Outlook for the Australian Resources Market - April

Speaker: Barry Dawes
Release Date: 21 April 2010

Its very pleasing to see the way the markets are moving now here in the second quarter after Easter, it certainly looks as though were going to see a very strong run in the commodities sector/resources sector, as weve been expecting. The key to the drive, of course, is the American bond market. I have to emphasis just how important the weakness is that were seeing in that market the interest rates had been falling for 28 years and now the bond market is signaling that were going to see an extended period of rising bond yields, that means rising interest rates. The causes behind it; probably the very large increase in money thats available there in the United States, were seeing increases in prices in all sorts of food stuffs and consumer items, so were seeing inflationary pressures which means that real interest rates are still quite low.

Commodity markets around the world, lead by gold, are showing its anticipating higher inflation periods and were also seeing a continuation of the world inflation recovery and that means that the demand for commodities themselves is very well underpinned. Weve seen 100% price rises for iron ore, very strong moves in coal, copper markets looking good, nickel, zinc, aluminum, these are all very, very robust and I expect to see strong moves in those ahead.

Now what this is saying to us, as weve been pointing out with our road map, is that we are now in the optimism up-leg we had that disbelief, wave one up-leg, for ten years, we had a very sharp sell off into the pessimism down-leg into the bottom of 2008/2009and the first leg up, weve had four months of quite weak market as it goes through a sub-pessimism wave, but now were on to a move which will see the big stocks, like BHP and Ucrest, Woodside , here on the Australian market, looking very, very good, but also were seeing at last some volume into the small stocks that we like. We think theres outstanding value in many of the stocks. It doesnt matter whether youre looking at coal, iron ore or nickel or gold or oil and gas, there are really, really good opportunities coming through and youre going to be surprised at how the market breadth is improving, there are new stories coming out were very excited about our Falcon Oil & Gas project, there in the Beetaloo Basin, which is paralleling some of the developments in shale gas, but more importantly, Shale Oil , like we have in the bark and shale in the Wollaston Basin. Thats happening here in Australia and its the next step on from the coal seam methane area which has had such a big boom

Anyway, talk to your advisors we are now coming into a very, very strong market and this is going to be extremely good for Australian resources

Australian Resource Sector Outlook March 2010

Speaker: Barry Dawes
Release Date: April 2010

The Australian resources sector is in a bull market uptrend with some very positive developments over the last couple of months.

Weve seen quite a strong A$, the copper price looks very robust and the gold price looks as if its finally starting to move up. Weve seen iron ore prices and coal prices being renegotiated upwards - and when we say upwards, were talking about 100% higher than prices 12 months ago.

At the same time weve also got the long awaited weakness in the American Treasury bond market which is going to be the key to everything. That weakness is accelerating and I think that over the next three months well see sharply higher yields on long term bonds and funds flying out of that bond market into equities, particularly resource sector equities.

This is a major long term bull market in resources which weve been talking about for some time.

One thing that we can really notice is the number of resource sector stocks that are in the major indices, for example the ASX 300 and the ASX 200. Its interesting that in 2004 the ASX 200 had 20% of resource stocks, but this has now increased to 30%. When we consider the ASX 300, it included 57 resource sector stocks at the end of 2004 and five years later that number is 109. Its clear that the resource sector is playing a bigger and bigger part of the Australian economy. The institutional fund managers who have any index weighting in their portfolios really have to move to a lot of these stocks. A lot of those 109 stocks are totally unknown to the major institutional investors, so theres a real catch up to come through.

We talked about our wave structure weve had ten years of wave one which was disbelief, weve had a big sell off in 2008, to produce those extraordinary lows , that was our pessimism wave, and now were in the optimism up-leg. Weve had the first leg up, weve had now four months of correction, I think that has now changed and is turning, were seeing lots of stocks starting to perform, sure its patchy we still note that there is a lack of liquidity in the market generally, in the smaller sectors, but BHP is doing very well and leading the market up.

The oil price is up, the oil stocks are starting to move, but generally an improvement on market breadth and its looking very, very, positive for the next year.

We think that the next six months is going to be outstandingly strong. Do watch the gold price and keep in touch with us, as weve got a lot of exciting things happening.

MPS 'Elliot Wave' for the Australian Resource Sector

Speaker: Barry Dawes
Release Date: 20 November 2009

Those of you who have seen me speak in public over the last year would have seen our modified wave count for the resource sector, and those of you who are familiar with Elliot wave know that the market generally moves up in three legs the first leg, a correction, the next leg up, a correction and then a final fling into a euphoric stage and then you get a sharp correction after that.

Thats roughly the Elliot wave concept , but what weve found is that it important to think of the market psychology at each stage in that wave count, and the first leg is disbelief because it is a move up after something has happened where the market has moved down, so its marked by disbelief, people say yeah its a false dawn, its not going to last very long and then we get the pull back into wave two and thats usually pessimism

The mood of the market is decidedly pessimistic. We certainly saw that late last year and the beginning of this year. Once that bottoms out it moves up into the optimism leg and thats when people become more conformable and the market has been climbing a wall of worry but it gets through that and people start to feel optimistic and we run through this optimism leg

We then get a pullback, which people see as an opportunity of buying in the dips, it becomes the opportunity leg and people are comfortable, theyre not worried about the end of the world, they say oh well the markets have come back, what a great opportunity to get on board and then we go for the final euphoric run.

We get a pull back, and its not a good pull back in terms of market psychology because usually its the first pull back, people think theyre going to buy in the dips but the markets really run its course, we get a rally which doesnt quite make sense then it turns over and runs into that pessimism stage again and then the markets start all over again.

