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Resources Sector Opportunities Remain

by Barry Dawes
  • Global economic expansion still on track
  • Global bond markets have now peaked
  • Banking and finance stocks down ~13% so far in June Qtr
  • Asian markets making yet more highs
  • Chinese crude steel production rate approaching record highs again
  • Forecast iron ore short-squeeze continuing
  • LME metals still tightening
  • Resources Sector improving market share within All Ords
  • Market breadth in Small Resources and Metals and Mining gaining
  • Market breadth in ASX Gold Sector improving through stock rotation
  • ASX Gold Index up 60% from low and seems to be still climbing
  • Oil price and sector may be turning up
  • Dawes Points  gold stock portfolio is up 81% since 1 Dec 14
The long term trend for resources remains firm as the demands from the real people in the world override the views of the financial sector bureaucrats and market manipulators.  The evidence is everywhere.  Especially if you are looking.  But closed minds abound in today’s world. But fear still abounds and a compliant populace in Australia has heeded the calls of the doomsayers despite the abundant evidence otherwise.  The rush to safety in bonds and cash has been strong but may now be no longer needed.  Sensing this, bond prices are now falling and bank shares are following - down almost 20% from their highs and down ~13% in the past two months.  The flow of funds is now trending from safety to something else. You should be putting your money to work in more active and productive enterprises that should give you major gains for the next decade at least. It is now worth just sitting back and think where we are as this change in bond yields takes place. The world’s new middle classes come from 1,400m people in China, 1,300m in India, 700m in ASEAN, 1,000m in Africa and 600m in Sth America. All wanting higher living standards. That means more food, technology, energy and resources. Against 360m in Nth America and 450m in Europe.  Most now wanting government handouts. Asia is growing through higher consumption and high infrastructure spending. China may be slowing in absolute growth figures but personal income is rising.  People everywhere in Asia are becoming wealthier.  Would you see these sorts of growth in personal income in the US, Europe or here? Average Annual Household Disposable Income in China from 2009 to 2018 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.  

The Paradigm 1 December 2014 Portfolio to 3 June 2015

      A cents    
  Stock ASX Code

1-Dec

3-Jun

Change

1

Beadell BDR

19.0

19.8

3.9%

2

Doray DRM

27.0

44.0

63.0%

3

Evolution EVN

43.0

114.0

165.1%

4

Kingsgate KCN

62.0

75.0

21.0%

5

Medusa MML

57.0

92.5

62.3%

6

Newcrest NCM

918.0

1381.0

50.4%

7

Northern Star NST

96.0

237.0

146.9%

8

Oceana OGC

96.0

313.0

226.0%

9

Regis RRL

207.0

119.0

-42.5%

10

Resolute RSG

129.0

31.5

-75.6%

11

Saracen SAR

21.0

48.5

131.0%

12

Tribune TBR

265.0

390.0

47.2%

13

Gold Road GOR

20.5

45.5

122.0%

14

ABM Mining ABU

22.0

26.0

18.2%

15

MetalsEx MLX

70.0

145.5

107.9%

16

Blackham BLK

6.7

18.0

168.7%

17

Crater Gold CGN

12.5

11.0

-12.0%

  ASX 300 Gold XGD

1701

2625.0

54.3%

This unweighted portfolio is up 69% from 1 December with 0.5% yield.  The weighted (big caps double, mid caps single and small caps half weighting) portfolio was 80% higher and had dividends from NST, OGC, MLX and EVN to take it to just over 81%. What did yours do? The XGD was up 54% before dividends. Look at the leaders.  NST had a very strong run but is now digesting that.  NCM had recently made new rally highs.  MLX has exploded higher.  SBM is catching up.  Market breadth is expanding.  New rally highs for many.  Do you understand the TBR story?  BLK, GOR, CGN.  Like them all! Were you aware that the term Hedge Fund came from the big bond funds that `hedged’ their bond portfolios against rising inflation in the 1960s by having a portion of their funds in investment vehicles that bought gold and commodity stocks? With the S$80-90tn now in bonds those fund managers have a lot of hedging to do! What would a 1% hedging premium (US$800bn) buy in the gold and resources sector?      What would 2% buy? Do you have enough gold and resources stocks? Look at this: XGD Gold stocks against A$ 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$, the iron ore price, the oil price  and…… oh yes, resources stocks themselves. But the rest of the scenario of:-
  • Global bonds peaking
  • Global equity markets surging
  • China hasn’t fallen over despite Wall Street’s best efforts to say otherwise
  • Gold price firm in US$ and rising elsewhere in other currencies
  • Metals consumption growth rock steady
  • Most metals in supply deficits
  • LME inventories very low
  • Resources sector earnings still attractive
  • Exploration successes still flowing through
is still spot on. I am winning now. Are you there with me to win as well? I own NST, MLX, CGN, BLK, SBM, GOR, TBR, DRM and more. 6 June 2015 Edition #37

