Gold price surge likely to continue

June 29, 2016 | Dawes Points |

Gold price surge likely to continue

Key Points

  • Gold surges above US$1320
  • Important technical break out achieved
  • ASX Gold Index breaks through 4800 @A$1770/oz
  •  6000 to be achieved sooner than anticipated!
  • Most gold stocks on PERs
  • XGD now up 198% from Nov 2014 1642 low
  • The Bifurcation between entrepreneurs and bureaucrats developing nicely
  • Global equities still in major bull markets
  • Best gold plays are   NCM, NST, EVN and OGC for bigger stocks
  • Growth stocks BLK, TBR, RSG, PRU, SAR, PNR, GOR, DRM
  • House stocks  AHK, AUC, CYL, SWJ, TNR, TYX

Gold prices are continuing their upward surge with a sharp US$100 rally after the Brexit vote confirmed popular opinion to leave the European Union.

The strength in the gold market has been displayed since the lows in January 2016 and long before Brexit became a market issue.  Markets respond to the major long term issues and tend not to be reversed over short term matters.

One observation made in Dawes Points in #48 was that the new highs achieved in US$ gold prices and in major gold equity indices in 2011 represented an `irregular B wave’ where this wave exceeded the conventional Wave 1 rally highs in 2008 when almost every other commodity peaked.

This is technical speak I have to say but extremely important nevertheless.

The 2011 rally peak for gold at US$1923 was 86% higher than the US$1032 2008 peak.

The performance of the Philadelphia Gold Index was not as robust but significant new highs were achieved in 2011 over 2008.

The rally in the gold price since Jan 2016 has also provided something equally fascinating.

Here the B wave rally to US$1320 has again exceeded the Wave I high of just under US$1300.

The subsequent breakout above US$1320 is important.

THIS IS A POWERFUL BULL MARKET IN GOLD.

It might also be suggesting an even more powerful forces are at work that will change the global allocation of capital.

The world has never been as wealthy and the wealth is no longer a US or Europe dominated force.

China, India and SE Asia are now wealthy blocs with over 3,300m people.

Wealth in property, corporations (listed, unlisted and state owned) and in cash (or near cash) is immense and far exceeds the levels of global debt (not counting derivatives of course) even though this is very high.  The roughly US$100 trillion tied up in bonds (mostly sovereign debt) is an asset for now for some but these will surely soon be seen as just liabilities and the mostly sovereign issuers will be seen for what they are:- low quality balance sheets and unreliable managers in non growth sectors.

Politicians pushing social programmes that promise other people’s money to an infinite populace seeking something for nothing are about to have their game curtailed.

Mathematically speaking it is only while manipulated interest rates are low and competitive market forces keep reported inflation low, can the low economic multiplier of social services transfer payments with bureaucracy churn and friction exist and operate with the very low IRRs (internal rates of return) on investment.

If just the interest rate is now raised on sovereign bond coupons those investments will be definitely showing negative IRRs on social welfare spending.

If the providers of capital for sovereign bonds become reluctant to participate then the coupons will be forced much higher and many social programmes will simply disappear.

What a paradox.  Negative interest rates offered and accepted when potential servicing risk by governments has never been worse!  10+ years of income with a government guarantee!  Trust me, I have a printing press!

It is highly likely that the so-called Brexit vote will change Europe initially but it may also lead to other EU countries doing similar and voting to leave.

The worst case scenario is for the EU Central Bank to lose control over the issuance of sovereign bonds issued in Euros.  If the Euro was to collapse, who would be responsible for bonds issued in Euros?

A more likely case is that Europe muddles through and something else happens.

In Dawes Points #48 the concept of a bifurcation was raised where the entrepreneurs and lovers of economic freedom threw off the shackles of centralised government and bureaucracy and all global wealth unleashed a surge into unprecedented period of prosperity.

The extraordinary developments are underway in technology of all sorts.  Mining technology, Fintech, Agritec, Meditec, Processtec, 3D printing, communications and, well, even computers.

Centralised government, bureaucracy and bond holders get left behind.

The Brexit vote, the Trump ascendency and perhaps even a return of the Coalition Government in Australia next weekend may be key triggers.

Bifurcation.  One road and another.  One road overcrowded with bureaucrats, politicians, socialists and the PC brigade.   The other, less well travelled, with people like you and me.

Who is going to win?

Look at these key market trends.

Given the universal pessimism still reigning in the media and with economic commentary you would be thinking the worst.  However, the markets don’t seem to think quite the same way.

The UK

Germany

Both these key markets are well positioned technically and long term (and now short term) oversold.

The picture in the US seems robust indeed with the major indices pushing against all time highs.

Dow Jones Industrial Average 30 close to all time highs

NASDAQ seems to want to break sharply higher

Russell 2000

Shanghai still hasn’t collapsed!

India is moving higher after its correction

While equities are doing just fine it seems commodities are now rallying from incredibly oversold levels.

And this critical price relative is really quite instructive.  Extremes provide great turning points and great entry points.

Which brings us back to gold stocks.

The ASX 300 XGD Gold Index will probably get a boost through the addition of an extra two or three gold stocks next week and as they will have been recent star performers they will probably accelerate the XGD’s performance.

My 6000 target for 2016 doesn’t look so distant now does it?  Just 1100 points, just 22%.  Might do it in July!

To put this in perspective, this little table from the Dawes Points universe of 22 key gold producers says that at 4890 we have the index on about 6x earnings at A$1770.

I have even added a line for A$2000/oz which gives just 4x earnings.  Again a higher gold price gives a higher A$.

This actually gets a lot better.

Whilst this universe is the same one I have used for almost 2 years it is soon going to get a boost from another 30 emerging gold producers I have identified and am monitoring.

Then we will be having some real fun!

As pointed out in the last Dawes Points on gold, the strategy has been to select the prime opportunities in the key geological regions and stick with them whilst keeping an open mind on new emerging opportunities.

Stay the course.  Hold those incomparable core stocks and wait for the rest of the world to catch up with what we have known for quite some time.

I am in Singapore just now and have been blown away by the wealth, the architecture and the art work.  Man’s creativity is being displayed so well here as it is in so many parts of Asia.

This period of global prosperity has a long way to go.

Take the Bifurcation Highway and enjoy the smooth ride!

I had hoped this 50th edition would be a blockbuster but I am on holiday now so the world will have to wait!

Barry Dawes
F Aus IMM MSAA 

`As a Post Script and a consideration of `What if’, you are all aware I am sure of the plethora of lithium wannabees and graphite promoters on ASX seeking to capitalise on the disruptive technologies associated with power storage in new generation batteries.  This is  a very exciting development.

Well as an alternative you could consider a company LWP Technologies which has just entered into a JV to develop an Aluminium-Graphene battery that has characteristics that if successful could leave lithium graphite behind.

Look at these specifications:-

Here is the link to the full presentation.

I own LWP and introduced this technology to LWP.

#50 
27 June 2016

I own or control in diversified portfolios most of the stocks mentioned here.

Barry Dawes
Head of Resources
BSc F AusIMM MSAA 

Follow me on Twitter @DawesPoints

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