Whats been really fascinating has been looking at where we stand, because last year clearly finished something and when we look at those various stages of the market we definitely did not have euphoria

At the beginning of last year definitely not, because the market breadth was so poor, institutions werent on board, the public wasnt on board, the market had already started to turn down well before we started to see the highs in gold, oil and BHP and those other large stocks.

Then if we go back there is no way that people would have regarded January ,February, March of this year as an opportunity because the sentiment was just full of pessimism

So when we think about the end of 2008 finishing something, it didnt finish an optimism leg because, again, we just didnt see the market breadth. We saw the big cap stocks up, but we didnt see the little caps there, they just did not participate so we come back and clearly that period last year was definitely pessimism country

So if it was pessimism country its finished that disbelief upleg, and the most fascinating thing is that if you look at the major commodity prices: oil , major commodities like oil, gold they made their lows, in the case of oil in October of 98 in the case of gold , very very important low, which was retested later, in march of 99, so we basically had 10 years of bull markets , 10 years of bull markets where theres really not a lot of people on board, and a lot of disbelief if you like, and weve had that pessimism, now people are more comfortable with the fact that hey theres a driving factor like the American dollar weakening, or the china being strong, or India coming through or brazil being very strong, those sort of things are building up for the optimism leg and thats where we are. Weve had our first leg up , which was again disbelief,. Weve had a correction there for a while people worried about things , now were turning up and I think things will be very very strong from here

Lets see where were going to be in 12 months time, but I think that the pessimism call back there in December last year has been the right one, were now in the optimism leg and theres going to be a lot of excitement for investors over the next several years (because remember that first leg was 10 years of bull market before we got the pull back) were going to have five or 6 in this leg , its not going to be straight up of course, and then weve got the next leg as I see it anyway giving rise to that 15-20 years that many other people are talking about in industry where they say hey, the demand for our raw materials Is such that its going to underpin the market

So watch this, its a good road map and I think its going to take us where we want to go

Gold Outlook - Gold is still driving the market

Speaker: Barry Dawes
Release Date: 19 November 2009

Those of you who have been watching these videos in the past will not be surprised to hear me say that weve got more of the same coming.

All the way through weve talked about the gold price being quite strong and really leading the resource sector. And thats reflecting all the inbalances in the world in respect of debt levels in a lot of the OECD countries. Now were seeing that strong gold price, were seeing gold over 1150 over night, and I think were going to see move up to the 12,13, 14 hundred dollars an ounce, reasonable soon, certainly thats what it looks like.

The demand for gold is still very robust and were seeing the major gold stocks starting to really perform and look as if theyre going to make a major upside breakout.

Now the gold price is moving because of a whole range of reasons. Mine production has been declining for the last 10 years, and that has a minor impact, weve seen India buy that 200tonnes of gold from the IMF and Im sure that other central banks around the world of smaller nations are looking to buy more gold as well. The American dollar is weakening, it has been quite weak over the past few months, and that certainly is helping things. The decision by the US fed to keep interest rates low for another year or so basically means that the US dollar will be much weaker against other currencies, and the so called carry-trade where people borrow low interest rates costs (US$) and buy assets will continue.

The weight of money in the United States banking system also certainly thinks, suggests, that well see flows of funds out of bank cash management into equities, weve seen the American equity market being very strong, itll flow into commodities, but particularly commodity sector stocks

One of the things weve been talking about over the last couple of weeks is a very long term share price chart for the S&P gold index, which has been put together going back to 1921, and this is from Eric de Groot and published on the jsmineset webpage. Now thats an outstanding chart that basically shows for the last 28 years the gold index in the United States , the Philadelphia gold index, has been going side ways, sideways for 28 years.and now its about to make a break, and in doing so were going to see very robust performances in the major gold stocks, and quite fantastic performances in some of the smaller gold stocks.

So gold is really driving this market.

The Outlook for Capital Raisings

Speaker: Barry Dawes
Release Date: 19 November 2009

Theres a lot of capital raising going on in the (Australian) resource market at the moment.

This is really very very good because weve had the best part of two years where companies just havent been able to raise money, particularly at the smaller end, and its the smaller end companies that have the really big impact on things like exploration and development.

One of the things weve been talking about for the last 10 years is that exploration as a sector is really undervalued, there is no optionality value in the tenements, there is no real value for the tenements, they still seem to almost be a liability, but going forward as these companies get more money youll start to see the increases in resources that were already seeing in things like nickel and iron ore, and gold to a lesser degree. Copper has also moved up , obviously with the things that are going on in Queensland.

But the dollars that have been spent, the new resources are coming through, the new projects are coming through, and theyre all adding to our export revenues.

The other thing I like to point out: the oil and gas sector, which we have been very very keen on, in terms of on shore exploration in Australia, particularly the northern territory, is going to be very very big in 2010.

Weve got the Falcon discovery in the Bedaloo Basin, you must look at our website (www.mpsecurities.com.au ) to look at the significance of that. Weve already got Central Petroleum in the Armadus Basin, and were going to see a couple of others in the Georgina Basin, so theres going to be a lot of activity. The results of that will be far, far bigger than anyone might have imagined, even three months ago, but youre going to hear a lot more about that, were very excited.

So just watch whats happening and keep in touch with people at MPS.

Thanks for your time.

Outlook for the Commodities Sector

Speaker: Barry Dawes
Release Date: 19 November 2009

Now when we look at the other commodities, Copper, has made a good upmove recently above $3 a pound and I think that will go much higher. Oil prices are looking very robust around $80 a barrel and I think we probably might get around $85-$90 a barrel by the end of this year, and much higher next year.

Oil and copper are leading the performances of zinc and nickel and aluminum as laggards, but theyre also looking very very strong, and the minor metals , and if we can call silver a minor metal, things like tungsten, the rare earths, lithium, are all performing quite well, and that means a lot of the smaller stocks will be performing extremely well.

