Fasten seat belts – Here we go world!!

A couple of weeks ago the Dawes Points comments of The Resources Boom Accelerating and the Equities Explosion Coming seemed a little courageous to many but the passage of the past two weeks has provided more concrete evidence of the continuation of the global economic expansion.

The Wall Street gloomthink and the charade being played out in Washington seems to be ignored by the markets except by the usual New York Bozos who just love bashing the gold price to protect the unprotectable and defend the indefensible, i.e., the US T Bond market and probably the US$.

And a strongly growing world economy is far more attractive than sitting in in a ten year T-Note for 2.7% or in a 30 year T-Bond for 3.7%    And if it is safety you want, well, bonds at this price seem very unsafe – all that risk and so little reward.

Global equity markets are exploding upwards.  The Leaders are leading.  The Russell 2000 scored a new all-time high this week and Wilshire 5000 and the S&P 500 are not far behind.   The Dow 30 has been remarkably volatile and so has diverted attention from the better performing indices.

The DAX is making all-time highs, the FTSE is getting ready to move and the Nikkei has bounced off its downtrend and is heading up again.  Hong Kong and Shanghai are looking very encouraging. And the local ASX 200 and 300 look just fine.

And resources commodities look good too. Oil is leading the charge driven by tight supplies with Libyan output down again.  US tight oil is only about 1million barrels oil per day and it might grow to 2.5-3mbopd within a few years but China now is a bigger net importer than the US and it alone will absorb another 1mbopd per year.  So no oil surplus in the years ahead. But higher prices of course.

Two charts here of US Oil Index and the E&P Index show new all-time highs.  Catch up Australia!

Now the iron ore price at US$134/t still hasn’t collapsed and RIO this week announced record shipments of iron ore (and other things as well).  And copper is starting to really look good now.

Have a look at the copper price and look at Freeport Copper, the world’s largest listed producer of copper with over 1.5mtp copper output rising over 35% by 2015 at cash costs of under US$1.60/lb.  Capitalised at about US$33bn with an EBITDA multiple of <3x, over 2mozpa gold and 35million barrels of oil equivalent.  And a 6.5% dividend yield.  Better than bonds!  Downtrend broken and leading the copper market.

LME copper stocks are down 25% from the highs in July 2013 to just 500kt and just 1.3 week supply at current consumption levels of 21mtpa.  Copper will be much higher soon.

http://stockcharts.com/c-sc/sc?s=$COPPER&p=M&yr=10&mn=0&dy=0&i=p38674516184&a=318139370&r=1381822274116 http://stockcharts.com/c-sc/sc?s=FCX&p=M&b=5&g=0&i=p75597707101&a=319422432&r=1381820660244

   
I continue to be very impressed with the prospects for several other metals in the years ahead.  Supply limitations together with growing demand make for great opportunities.

With Zinc, the supply side(11% closure of existing mine capacity) is inversely matched by a projected growth in demand as China increases its proportion of steel protected by zinc galvanizing. LME inventories are down 19% from the beginning of the year to <1mt.  Expect a big jump in zinc prices as the mine shortfall becomes really obvious and few listed investment opportunities exist.

With Lead, the US, Europe and Japan are supported by recycled metal but China and other emerging economies have little scrap so newly mined metal is needed.  Few mines are available now and LME inventories have been essentially declining for two years and are almost 40% lower at just 238kt or just two weeks supply at current consumption rates.  Shortfalls expected here too.

With Tin, the supply is now quite limited with very little new capacity to come onstream in the next few years to meet growing demand.  LME inventories have been in a three year downtrend and are just 13,000t- about 2 weeks supply on 340ktpa consumption.

With Uranium, reactor demand is already well above mine supply and the  warheads to power rods transfer has now finished.  68 new reactors coming on stream and not much in the way of new mine production. Just watch this space.

The demand for raw materials from the Non-OECD is now well over 50% of all demand and the growth should be accelerating against a background of supply constraints for most resources commodities.

And this leads us to our favourite area – the small resources stocks that can give those exceptional returns.  And because these are all tied up with gold they tend to perform together.

The poor performance of listed gold stocks and small resources stocks over the past couple of years have been perplexing and great wealth hazards.   It has certainly been puzzling as to why the market action has been so extreme particularly against such strong fundamentals.  Well certainly the fundamentals that I see and not those of the Wall Street cabal.

I have spent some time searching for analogues where markets have had so much volatility and have fallen so much against what appear to be good fundamentals. Stocks falling >90% are usually associated with severe recessions and for an index to fall almost 80% you would expect the worst to have happened.  The searches showed that such markets are very rare and apart from the Dow Jones in 1929-1932 Crash in a very different environment there have been few even vaguely similar.

So why has all this happened and what does such volatility really mean?  Let’s go back to the ASX All Ordinaries Gold Index.  This is real volatility in a bull market.

Certainly there was a bull market that began in about 2000 (when the Index was started) that ran well into 2008, had a sharp pullback then rallied hard to new highs in 2011.  The subsequent decline into the June 2013 lows has been vicious.

So we had a good +594% run into 2008 then the 61% pullback, up 218% then down our famous 77%.

Just note the performance of the US Philadelphia Gold Index with similar volatility with essentially co incident timing on highs and lows.

It is hard imagining the combination of a major bull market with such volatility against still strong fundamentals.

But I have found something that does seem similar.  Lots of volatility and has major moves over a short period.  And it is an Index!

Look at the volatility in a bull market!  Up 1300% in 18 months!  Down 73% in 6 months then up 300% in 3 months!  Wow!

And there is more. Down 79% in 15 months (see XGD down 77% in 26 months!) and then the stupendous jump of 223% in 1994 over just TWO MONTHS!!!

This was a new market with lots of speculation and volatility but look where it is now.


I actually think the Chinese might decide that they like stock market speculating again very soon.  It just needs only about a 1% rise to break a four year downtrend.

So coming back to the resources sector what might we soon see?

With the very strong fundamentals for so many commodities the value for these small companies is outstanding.  Given how underweight the world is in these stocks we just might get the big run as we saw for Shanghai.  200% in just two months?

Now have a look at this for the Philadelphia Gold Index (XAU).

A rubbery 12 month downtrend in the bear market since April 2011.  The downtrend has been broken and the XAU has come back to support on the downtrend in a declining wedge.
http://stockcharts.com/c-sc/sc?s=$XAU&p=D&yr=1&mn=6&dy=0&i=p92731593672&a=318608303&r=1381893712088

Usually such price patterns are resolved in the opposite direction to the declining wedge so itshould break sharply upwards.

And something very interesting took place in the US markets on 15 October that might be indicating a major turning point.

Our favourite Bozos in New York markets thumped the gold price down US$22/oz to almost US$1250 then the market jumped up over US$30 to the current US$1285.  It was almost as if the gold market said that “If that is that your best shot then you shorts are now finished!”.

The XAU countered by closing up 2.4% as well!  This just might be a confirmatory price reversal.

So if it is a price reversal then the bottom of the declining wedge should be the completion of the Right Hand Shoulder of the overall reversal pattern.

The upside breakout could be very powerful indeed.

So go back to the Shanghai analogy.  +200% in two months.

Let’s just watch and see if markets are strangely stronger tomorrow. If so it will be a great ride.

16 October 2013

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