Resources Sector Bull Market Gathers Pace

by Barry Dawes

Key Points

  • Global equity markets make further all time highs
  • Bond markets (and US$?) have peaked
  • Disinflation rally is finally over
  • Iron ore price begins major short cover rally as ore stocks decline
  • Industrial metals ready to surge
  • Oil price has bottomed out
  • A$ and $C rallying from oversold positions
  • Gold firm again – ASX Gold Index up 65% from November lows
The messages from the market for much better times ahead for resources are getting stronger by the week as rallies in important commodities and the bounces in the A$ and C$ gather momentum.  The market indications from the last Dawes Points seem to have come together well with gains for us everywhere. I have been talking for most of the past year about a global economic boom unfolding as millions of people in Asia, Africa and Sth America join the rising middle classes seeking higher standards of living. Without doubt, the GFC of 2007/09 undermined the confidence of many of the investors in the West and caused a run to cash and bonds and produced a commentariat vying to see who could be most bearish.  I think US investment banks out of Wall Street have grabbed the honours here but the internet bloggers and the End-of-the-Worlders have been very close behind. It has been a China bashing, commodity thumping and gold shorting mantra in front of a `come and buy my 30 year 2.5% risk free pieces of US Govt junk paper because you won’t get any income anywhere else!’ program. Dawes Points has disputed this all along because it just never made sense against the true actions in the market place. First of all just refer to the performance of the equity markets around the world.  New all time highs everywhere (and now even Nasdaq after a 15 year wait) or at least new 6-7 years highs for the laggards. Rising equity markets do what they have always done:- attract new capital for investment.  More capital, more investment, more employment and more demand for inputs. In today’s environment of too much cash in bank deposits and mostly undergeared corporate balance sheets you might ask what is there to invest in.  Good question, but the answer is always initially M&A of competitors but this time there is a massive global requirement for infrastructure expansions and upgrades(Even in the US’s US$0.5Tn deficit economy, infrastructure replacement is important.). The rest just follows.  The longer it takes the longer will the equity bull market run. For infrastructure examples, isn’t it amazing that Singapore with a population of under 6m, rough dimensions of 40x23km with area of 720km2 can have five busy metro rail lines and three more under construction.  Imagine this in dozens of cities in China. The householder in Australia with its A$1,700bn bank deposits will be coming out soon as will its counterpart in China with RMB100trillion (US15tn!) to spend. Similar numbers crop up around the world.   Too much cash and too much fear. The ASX Gold Index made a new rally high in April that marked at 68% gain from the November lows and even the majors BHP, RIO and FMG have jumped. The global bond markets obviously last month decided enough was enough and carnage was wrought upon the buyers of sovereign junk at sub 1% yields.  If there ever was a mania where people lost control of their senses it is the recent actions in the bond market. The comments on bonds in the last Dawes Points seem to have been on target. So now that game of miniscule and negative cash/bond yields is over, where will the money go? Could it be that after all the efforts of central bankers to increase inflation they may actually have succeeded? Let’s think about that for a few moments.  We will come back soon. Let’s think about China now.