When we step back and look at the economic side of things we like to focus on the steel industry, and the Chinese steel industry at the moment is still running around 620-625million tones per annum, annualized rate, and now remember that the US is only doing about 57million tones per annum, so the Chinese steel industry is 11 times bigger than the US steel industry, and that show that the demand for raw materials will be robust and will lead to very strong exports for Australia, good export revenues. Now, at the same time were seeing the coal market showing good signs of recovery.

So all these points are reinforcing the concepts that weve had all through this difficult year, which is ending very well, that the weakness in the market last year was a real aberration, and it was an inventory adjustment on the downside, going into the lows that we saw at the end of the year then an inventory adjustment for the first 6 -9 months but now were starting to see economic recovery continuing.

All these things bode well for commodities in all currencies, not just in the US$ but growing and performing very very well.

Now, the impact on the A$ youve seen weve been trading around 93c against a weaking US dollar, I think were going to get to parity, probably in the first quarter of next year, and possibly much higher going forward as we see both the effect of a weaker American dollar and very strong revenues.

Youll also note our correlation of the A$ against the Philadelphia gold index , over the last 15years the correlation is really quite remarkable and that says that both the A$ and gold shares are going to go to significant highs over the next couple of years.

Diggers and Dealers

Speaker: Barry Dawes
Release Date: 24 Aug 2009

Well, last week I got to visit the 2009 Diggers and Dealers convention in Kalgoorlie. Its a three day event and we saw probably 40 companies presenting and quite a few others with booths there telling their stories, selling their wares and allowing us to catch up with whats gone on over the past year.

The thing about going to Diggers & Dealers and listening to those companies presenting, particularly if theyre the companies youre quite familiar with, is that you can see the significant progress that has been made over the last 12 months, despite the volatility that we saw over the 2nd half of last year, most of the companies have really been able to achieve a lot. Thats either consolidating tenements, building new mines, increasing their reserves through exploration, looking at other exploration thats lead to new discoveries. I was particularly impressed with what had been achieved in terms of consolidation of tenements and also exploration. Some really good companies have shown that they have been able to make excellent progress over the last year.

In terms of what was on therethe Iron Ore sector is becoming quite significant, instead of it just being BHP and Rio, and one or two others, theres a plethora of players and its difficult to assess whats the best value, but we know that there are a number of groups out there that do look to have good operations and provide excellent relative value.

There are a number of companies which are looking at 1-2million tons per annum project developments often with a partner, often with a Chinese partner, fitting in with existing infrastructure or being able to tie in with a bigger player. Were also seeing the development of some new standalone projects requiring infrastructure developments.

Things that I did like there were Grange Resources, with its project in Tasmania (the pelletised Iron Ore), that projects been running for about 40 years so its had a long history, but its still running at about 1.5 million tones and theyve got another project, which they would like to develop along the same lines around Albany. So that looks really quite exciting.

A little company called BC Iron looks very interesting with its projects, which start up quite soon, a JV with FMG.

And the other one that I liked, Flinders Mines with potential of a very very large resource.

These companies I think have got excellent valuations and investment arithmetic that makes them look particularly good.

On the nickel side where weve seen more exploration in those brown field sites, great performances by Mincore, Independence , Western Areas, and of course that new entrant Mirabella.

Nickel prices touched $20,000 a tonne again this week, and it looks as if well probably see better nickel prices going forward, as we go into the second half of the year after the northern hemisphere holiday.
Those sorts of companies that I mentioned, I think are extremely well placed, Mincore in particular Good earnings, good cost structure, strong addition to resources, exploration has been impressive.

On the Gold side, again, the feature there was consolidation of tenements, and development of new projects , exploration, Norton Goldfields look very very good, Integra looks outstanding, Avoca looks outstanding, and we saw things outside of Western Australia, with the development in the Northern Territory around Tennant Creek with companies like Emerson Resources and Westgold and little Truscott Mining which sort of fits in there, those companies I think are redeveloping areas that have only been treated very shallowly with exploration in terms of drilling depth, but more importantly, there hasnt been much exploration for over 20 years, despite the level of gold price that we have seen in recent times.

That consolidation is also taking place in other parts of the country, but Tennant Creek area looks really interesting, and that stuff around Kalgoorlie.

In terms of copper, we saw a really good story from Ivanhoe Australia, obviously with its Molybdenum-rhenium project as part of a copper area, consolidation of tenements again, new exploration programs that are actually spending money drilling, and they look particularly good.

We also saw PanAust and Equinox with projects in Laos and Zambia respectively, new companies, companies going places and growing with good long term futures.

Also I went to see Clancy Exploration, a company we floated a couple of years ago, theyre doing some very good work in New South Wales, it looks good.

As far as the other players, lots of action I think, but the themes are consolidation of tenements, making stronger companies, more exploration, exploration dollars will bring success as people look deeper things.

Resources Sector Update: August 2009

Speaker: Barry Dawes
Release Date: 19 Aug 2009

You can see that the markets, since the last one of these, have preformed very very well, particularly the resource sector, the gold price has held fairly steady in US dollar terms (in A$ its fallen because we had a much stronger $A) but we’ve seen quite good performances out of the base metals over the few months, reflecting the Chinese restocking and a realization that probably we’re not going to see a rerun of the 30’s even though Wall St economists and analysts are very much influenced by perhaps what’s happening in their banking system and in their economy generally.

But there are other places we should be looking.

China, clearly is growing very well, we’ve seen steel production exceed 600million tones, that’s a new record level over the last couple of months, so higher than the level of 2008, and that’s a great contrast with what’s happening in the United States, where its only running at about 55miilion tones, so it’s more than 10 times the size there in china at moment and it dwarfs whatever is happening in the United States.

