increase demand? And overall global demand should soon pick up as well. But probably not yet for high cost producers.
These inventory shifts could cause a serious short cover rally in iron ore price. Watch this space.
Keep in mind iron ore is an illiquid market and the shorts in the futures market may have some heart burn trying to pick up a few cargoes if the market goes buyer no seller.
All three Australian iron ore producers BHP, RIO and FMG are strong BUYs and recent operational rationalisations by each has only improved their prospects.
And the individual metals. Don’t manganese alloys look interesting! Strongest of all the metals!
Looking at LME inventories over the same period against consumption it is clear that the denominator has risen 30-40% for the LME metals.
Nickel metal inventories have surged wildly as stainless steel producers have sought far cheaper nickel pig iron made from nickel iron laterites. Perversely, reductions in availability of such ores from Indonesia will leave nickel in a deficit very soon. Watch the price of this metal.
Most other inventories have been heading south rapidly over the past two years. Some inventory levels are now very low. Against 40% more consumption they are VERY low.
If we leave out the distorting effects of aluminium and nickel, a composite can be established. This says the average LME availability of these four metals copper, lead, zinc and tin is just over six days (just 1.78%!!!).
This certainly doesn’t say a collapse in demand.
Is there anything in the above that suggests Dawes Points is incorrect in being bullish?
Now just look at copper.
In US$ testing downtrend but in Euros it is already away and will move higher.
Copper in A$ is looking ready for a massive upmove. After a compound annual growth rate (CAGR) from 2000 of 3.21% and 4.58% pa from 2010 in consumption, copper is moving ahead of supply and has only 1.5% of annual consumption as LME inventory.
I have some favourite stocks here but Cudeco (CDU.ASX) is now finally so close to production. Inventories (>200kt) of high grade ore and native copper have been built up ( 
Lead has had a good move up in the past two months and a 14 year CAGR of 3.76% and four years of 2.80% but there is less than a week’s supply on LME. Should be much higher in 12 months.
Nickel has a roller coaster ride with a long term growth of 3.70%pa since 2000 but 6.16%pa since 2010. The appearance of nickel rich iron laterites being turned into nickel pig iron has left demand for metallic nickel high and dry and hence the big build up of LME inventory. The export bans by Indonesia on unprocessed ores have now changed the market balance so we should see a draw down on LME inventories, and if this takes place, nickel prices could surge.
Tin has the lowest long term growth of all the LME metals but the real story here is the requirement for new supply. Nothing much coming, no inventory (down 25% in past 3 months!) and the interesting characteristic of being the only LME metal other than copper that made a post GFC high in 2010/11. Should be one of the better performing metals for the next few years.
Zinc has had a slower consumption growth rate but has moved up strongly as inventories have declined sharply with a decline in supply that will only get worse in 2016. A much bigger price coming here.
These don’t suggest recession is upon us.
And as you can see, no LME inventory buffer is available for these metals.
In Australia this means anything in LNG export or the Cooper Basin or newly developing unconventional is now very cheap.
Ask me about my favourites.
This is finally turning up and it would suggest that over the next two years this means ASX Gold Index should almost double against A$ gold from 1.6x to 3.0x.
Are you bullish on US$ gold? I am bullish on US$ gold but also the A$ so if both rise then ASX Gold stocks will be really flying.
Dawes Points has picked some real winners here from the lows in November and December 2014.
As noted previously, the issues for individual stocks are complex of course but we are talking about stocks still down 70% and in the very early days of a new bull market in gold.
Risk is still low, reward is still high!
This rise of the ASEAN nations (over 700m people) with Indonesia with 250m people and strongly rising living standards should not be ignored either.
The preoccupation with the defensive chasing of yield thesis just seems wrong to me because the markets are saying something different. Note that the US small caps (Russell 2000 and S&P 600 Small Caps) here are again reasserting the market leadership after a year’s hibernation. This says expanding US economy. Don’t ignore the recent wage rate rises in the US either. Inflation is coming. And this spells doom for deflation-priced US and European bonds. And for the defensive yield and high cash strategy.
Why be defensive in respect of our resources sector when the world is out there having fun?
The global economic boom is now well underway fuelled by central banks flooding the world with liquidity. Watch for changes to the velocity of money in circulation. Commercial banks are starting to lend gain. Everywhere. Especially for takeovers.
It seems strange that the world commentary focus should be on the US Fed and interest rates with players cheering down the Euro and thumping commodities while chasing impossibly valued sovereign bonds and an overvalued US$. The markets are saying something very different.
These markets are barometers for future economic conditions so steady growth for China and rapid and increasing growth for India and ASEAN seem very likely. Iron ore and coal commodities might soon surprise us to the upside. Maybe quite soon. These countries with low installed steel capacity but strong demand will be taking surplus Chinese steel.