China Steel and Iron Ore

Remember the China is slowing/adjusting/collapsing story we have been fed over the last few years? And last month too.  Do you believe it? We all know China has debt.  And enormous reserves.  Most of the State Owned Enterprises (SOEs) have excessive debt as do the provincial governments.  The Central Government is OK and households have around RMB100trillion in bank deposits. A rising Shanghai stock market will attract an equity for debt swap where everyone benefits.  Gigantic savings to meet huge capital raisings and debt repayment. But in the meantime demand for raw materials is still strong.  Despite the calls for a decline in demand for raw materials, especially iron ore, the opposite was true.  Iron ore imports were up 13.8% in 2014 and are expected to rise about 12% to over 1,000mt in 2015. How do you get a decline in demand with a 13.8% increase in 2014 and the highest import rates were in the Dec Qtr? I have noted that even the know-alls in the political gossip sheets now have a view (and advice!) on the declining market for iron ore.   Surely a true sign of a market low. In the real world it seems the December and March Quarters were for running down inventory.  China port stocks fell 12% (now down below 90mt and almost 20% from the Sept 14 high), steel mill stocks fell, the major iron ore producers cut back production and ran down mine inventories.  But steel production stayed high. March 2015 had the 6th highest ever monthly annualised production rate for crude steel in China and was only 1% lower than March 2014.  Some massive slowdown here! The Spring Festival (Chinese New Year) brings seasonal slowdowns and seasonal expansion afterwards.  It should be the same in 2015. 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.

Industrial Metals

Another surprise for the bears who have been talking down metals consumption and oversupply.  You will recall in the last Dawes Points the table of consumption of most major resources and the prospects of supply/demand deficits in 2014/15/16.  Well, have a look at some of these growth rate figures since 2000 (14 years) and from 2010 (4 years). Some robust figures here.   Who was saying declining demand for resources? I have included Manganese Alloys (Ferro manganese and Silico manganese) here because they are now the fourth biggest metal group after steel, aluminium and copper. Do you like these growth rates?  And most people KNOW commodity demand has fallen.

2014

000tpa

14 years % CAGR

4 years

% CAGR
NEW CAPACITY NEEDED FOR 2017 (ktpa)
Steel *(mtpa)

1,689*

5.07

4.65

247*

Aluminium

47,623

3.85

4.33

6,458

Copper

22,886

3.21

4.58

3,291

Manganese Alloys

19,346

6.89

7.70

4,822

Zinc

13,573

3.21

1.77

734

Lead

10,952

3.76

2.80

946

Nickel

1,860

3.70

6.16

365

Tin

361

1.95

0.70

8

Any ideas about where we will find this capacity and the ores to fill them? And can you see any of the Recession/Depression/economic collapse in the features of this graphic? 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 ( http://www.asx.com.au/asxpdf/20150505/pdf/42ycgd1lzml3y0.pdf ) and are ready for milling or direct shipment. Try these numbers:- Copper price/ tonne     US$6400 (A$8200) 3mtpa @ 3% Cu = 90,000tpa = A$738m revenue Op costs @ A$40/t (CDU says <A$30/t) = A$120m Operating surplus  =  A$620m. Market cap ~A$350m on 278m shares. And very long mine life beyond just the high grade zones. Could this be cheap?   The NPV must be 10x the current market cap. Look at other industrial metals. Aluminium is looking reasonable after a compound annual growth rate (CAGR) from 2000 of 3.85% and of 4 year rate of 4.33% and has also had a reduction in inventories of 1.6mt ( from 12% of consumption to now just 7.9%).  It does need a strong move up soon to suggest higher prices in 2015. 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.

Oil Price

It has been a fair observation that previous collapses in oil prices have been followed by several months of consolidation then a rally back to previous levels.  A postulation would be that demand increases as the price falls and all storage options are taken up to grab rare cheap oil. This time is unlikely to be very different. Certainly excess supply in the US is chasing ever diminishing storage availability but market price action is saying something else. It has previously been noted that the most recent new low in localised US domestic WTI was not confirmed by the global Brent price and oil expressed in Euros simply does not suggest that new lows are coming. 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.

Gold Stocks

The last Dawes Points highlighted the discount of gold stocks against A$ gold price. 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!
Price Target Potential Price Left to gain

