Gold – Ready to move up again #56

October 25, 2016 | Dawes Points |

Key Points

  • Gold market bottoming after a 15 week consolidation
  • Dawes Points ASX Gold Sector Universe at PER 9.0x FY17
  • Gold in other currencies looking strong
  • Global gold sector running short of reserves
  • Inflation indicators turning up
  • Oil has bottomed and is heading higher
  • Global bond market 35 year party now over
  • US banking sector looking up
  • Gold sector looking good now for next upleg
  • Buy the ASX gold sector stocks
  • Buy emerging oil and gas stocks

 

The powerful bull market in gold appears to be remaining powerful with the recent correction lasting 15 weeks and pulling back only 9% in US$ terms.  Gold stocks (XGD.ASX) in Australia pulled back 26% after a 10% fall in A$ gold prices.

Only shallow pullbacks but they have had heavy influences on sentiment with volumes drying up on XGD.

Gold price uptrends in other major currencies are looking powerful too.

Questions on the direction of gold are continually asked but the answer must simply be the same.

More buyers than sellers and the demand is stronger than supply.

The demand from Asia with the Diwali season from India in full swing this week after some reported better harvests matching with continuing firm jewellery demand from China to help absorb all the mined gold means that the tightness in the gold market remains.

Gold mine supply is still constrained and expectations of declining output from largest producer China must start to take hold soon.  How long can China maintain 450tpa from a fragmented industry of small mines?  Looking at global mine production overall, the decline in most major gold producing countries should also continue.  The continuingly impressive gold industry leader Randgold CEO Mark Bristow (US$2 to US$130 in 14 years) has highlighted that the global gold industry needs to find the current 90 million ozpa mine output each year to just replenish reserves without expanding output further to meet the rising demand.

This Mark Bristow graphic shows the industry has found next to nothing since 2009 despite record recent exploration budgets. This also says hold onto your gold.  It is becoming rarer and even more valuable each year.


Source: Randgold

Even EFT holdings of gold remain firm and even rising while the US$ gold price has had its consolidation pullback.  The current position is around 2060t or about 65moz, well above this green line.

The outlook is further bolstered by some key indicators that are now suggesting that the massive QE stimulus packages from US, Japan and Europe are now beginning to flow into inflation.

As suggested previously, US Fed stimulus was primarily into US banks to shore up bank balance sheets and to ignore the mainstream economy.  Zero Fed interest rates allowed banks to borrow at zero interest and lend back to the Fed for a fee. The 0.25% new Fed interest rate is higher than the Fed borrowing fee so lending now has to be to the real economy at much higher lending margins.

US banks would be delighted at sourcing funds from the Fed at 0.25%, and from other parts of the market, to onlend to businesses at 6% and personal loans at 12%.  Nice margins to be had again.

US banks have underperformed the general equity market horribly since the Lehman Bros Crisis but it may be time for this to reverse and see outperformance.  This graphic is a powerful decade-long technical pattern of a US Banks Index vs S&P500 that could provide a multiyear 200% outperformance if resolved to the upside.

The higher lending margins would be the catalyst.

The short term seems quite constructive and we should see resolution here quite soon.

A stronger banking sector doesn’t quite fit the concept of equity market declines against rising bond yields.

In fact, the opposite is probably very nearly the case.  Isn’t `conventional wisdom’ grand!

The inflation picture is also now very interesting.

In the US, the total cumulative inflation from 2006 is over 40% and rising.  You have been told by the politicians and bureaucrats that there has been no inflation and a deflation is the problem.

In the UK the picture is no different even though the chart is.  A weaker Sterling may accentuate this.

The direction is up for inflation.

The bond market peaking story has been a key plank in Dawes Points so I probably won’t labour it but you must remember this:-

US 30 Year Treasury Bonds at hysterical highs and miniscule yields.

And you would be delighted again to see this as 10 Year T-Bonds roll over.

Gold is just getting stronger.

Look at gold against US 30 Year T Bonds.  We know who is going to win here.

And commodities (CRB Index – read OIL), are also breaking upwards again against T bonds.

Take a look at oil again.  Its correction is over.  Demand is continuing strongly and market balance is already here.  Natural gas is having its own little run and has recently been as high as US$3.40 /mmbtu.

(By the way, I am buying oil stocks again. Ask me what I am doing.)

Look at the performance of gold in the various currencies.  It is not just a US$ : Gold relationship:-

Gold in US$ has broken its downtrend, has come back for a `goodbye kiss’ and should now move higher.

The Euro is also providing a suggestion by pressuring a resistance line that a sharp rise is now due.

Gold in Sterling is, well, just on a tear on its way to test previous highs.

Gold in Japanese Yen just looks to be a base that will support a strong move sometime.  Maybe soon.

And gold in A$ has pulled back to the uptrend line and should also head higher.

The outlook is just strong and we haven’t had to pull back on the big picture at all, even though Dawes Points did just fall short on the 6000 for XGD.ASX in July.  It will come soon enough.

This pullback in the XGD might just be enough.

US gold stocks hit precisely the 116 resistance level and now after a 25% pullback may just be ready to go again.

The shorter term for the XAU matches the XGD.ASX so we should be seeing action again very soon.

Gold itself in the longer term, just looks robust with momentum indicators turning up again and the 50 week MA is crossing the 200 week MA.

Hold on to your gold, buy more great value dividend paying gold stocks, search out some gold mine developers and watch for some more excellent discoveries.

Barry Dawes
BSc FAusIMM MSAA

24 October 2016

I own and control portfolios with ASX Gold Stocks and ASX Oil and Gas stocks

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