Good signs of global economic expansion are there despite this current rout in iron ore prices gripping the locals.
Small resources stocks are starting to move higher and many with gold or technology materials are outperforming. Capital raisings are happening again with funding available for advancing new projects whilst survival capital is still hard to raise.
I see many brilliant opportunities and clients are making money again. This is the time when small investments spread over tiny nanocaps give the highest returns and lowest risks. Are you on board?
And on iron ore, what will happen to the 300mtpa of Chinese magnetite production which has cash operating costs of close to US$100/t? At US$48/t that is at least about a US$30/t loss. Times 300mt that is US$9,000m in losses. Atlas Iron is small beer. How long will these low prices last? Production cuts in China must be coming soon. With low steel mill inventories, lower port inventories and short positions in the futures there might just be a major short cover rally. The declining iron ore price has never seemed right to me. I have been clearly wrong but let’s see what the next year might bring. Or even the next month.
Here in Australia the All Ords is flirting with 6000 again and making 7 year highs but Resources are still being spurned. BHP is showing a 5.5% yield. Great buying.
Can the world be slowing that much while markets are moving up?
But as ever, I simply ask, `What are the markets saying?’.
It seems to me that the choir and what’s on the new song sheet are not yet in sync.
Try looking at this
The bond markets.
Major new low for yields in US 30 yr T-Bonds last month.
But the new lows not confirmed by the US 10 Yr Notes.
And bonds globally are just ridiculous. Germany at 0.18%.
Japan has said this was ridiculous. The capital losses from buying at 0.20% to 0.40% are unimaginable. Try 25%.
And then look at the UK. Big losses here too.
Why is this so? Why is there a rush for income at such low rates? And why the love of sovereign bonds when government and bureaucracies in so many countries around the world continue to show utter incompetence in managing taxpayers money at every level? Unelected officials with their own agendas.
And just look at prices for US 10 and 30 year bonds. 10 Year bonds hitting the uptrend return line for a Good Bye Kiss (a lovely term for when a market breaks then returns to the break out line then surges in the other direction) but 30 year bonds hitting new spike highs. Overbought signals everywhere. New highs in the 30 year Bond Index but no new lows in yield. Danger, Will Robinson.
I keep noting references as to who will buy these bonds once the decline does get underway. Could be a case of seller, no buyer.
Now look at some currencies. Starting with the commodities currencies the A$ and C$. Both are in long term support and are heavily oversold. Dawes Points has not got this right for the past year but I repeat the point above, nothing has changed in the Big Picture.
A$/US$ C$/US$
Now just for lark let’s look at the A$ on the crossrates. Well this is not bearish against the Euro.
Nor is this against the GB Pound.
Nor this against the Yen.
Well I find this interesting and not what most people are talking about.
Now here is another view on life. Commodities in other currencies. Reuters/Jefferies has decided to discontinue the favoured Continuous Commodity Index so let’s use copper and Brent oil. Start with copper in Euros. That’s interesting! A break out!
And in Yen.
And in this context just recall the consumption data from a Dawes Points earlier this year and the turn to deficits over 2010-2016 for most major resources commodities.
Annual consumption and consumption growth data
Where are the demand decline-driven bear markets?
Do not ignore the biggest traded commodity in oil. The US shale oil production is only part of the equation. Why has Brent surged to a 20% premium over WT when the proposed dropping of the 40 year old US export ban was overturned was supposed to bring them to parity?
Could it be supply concerns. Iran is now backing Shia Iraqi fighters against ISIS and Saudi Arabia is Sunni and is fighting against Iran-led incursions in Yemen, right on the Saudi border. A civil war here could affect oil shipments in the major shipping lanes such as the Straits of Hormuz. The tentacles are spreading. Export cuts at Libya. Iraq output down. What if Qatar fell? The impact on LNG would be immense.
Nor here. Oil price recovery may be coming sooner than you think.
Shell might be thinking so with its bid for BG Group. Great confidence for LNG. And LNG Ltd (LNG.ASX)!
Gold has bounced after the US Jobs Report selloff and is readying itself for another run up. The emphasis made here for some time now on the rapidly rising demand for gold from Asia can only be increased as we see the Shanghai and Mumbai stock markets roar to add wealth to citizens. Jewellery demand is robust in these countries and low gold prices can only increase demand.
Needless to say, the gold price in most currencies is in a good bull market. You knew that of course so I won’t show it again. Well I will anyhow. In Euros and A$
And the US market for gold stocks has given us some fascinating market action. Reversals patterns last month. When a market makes new low (or high) then closes above (below) the previous day’s high(low) then it generally indicates a direction change.
Our collection of US gold sector Indices makes for some very encouraging analysis of reversals.