The performance of the stocks, really the base metal stocks, things like the Mincors and Independence Groups, and the Kagara Zincs all those have done very well at that mid cap range, and what we’re seeing also now is some of the smaller stocks are starting to perform as people recognise that these things are really extremely cheap, they’re coming off the floor so we’re seeing very good percentage rises. We should see a lot more of these things particularly for the gold and base metal players.

The Iron Sector has been also buoyed by the iron or shipments into China at very high levels they’re record levels of imports into china and the prices of Iron ore above the benchmark prices achieved and set earlier this year. So a lot of those little Iron Ore companies are positioning themselves quite well. In the coal sector we see a parallel, and improvement there, and some mines have been reopened, we’ve still got the navies of ships sitting off the ports, all waiting to pick up on the coal and the numbers we’re starting to see for thermal coal demand going out two or three years are still quite substantial, we’re looking at about 5% per annum over the next 2-3 years increase in seaborne trade, most of that income really has to come from Australia. So the Australian resource sector is looking quite good, and it’s assisted by the US equity market rallying.

The driving force is obviously the very large level of liquidity, easing monetary conditions, and we’re seeing the American dollar weaken as a result of the increase in supply of dollars, the American bond market weakening, as a reflection of the increase in the supply in bonds, and with the deficits continuing hitting 1.8trillion dollars or there about for the next year or two, that’s a lot of bonds that need to be rolled over or issued. So we must see lower bond prices, higher yields and I think we’re also going to see quite strong inflationary pressures picking up, particularly in the United States. That will come back and impact the gold price, reasonably soon.

I think the next two or three weeks will be the critical stage, however we look at it, the driving force of China, India, South America, middle East with a rise in demand for raw materials, and that those monetary issues effecting the US and UK as well, weakness in currencies, all those are just going to push money into the resource sector.

We saw 10 years of commodity bull market, from the December quarter ’98, up until the big correction last year, but should be seen as a correction. We saw the low in November 98, in terms of commodity stocks, they didn’t participate in the new lows that we saw in March, and they look as if they’ve probably got another five to six years of bull market ahead of us.

Sure it’s not going to be straight up, there’ll be rocky bits, but it has been robust from here and I think it’s going to be robust for a bit longer, and then we’ll get some sort of correction, of some sort of sector rotation and then probably a very strong market again, probably in early 2010. But I think most of 2009 will be good before we start getting that correction. But if the gold price does what I think it might do we may in fact find that correction is really only a matter of rotation within the market, gold market and the speculative should have a very good run up until Christmas.

Basis for Resources Outlook

Speaker: Barry Dawes
Release Date: 10 Jun 2009

Barry Dawes, Managing Director of Martin Place Securities, speaks on the Australian Resource Sector and the Economic Recovery:

This week we’ve seen quite good encouragement from the markets showing us that the recovery that we’ve expected pretty much looks as if it’s well underway.

The markets are telling us that commodity prices have risen and will go higher and were particular encouraged by the way the gold price in US$ has been strengthening again as we had expected. The A$ has been very strong and that in itself is good confirmation in a big market that the recovery is underway.

The driving forces are clearly the international stimulus that have gone through from the US, from Europe, from Australia, putting money into the system, in various ways, the net effect of this must be to increase investable funds, which will really flow into equity and commodity markets.

The gold price, as previously mentioned, does seem to be indicating that we’re going to see prices well over $1000 in the very near future, and we’ve certainly got targets of $1200 - $1250 and then $1500 probably within the next 12 months, and maybe even sooner than that. The big driver, of course, with all this stimulus is the United States, where we are seeing their budget deficit of 2 trillion dollars this year and more than a trillion the year after, means that a lot of bonds have to be sold, which means that their bond market is going to see a long end, rates well above 5 and 6 percent, not just the 4.5% that we’ve now got. So, the American dollar will continue to weaken.
Now, funds will come out of the bond market, will come out of that cash mountain that is talked about in the United States, where 9 or 10 trillion dollars has been sitting in bank deposits and cash management trusts, earning next to no interest, those funds will have to come out, and they will flow into the commodity markets, into resource sector equities, and probably also into the general equity markets.

We have had quite a good performance out of the US equity market more recently, and if we do get that thing testing just over 9,000 on the DOW, it certainly suggests that that equity market will be firmer for the rest of the year, and will probably confound a lot of the bears.
There does appear to be a lot of institutional cash on the side lines, people have been uncertain and unwilling to come into the market, but I think we’re starting to see those funds coming in and people feeling a lot more comfortable

Again, from our point of view in the resource sector, we’re seeing the leaders still consolidating after big moves from the lows late last year, but I do think we’ll see the BHP’s and the Woodside’s look much stronger as we go through.

But what is of more interest, is the second liners have been performing, and a lot of the very small stocks that have been pummelled of the past nine months/twelve months, are now recovering and we’re seeing some very, very, good performances there

All in all – it’s an outlook which is just self-reinforcing, and I think confidence will come into the market. Our longer term view, that last year was really a correction – and a very savage correction – in a longer term bull market for commodities, I think  will be confirmed and I am very encouraged by the way we’re starting to see a lot of market breadth, improvement in market breadth, and good participation by people in all areas of the market, in the resource sector, particularly at the small end.

So have a look at our list of recommendations (which is available at the end of the video), do note that our Directors and associates hold interest in many of these companies, but we back them because we believe in them and the market look as if they’re doing what we thought they might be doing for this year.

market that the recovery is underway.....

Australia's Strengthening Market

Speaker: Barry Dawes
Release Date: 6 May 2009

It is pleasing to be able to report that the markets are playing along with the view that we’ve had over the past couple of months, that is that the resource sector would recover reasonable well and that it’s being supported by the commodities – the copper price in particular, and the oil price leading everything higher.