The HUI unhedged gold index.
The XAU, the major US Gold Index.
And then the two major gold stock ETFs GDX and GDXJ.
Here in Australia, the ASX 300 Gold Index (XGD) has moved up nicely too to reflect the A$ gold price over A$1550/oz. I see it moving up strongly to 4500 quite quickly.
We are still down 70% from the 2011 high.
And the ASX 300 Gold Index is down 83% against the A$ gold price.
Gold stocks are picking up market share and the three decline in the 12 week moving average has broken its downtrend.
Newcrest and Northern Star have been the leaders in this new bull market for gold stocks. I hope you are on board.
Remember these stocks as well as my recommendations for this long term bull market. Most are over their recent capex, have reduced debt and costs and are making money. Dividends soon and for a long time :-
Metals Ex MLX
Doray DRM
Tribune TBR
St Barbara SBM
Resolute RSG
Evolution (EVN)
Beadell BDR
Blackham BLK
Crater Gold CGN
Don’t let global ignorance cloud YOUR own judgement.
Barry Dawes
BSc F AusImm MSEG MSAA
I own NST TBR SBM DRM CGN BLK MLX BHP and LNG 
Should it be just one oz and 1 million per month then that is 12moz or 375tonnes pa. Two oz is 750tpa or 25% of world gold production. We will find out in just a week but this could make gold “cool” for the ``techies” demographic (read China!) and physical gold demand could really overwhelm the bears.
This market can only go higher. And much higher at that.
In the short term, gold stocks in Australia have consolidated recent strong gains and the shallow and short correction I expected was certainly shallow but has been rock solid for over 6 weeks.
ASX Gold Index Daily 12 months
(Source IRESS)
The leaders in this index Northern Star (NST) – are you on board yet? - and Newcrest (NCM) are leading.
I expect the market will hear much good news from many of these companies as operations are properly bedded down and as the benefits of the lower A$ and fuel prices work through. March Qtr figures should show very good cashflows from producers and exploration should be picking up again.
This confidence will flow through to developing companies and the capital raisings underway will be able to replenish severely depleted bank accounts. Watch this space.
ASX Small Resources
With that in mind, have a look at this. The ASX Small resources Index. The XSR did not make a new high in 2011 but it had a 72% fall which has finished and now will move back up to new highs.
ASX Small resources Index Monthly 20 Year (Source IRESS)
What extraordinary volatility. What extraordinary opportunities!
I have continued to point out the Disbelief/Pessimism stuff and labelling the ASX Small Resources Index (XSR) like this makes so much sense. The Optimism Leg is underway now at long last.
My recent 
I will explain my 2015 portfolio a little later this month.
I still expect the next move up to be very strong and last for a very long time.
Almost every cycle I have experienced has seen strong investment and consumer demand that pushes hard against capacity and results in higher prices for commodities and manufactured goods. Labour prices follow higher as do interest rates and debt.
High interest rates reduce demand, prices fall and newly committed capacity comes on line only to see operating and corporate failure. Equity markets fall and many bond prices rise. All commodities, including gold, fall in price, inventories rise and unemployment surges. Bad news, misery and Hard Times.
Then it all starts again.
But this time it is very different.
This time the world has a growing China with 1400 million people. IMF says its Purchasing Power Parity GDP figure is now US$17,600billion pa and growing at 7+%pa compared to US$17,100bn and 4%pa for the USA. This time the world has 1300 million people in India and growing at 8%pa. Add 700m people for ASEAN, 1,000million for Africa and 700m for Sth America.
Resources materials consumption is at record levels and growing. I have previously highlighted the strong demand for iron ore into China and the just-published 2014 import data showed an increase of 13.8% to 932mt. So much for slowing or falling demand from China. High growth rates are always unsustainable but slowing growth is not declining demand. It is worth reviewing all of this data to show what is happening on the demand side.
Spend the minutes to see the demand/consumption levels. See the growth rates. All these consumption figures are at RECORDS levels.
To see commodity price fall 50-80% and the resources shares fall even more doesn't make sense. In previous cycles, as noted above, demand fell and commodity prices collapsed. This time commodities collapsed and consumption reached record levels. Its true.
Recall that the commentary has shifted from incessant calls for demand shortfalls to tirades about oversupply. What is going to be the next mantra for Wall Street’s self absorbed IBs? The managements of resources companies have been pilloried by everyone. The operators working at the market edge have been replaced by the bureaucrats to help `steady the helm’. The entrepreneurs have packed up their tents and shut down their businesses to protect their core assets.
The financiers have been long gone and the funds themselves have been commandeered by even more colourless bureaucrats who would rather have safety at <2% on 10 year sovereign debt than back any cohort of risk takers and builders.
So come and look at this data.