The thrust of our strategy is really to accept that what we saw late last year was a deleveraging which lead to a major de-stocking of all sorts of inventory, right across the board, whether we’re talking about LME inventories or motor vehicles or equity holdings, people searching for cash, selling off things, to discounted levels. Things have stabilised as a result of bailout efforts, easing monetary conditions, lowering interest rates by central banks all around the world and the medicine is actually giving results, as to be expected.

From our point of view, the American dollar is in a long term weakening process, and I think we’re going to see a much, much lower US dollar as we go forward. The American bond market is starting to break down, is starting to sell off in fairly series levels after that spike that we saw late last year, with yields on the 30yr bonds under 2.5%. Clearly unsustainable against the large refinancing that the Americans are going to need to finance their budget deficit

Now with the good performance of the smaller stocks, the stocks that we really to thinking about, in a big picture sense, are the companies that are making discoveries. Karoon Gas with its discovery with ConocoPhillips with Poseidon in the Browse Basin is of very, very great significance, because I think that will flow on to a lot of the other explorers, and CuDeco; a bit controversial for some people but very solid fundamentals as far as we’re concerned. That has moved up quite nicely, reflecting very good progress on its project up there at Rocklands. It just means that explorers, developers, have a very significant upside and these discovery themselves will encourage people to come into the market and bring about that increase in participation by the smaller scale punters that we really did not see in our option, in the bull market that ended in 2008. I think we’re going to see a lot of that in 2009/2010.

Keep watching our website for the recommended stocks and investment opportunities as they come up.

The Start of the Economic Recovery

Speaker: Barry Dawes
Release Date: 16 April 2009

The markets are showing very solid and encouraging signs of a recovery after the big sell offs that we saw last year.  The world outlook is still clouded, as it always is, but there does appear that things are certainly improving in China and there’s the first signs coming through from the United States that things are possibly on the improve.

But the thing we really focus on is the resource sector and what’s happening there, and some indicators that have come through have been very encouraging indeed.

The first and the most important thing is the fact that most of the resources sector indices, stocks, commodities, did not make new lows in 2009. Their lows were seen in that October/November/December period of 2008. And if we look at things like the China, Shanghai index, the Hang Seng in Hong Kong, those indices did not make new lows in 2009. The copper price, the oil price, now the zinc price, the nickel price, they’re all improving, and the stocks like BHP have done very well so far into 2009, but no sign of these wanting to go back and make new lows.

The other very, very, important thing is that the A$ has not gone to revisit new lows in 2009, in fact it’s made a new high, about a 6 month high, at around 73c and it looks as if it’s going to go higher than that, so the markets are telling us that the commodity sector, the resource sector, the inflation, the hard asset sector, are doing better than the broader markets

Now if we think about what has also been happening, the lows we were seeing in October/November that means that we’ve had 5 months of bottoming phase in the recourse sector and what we’ve seen this week in particular is quite strong performances from the small caps. Now that’s also very, very encouraging. A lot of these things have fallen over 90% and they’re now recovering, and they look as if they’re also going higher.

Now the interpretation you could make of the markets at the moment is that we have seen one extraordinary inventory adjustment. Sure the United States has got problems in its banking system, and it’s economy and so-on, but what we’ve really seen is wholesale destocking everywhere from the commodities, right through to the manufacturing goods and so on. And with the problems that we saw with shipping, the letters of credit problems, it really means that inventory of manufactured goods, particularly here in Australia have actually been dwindling, so if things start to free up and the consumer is starting to show more confidence I think we’ll find that there is going to be demand all the way along the pipeline

Now in the resource sector this is particularly important because the inventory of most LME metals and other commodities are still really quite low, they might have shot up in percentage terms, but in available tonnes for consumption on a monthly basis they’re really quite low.

So Copper, which got over half a million tonnes and is now fallen nicely under 480 million tonnes, that stock pile really only represents still 10 or 11 days. Even aluminium which has got bloated stocks and it’s got other structural issues behind it, it’s still only got about 30 days of inventory there. so these things are still tight.

The other thing that we really should be looking at is the amount of cash that is sitting in the sidelines, in the United States there is clear evidence that that 9 trillion dollars which is earning less the .2% annualised, is going to have to flow into the markets. Dividend yields are higher than that in stocks, we still have that cash, together with a weakness in the bond market, which will provide cash that will go into equities and into resource stocks and commodities in particular. So the outlook, I think, is improving all the time.

Things to watch for: Sure, copper looks good, oil stocks, energy stocks are looking good. We particularly like gold at this stage because the gold price’s made its peak nearly two months ago, it’s had a lot of sideways movement and looks to me as if it wants to move higher and some of those gold stocks look extremely attractive and the other thing that we really like, very much, is uranium.

And the uranium stocks this week, or over the last week or so, have been very strong, and they’re going to go a lot higher.

So, focus on gold, energy, and these other commodities and I think people will find a surprising strong market over the next twelve months.

Gold is the Driving Force

Speaker: Barry Dawes
Release Date: 6 February 2009

The economic outlook for the world is difficult and may be suggesting further falls in the major indices in 2009 but the strength of gold strongly indicates that clients will not only preserve capital but should achieve outstanding returns as gold prices surge to levels well in excess of US$1500/oz.

As we move into 2009, we have to reflect on a turbulent 2008, which took commodity prices up to some very high levels, Gold well over $1000, oils prices 147; Performances of the big stocks were very good, we saw BHP at $50 in June, and that was against a back drop of a US equity market which was quite weak, with a number of sell offs staring in January and following through all the way through the year and seeing that index basically in the states falling by 50%

The third quarter and fourth quarter in Australia for resource stocks and in the commodities sector was just diabolical. It fell a lot more than 50% and a lot of stocks would have fallen as much as 75%, even 80 or 90% for some smaller stocks with a low level of liquidity.  But since that period, since the lows that we saw in late November, we’ve seen the US indices steady. We’ve seen commodity prices bottom out, sort of, and we’ve certainly seen a strong Gold price, with gold rising over $900 an ounce again.

All these things are suggesting to us that there probably is a bottom coming in the stock market. Now the news that you see on your TV every night, and in newspapers every day is certainly still very, very negative, problems everywhere around the world and one would think that that would be sufficient to undermine confidence in the equity markets but performance of the equity markets over the last 2 ... 2 and a half months certainly suggest that maybe a lot of that has already been discounted. Risks are still there and no one really knows where it’s going, but we can only follow what the markets are telling us.

Now, in the first instance - coming back to that point about gold: gold over nine hundred dollars, that is a very important point. The silver price has also been moving up steadily and now it’s over $12 after under $10 back in 4th quarter of last year.

We’ve finally seen a turn in the Baltic freight index up sharply this week, reflecting a bit more confidence coming into the market for bulk commodity goods like iron ore and coal, particularly to the Asian markets.

We’ve also seen the gold stocks in the United States looking quite reasonable, moving up, we know that the gold stocks were sold off very, very, sharply, relative to the gold price, so even though the gold price might have come down from $1000 to just under $700 with a 30-35% fall the gold stocks basically fell in half, and they went to a discount, to their normal index to gold price ratio. So they’ve been catching up to gold and I think they will continue to improve from there.

The oil price appears to be bottoming... maybe... we’ve certainly got higher prices in the forward months that we have in the spot market there in oil, so the market thinks it’s going to rally.

The copper price is showing some signs of stabilizing, despite quite substantial rises in inventory on the LME.

So we have to look at all this evidence and try and work out where we’re going to go to next.

The other major points following on from the gold price and what’s happening with these commodities is that the US dollar had a very strong rally, as we know, it’s peak coincided with the lows in the equity markets, as the dollar came off the equity markets rallied and we generally find that when the dollar’s strong the equity markets’ weak. But the US dollar had another rally recently, it doesn’t seem to want to go further, but we’ll let that market work it out. If it isn’t going to go any higher it probably does mean that we’ll see the rally in the equity market that has probably been expected but there aren’t too many believers there.

The other key feature, after the gold price and the dollar, is the bond market and the American bond market has seen yields falling now for 28years. And what we saw late last year and into this year with a spike high in bond prices and yields down to 2.5% on a 30 year treasury, certainly look to be final spike highs, ahead of much higher yields required to raise all the funds that the US government will need to fund its bailout program. So the bond market is suggesting that the flight to safety is no longer going to be there.

We’ve got another really interesting fact; in the States there is probably 10 trillion dollars cash in bank deposits and cash management trusts, now bank credit analysts has a wonderful ratio of bank deposits and CMT’s versus the Wilshire 5000 index which is capitalised at about 12 trillion dollars, so 90% of that market capitalisation is matched by cash in the bank. And that’s earning less than half a percent, so there’s very low returns and possibly substantially negative real returns for cash on deposit, and that cash will probably come out when it sees the bond market weakening, when it sees the equity market probably bottoming and it could provide a rally for us.

Whatever the outlook, we really should focus on gold as doing well in whatever the outcome. The gold price in Australian dollars got over $1,400 last week, the gold price in Pounds, in Euros, in so many other currencies is at all time record highs, and it’s suggesting to us that the gold price really does want to go much higher in all currencies. So the gold price I think will do well in a deflation or inflation and maybe a hyper-inflationary environment that may develop in some countries as we go through the next couple of years.

So gold I think is the place to be.

We have a series of gold stocks that we like very much, certainly Newcrest (ASX: NCM) and Lihir (ASX: LGL) people should have those in their portfolios, Dominion (ASX: DCM), Avoca (ASX: AVO), St Barbara (ASX: SBM), Integra (ASX: IGR), SinoGold, Hill End Gold (ASX: HEG) these sorts of companies are well placed with resources, with production, or near production, and they should do very well and continue the performance that we’ve had against the relative market over the last two months.

Now some of these gold stocks are up 100-150% and they do look as though they want to go higher over the remainder of the year. So the gold sector to us looks outstanding value and should be the most defensive, but also the most aggressive place to be with your portfolio.

Australian Opportunity

Speaker: Barry Dawes
Release Date:December 2008

Barry Dawes speaks about investing in Australia, the Australian economy and Australia's outlook in the current market

Talking about Australia...we’re a long way from anywhere when you’re in the Northern Hemisphere. But Australia really has been away from much of the turmoil that’s taken place in international financial markets over the last year, the main reason for that has been that Australia’s reliance on its commodity base has allowed it to sail through much of the problem. But the other thing, which is very, very important, is that the Australian economy is in remarkable robust shape, after having 11 years of expansion. And during that period we’ve had some very important things happen. Probably most important is the fact that we no longer have any sovereign debt. That is zip... in fact that is a positive, we’ve had over 10 years of budget surplices at the federal level and as a result of that we now have a surplus on our capital account on behalf of the federal government.

So that puts us in a very, very different position from almost anything in Europe, the UK, the US, Japan and many other parts of the world, so Australia has been in a quite good position. It also means that there is a buffer for the federal government to increase spending, and carrying out other fiscal programs to underpin the economy.

The other really important thing is our banking system.  Our banking system has been remarkably robust, sure the stocks have probably been down 50% from their highs, but they’re nowhere near the 90% declines that we’ve seen in the bank stocks around the world.  Australian banks do not have very much exposure to the derivative markets, and very importantly, that property markets in Australia have been reasonably quite, which is unusual at this stage of a 10 or 11 year expansion. The Sydney property market peaked in 2002, and since then it’s been fairly steady, so we’re not going to see the problems that we’ve perhaps seen in the UK or in the United States in respect of property values and that impacting on the banks.