Growth everywhere (except for Chinese crude steel production).
Some excellent work from Glencore is contained here. 
Note the huge investment by BHP, RIO and Vale into iron ore and bulk commodities. Note Glencore’s commitment to industrial metals like copper, zinc and nickel.
Look at this Glencore graphic of the demand growth rates of metals against bulk commodities. 2014 was a very good year for demand but not prices.
Go back and look at the growth rates of copper, nickel zinc and aluminium. Note, in contrast, the turn to deficits in 2015-16 and the impact beyond.
And let’s use Glencore’s stock level analysis for copper (note LME inventories have risen by a miniscule 50kt since this was presented). Glencore also correctly points out that much of the supposed new copper capacity coming on line has been deferred due to availability of capital, corporate over-extension, environmental and political interference and just bad luck. Glencore things the Copper Deficit might just come earlier than expected.
Copper price action is indeed fascinating. Channel analysis picks up important support and the 2002 uptrend is helping out. Oversold and ready for strong bounce after falling for three years. And note that copper made a new all-time high in 2011. Strong underlying long term fundamentals applied then and still apply now.
Here you should be recognising that the old paradigms are no longer working so you need to be thinking what else might be happening.
So here is my paradigm. My way of thinking.
You will recall I have referred to my presentation of the MPS Disbelief, Pessimism, Optimism, Opportunity and Euphoria graphic in November 2008 at Mines and Money in London.
Source: RBA
What can we make of this and what do we do next.
So let’s come back to the Australia Resources Sector.
These are the four key indices.
XMM Metals and Mining
XJR ASX 300 Resources
XSR ASX Small Resources
And XGD ASX Gold Index
As noted, XGD, the Gold Index, made a new high in 2011 but none of the others did.
All these have done the Disbelief Rally that peaked in early 2008, the decline into late 2008 then the bounce rally into April 2011 and the unrelenting decline into the lows which I consider were in November 2014.
They all bottomed on 16 Dec 2014 except for the Gold Index which bottomed more than a month earlier on 6 November.
Now if all the above fundamental supply/demand data are correct (Glencore definitely thinks so) then there should at least be a good bounce in 2015 for all things resources.
Now let’s take a further step.
What are the global equity markets telling us now?
Starting at the heart in the US. S&P 500 - maybe overbought and concerns are developing over the strength of US$ on earnings but the long term trend seems OK. Renewed calls for a crash `tomorrow’ are still coming through. Mkt cap US$17tn PER 17.6x
The Russell 2000 for `small caps’ had a Gap Year in 2014 for a bit of rest but it too does not look over extended. Mkt cap US$2.0tn. PER is 50.9x.
And the broad Wilshire 5000 looks very stable.
And look at the rest. Germany is OK. Recent new highs. Mkt Cap US$1.1tn. PER 17.6x
But now look at where the real action is. Asia. China, India, Japan (sort of), Rep of Korea and ASEAN. And this flows into Middle East and Africa.
China and Japan have started major new uptrends after long periods of decline.
Singapore and Taiwan are ready to move up. Not quite all-time highs yet but certainly trying.
And now we have India under the new Modi administration.
1,280m people and GDP of US$900bn and growing at 6-8%.
India is the fourth largest producer of crude steel and whilst historically India has been an exporter of iron ore, its domestic policies have created a real uncertainty. Exports were banned and India became an importer. Now, exports are OK but net imports are likely to continue and to meet the proposed +8% growth in in domestic crude steel that will take India to over 200mtpa by 2015. A lot of iron ore and a lot more coking coal will be required. Have we heard all this before? Yes, but this time it does appear to be happening and the pattern of Indian crude steel has traditionally been skewed to EAF (Electric Arc Furnaces) treating scrap and operating DRI (Direct Reduction Iron) plants. It will be interesting to see if a new collection of conventional blast furnaces will be built to take imported hematite and I am sure India will take a fair proportion of any Chinese export steel in the short term.
India is growing, its stock market surging and Indians are becoming wealthier. And India loves gold and will import a lot more, absorbing anything global gold mines can produce.
It has to be expected that demand for zinc, copper aluminium and nickel will also benefit.
Coal imports, both thermal and coking, into India will only increase despite the proposed drive into solar and renewables. Domestic policies on coal tenements are as complex as those for iron ore so don’t expect much of a surge in domestic production.
China, India and all the other emerging economies will be taking more cheap oil and bring the market back in to balance as the US oil patch shrinks a little for the time being. Shale oil recovery in North America is very like mining now with the capital costs actually being operating costs. And the financing of this drilling activity has taken such a major hit that will take the oil drilling industry a few years to recover from.
But the oil price does look to me to have very limited downside now and each severe sell off seems to correct within a few months. This time should be no different.