Now the outlook on a world scene is difficult to come to grips with in terms of where we will be in 2009. Because we’ve got such a big reliance on China we’re probably in a far better position than perhaps if we were in North America. We can expect that the China will continue its growth , slow growth is probably recession by anyone else’s standards, but never the less it will be growth in the 7-8% level, which will be good for Australia. Commodity demand will still be firm in terms of volumes, prices have come off but the important areas in iron ore and coal still remain reasonable robust.

Now as far as the economic outlook, 2009 will be difficult, Australia will have a growth in 2008 of about 2.5% and should decline to about 1.7% in 2009 according the latest OECD figures that have just been released this week, and then we should get a recovery to about 2.9% in 2010. Our interest rate environment is coming down.

The budget surpluses that the Australian government has had, will also allow the reserve bank to ease on monetary conditions and bring interest rates down even more. The rise that we’ve seen over the last couple of years in Australia was counter-trend to what was going on in the United States and now we’re seeing the interest rates coming off and probably other half to 1% cut before the end of the year. So the Australian economy looks quite reasonable for 2009 and it should be able to withstand reasonable shocks in 2009 and beyond.

Commodity Outlook

Speaker: Barry Dawes
Release Date: December 2008

Barry Dawes on commodity investment, demand, inventory stocks and the future outlook for commodities.

The commodity outlook going into 2009 is difficult to read, we’ve seen unprecedented falls in commodity prices over the last four or five months as we’ve seen this deleverage action taking place primarily from hedge funds and others the fall in prices of copper, lead, aluminium, nickel, zinc, have been really quite remarkable and we’ve not seen this sort of thing happen before where we can go from such strong demand to such weak demand.

Now it’s suggests a number of things, one that the inventory adjustment through the end user cycles is being run down, everyone’s basically stopped, consumption has fallen, but demand has fallen even more, so inventories are being wound down right throughout the pipeline.

Now if the interest rates, and maybe some inflationary issues and the US dollar changes, if that’s going to make the consumer change his view or the stockists change their views, we could see a fairly significant rally in all the metals, they’re over sold, they’ve done things that I’ve never seen in 30 years of watching markets and I think that there’s a reasonable possibility for quite a strong bounce.
The other thing we need to keep in mind is the gold price. We watch this very, very, closely. The gold price does appear to have been suppressed over the last several years and without doubt the actions in the market since the highs of over $1000 back in March 2008, certainly suggest that there have been actions to suppress the gold price. I expect that the short positions in gold will really come to the fore. I think gold prices will be quite strong going through the next couple of years, and that’s going to impact on all commodities and will have a big impact on the way the Australian share market works.

One of the things that I’ve noticed over the past four or five cycles is that the gold price has a very, very big bearing on the willingness of people to come into the stock market, particularly in the resource sector. So let’s watch that.

One of the things that has been remarkable with the high oil price and high gold price that we had during 2008, the stocks for the gold producers, the gold explorers and developers, and the oils producers and explorers, were moving in different directions. The stocks were moving down while the commodity prices were moving up. This is really quite unusual, I expect that to turn as we go into 2009 and we’ll find both oil price for supply reasons and keep in mind the supply of oil is going to be a critical issue for the next couple of decades. And short term I think we will probably see oil prices have a bounce and I think the oil stocks will participate in that.  Now with the gold price moving higher, and suggestions of it moving much higher, I think we’re going to find that the changes and the accumulation under way in the gold sector will continue to improve. So they’re going to be the key drivers

When we look at the rest of the market, the prices of copper and nickel and zinc in particular, have been quite horrific and we’ve seen closures of mine capacity in all those metals in Australia, and I expect to see one or two more come through over the next couple of months before things turn up. But they will turn up, because again, supply side issues on these commodities, mean that there isn’t a huge overhang of capacity, not a huge over hand of supply so if consumption holds and starts to pick up modestly next year, we’re going to find though, that the inventory managers, right throughout the pipeline, are going to want to increase their inventory levels, particularly at times while prices are low and interest rates are low.

BHP December 2008

Speaker: Barry Dawes
Release Date: December 2008

Asia's growth, the steel industry, the effect of the steel boom on BHP and a forecast for BHP.

The steel industry is really the driving force in Australia resource sector. Clearly Iron Ore, Coking Coal, and from that we’re talking about zinc for galvanizing and nickel for stainless steel, all of these products are really driven by the world steel industry and with China having such a dramatic growth, over the last 5 or 6 years, the Australian mining industry has benefited from that quite substantially.

Now china will slow in the year ahead, but it’s still going to be growing and growing basically means more tonnes, and more tonnes mean more earnings for the producers.

The basis all that Asian growth, based on China, but do keep in mind that we’ve got to Include India there and also need to include the middle east and for that matter we also need to go and think about the 590 million people in South America, so the emerging companies, including China, have been the real drivers for the resources boom for Australia. That steel industry has been growing and requiring those raw materials.

The biggest beneficiary of the steel been has, of course, been BHP with Rio and this week we’ve seen BHP decide to walk about on its takeover bid on Rio . Now, that really makes a lot of sense for BHP not to go ahead with that it was always our view that it was a good thing for BHP that it would make it a much bigger and stronger company, but it’s quite clear that the way markets are operating at the moment, and Rio’s position by taking on Alkane and a whole lot of debt associated with that has left Rio as a far less attractive company that it was 6 months ago. And the current environment is such that BHP is wise to walk away from that

But when we look at BHP now, without Rio, it’s probably going to be re-rated in the market; it’s probably going to have one of the best balance sheets of any company anywhere in the world. Very strong cash flows, and debt to equity ratio which is probably under 15%, so BHP has got the ability to repay its long term debt in cash flows in well under 12 months.

Now that means that BHP will be on the acquisition trail and it will be looking at first class assets worldwide. BHP, I think, is going to be one of the companies to watch over the next couple of years.

The other thing about BHP to keep in mind; it is one of the world’s most important uranium producers, the uranium price is moving up now, it’s moving up through $48 , $53 now $55 today, on the spot market , and when we look at the long term supply and demand position for uranium it’s very robust in favour of producers in terms of future prices.

The failure of Cameco to get its Cigar Lake up and running has left the market in a very tight position, so I expect to see higher uranium prices going forward. And BHP with the Olympic Dam expansion is going to be extremely well positioned for that.

Gold Market Outlook

Speaker: Barry Dawes
Release Date: December 2008

The outlook for gold has never been better. Barry Dawes analyses the world market for gold.

As we move into 2009, we have to reflect on a turbulent 2008, which took commodity prices up to some very high levels, Gold well over $1000, oils prices 147; Performances of the big stocks were very good, we saw BHP at $50 in June, and that was against a back drop of a US equity market which was quite weak, with a number of sell offs staring in January and following through all the way through the year and seeing that index basically in the states falling by 50%

The third quarter and fourth quarter in Australia for resource stocks and in the commodities sector was just diabolical. It fell a lot more than 50% and a lot of stocks would have fallen as much as 75%, even 80 or 90% for some smaller stocks with a low level of liquidity.  But since that period, since the lows that we saw in late November, we’ve seen the US indices steady. We’ve seen commodity prices bottom out, sort of, and we’ve certainly seen a strong Gold price, with gold rising over $900 an ounce again.

All these things are suggesting to us that there probably is a bottom coming in the stock market. Now the news that you see on your TV every night, and in newspapers every day is certainly still very, very negative, problems everywhere around the world and one would think that that would be sufficient to undermine confidence in the equity markets but performance of the equity markets over the last 2 ... 2 and a half months certainly suggest that maybe a lot of that has already been discounted. Risks are still there and no one really knows where it’s going, but we can only follow what the markets are telling us.

Now, in the first instance - coming back to that point about gold: gold over nine hundred dollars, that is a very important point. The silver price has also been moving up steadily and now it’s over $12 after under $10 back in 4th quarter of last year.

We’ve finally seen a turn in the Baltic freight index up sharply this week, reflecting a bit more confidence coming into the market for bulk commodity goods like iron ore and coal, particularly to the Asian markets.

We’ve also seen the gold stocks in the United States looking quite reasonable, moving up, we know that the gold stocks were sold off very, very, sharply, relative to the gold price, so even though the gold price might have come down from $1000 to just under $700 with a 30-35% fall the gold stocks basically fell in half, and they went to a discount, to their normal index to gold price ratio. So they’ve been catching up to gold and I think they will continue to improve from there.

The oil price appears to be bottoming... maybe... we’ve certainly got higher prices in the forward months that we have in the spot market there in oil, so the market thinks it’s going to rally.

The copper price is showing some signs of stabilizing, despite quite substantial rises in inventory on the LME.

So we have to look at all this evidence and try and work out where we’re going to go to next.

The other major points following on from the gold price and what’s happening with these commodities is that the US dollar had a very strong rally, as we know, it’s peak coincided with the lows in the equity markets, as the dollar came off the equity markets rallied and we generally find that when the dollar’s strong the equity markets’ weak. But the US dollar had another rally recently, it doesn’t seem to want to go further, but we’ll let that market work it out. If it isn’t going to go any higher it probably does mean that we’ll see the rally in the equity market that has probably been expected but there aren’t too many believers there.

The other key feature, after the gold price and the dollar, is the bond market and the American bond market has seen yields falling now for 28years. And what we saw late last year and into this year with a spike high in bond prices and yields down to 2.5% on a 30 year treasury, certainly look to be final spike highs, ahead of much higher yields required to raise all the funds that the US government will need to fund its bailout program. So the bond market is suggesting that the flight to safety is no longer going to be there.

We’ve got another really interesting fact; in the States there is probably 10 trillion dollars cash in bank deposits and cash management trusts, now bank credit analysts has a wonderful ratio of bank deposits and CMT’s versus the Wilshire 5000 index which is capitalised at about 12 trillion dollars, so 90% of that market capitalisation is matched by cash in the bank. And that’s earning less than half a percent, so there’s very low returns and possibly substantially negative real returns for cash on deposit, and that cash will probably come out when it sees the bond market weakening, when it sees the equity market probably bottoming and it could provide a rally for us.

Whatever the outlook, we really should focus on gold as doing well in whatever the outcome. The gold price in Australian dollars got over $1,400 last week, the gold price in Pounds, in Euros, in so many other currencies is at all time record highs, and it’s suggesting to us that the gold price really does want to go much higher in all currencies. So the gold price I think will do well in a deflation or inflation and maybe a hyper-inflationary environment that may develop in some countries as we go through the next couple of years.

So gold I think is the place to be.

We have a series of gold stocks that we like very much, certainly Newcrest (ASX: NCM) and Lihir (ASX: LGL) people should have those in their portfolios, Dominion (ASX: DCM), Avoca (ASX: AVO), St Barbara (ASX: SBM), Integra (ASX: IGR), SinoGold, Hill End Gold (ASX: HEG) these sorts of companies are well placed with resources, with production, or near production, and they should do very well and continue the performance that we’ve had against the relative market over the last two months.

Now some of these gold stocks are up 100-150% and they do look as though they want to go higher over the remainder of the year. So the gold sector to us looks outstanding value and should be the most defensive, but also the most aggressive place to be with your portfolio.