2-Dec

end 2016 gain

11-May

Gain end 2016
XGD

2010

5100

154%

2584

29%

125%

BDR

20

125

525%

22.0

10%

515%

DRM

29

100

245%

44.5

53%

191%

EVN

54

200

270%

118.0

119%

152%

KCN

70

400

471%

75.5

8%

464%

MML

65

250

285%

101.0

55%

229%

NCM

1037

2400

131%

1384.0

33%

98%

NST

117

500

327%

202.5

73%

254%

OGC

230

600

161%

262.0

14%

147%

RRL

144

250

74%

121.0

-16%

90%

RSG

27

125

363%

36.5

35%

328%

SAR

24

90

275%

48.5

102%

173%

SLR

25

85

240%

18.5

-26%

266%

TBR

265

1000

277%

345.0

30%

247%

TRY

50

450

800%

40.5

-19%

819%

GOR

22

220

900%

36.5

66%

834%

CGN

12

50

317%

9.2

-23%

340%

ABU

25

90

260%

25.0

0%

260%

MLX

70

300

329%

151.0

116%

213%

So back to that inflation comment earlier here. Most of the investing public has no idea of inflation and seems to think deflation is still the way forward. Indications are now coming through. Let us count the ways:-
  • Wages growth in US after a decade of stagnation
  • Real interest rates are negative
  • Easy money conditions
  • Bottoming and upturning commodity prices
  • No commodity inventory buffer
  • Continuing currency volatility
Let us just watch this but keep in mind the flow of funds out of bonds now that a peak has been achieved. Global competitive pressures have been good against rising costs for some time now but with demand bottoming for labour and again pressing against limited supply and under investment for many resources commodities then we might see some unexpected CPI numbers ahead soon I consider this Resources Bull Market has a very long way to go! Barry Dawes 11 May 2015 I own DRM, MML NCM, NST, TBR, GOR, ABU, MLX, CDU, FMG, BHP

Booming Asian equity markets aren’t saying `slowdown’

by Alison Sammes
Key Points
  • Asian equity markets booming ahead
  • Global bond markets have peaked
  • Funds to flow into hard assets and inflation hedges
  • Commodities surprisingly strong and breaking out in Euros and Yen
  • US$160bn Asian Infrastructure Bank to fund major Asian infrastructure program
  • Silk Road trade route program to increase Asia Europe trade
  • Oil price has most probably bottomed - Shell bids US$70bn for BG Group
  • A$ has probably bottomed
  • Gold demand very robust
  • Gold stocks ready to run in next upleg.
  • Recent capital raisings and stock selections are up strongly
  • Are you on board?
Gold and oil might be ready to move much higher at a time when Asian markets are booming.  Australian resources stocks are looking very good and are underowned. Whilst the past month wasn’t particularly kind to us after calling for the next upleg in gold and gold stocks, the overall the signs are there for a major change in long term sentiment after the general mania in chasing overpriced bonds and the upswell in global equity markets.  As for the rushing to the safety of the US$ because of collapsing Emerging Markets – what garbage! Asian markets have been very strong in recent months. Have a look at these stats
  • Shanghai – up 92% since 1 July 2014
  • Mumbai – up 40% since early 2014
  • Tokyo  - up 40% since 2014 lows
  • Singapore- up 15% since early 2014
  • Taiwan - up 15% since early 2014
  • Manila, Thailand are surging and Sth Korea is trying hard.
At any other time everyone would be talking about global boom as I have.  Instead, it is still gloomy out there.  Mines and Money in Hong Kong recently was subdued with a low turnout.  Sentiment is still underwhelming and turnover has been low.  But signs for a turn are good. This new US$160bn Asian Infrastructure Bank will assist in financing of major upgrades to rail and other infrastructure from Guangdong through Beijing, Mongolia, some of the Russian `stan’s and into Europe.  Rail freight could rise from 1% of Chinese exports to Europe to 5-7% by 2020. That is essentially up 10x in growing tonnage. This rise of the ASEAN nations (over 700m people) with Indonesia with 250m people and strongly rising living standards should not be ignored either. The preoccupation with the defensive chasing of yield thesis just seems wrong to me because the markets are saying something different.  Note that the US small caps (Russell 2000 and S&P 600 Small Caps) here are again reasserting the market leadership after a year’s hibernation.  This says expanding US economy.  Don’t ignore the recent wage rate rises in the US either.  Inflation is coming.  And this spells doom for deflation-priced US and European bonds. And for the defensive yield and high cash strategy. Why be defensive in respect of our resources sector when the world is out there having fun? The global economic boom is now well underway fuelled by central banks flooding the world with liquidity.  Watch for changes to the velocity of money in circulation.  Commercial banks are starting to lend gain.  Everywhere.  Especially for takeovers. It seems strange that the world commentary focus should be on the US Fed and interest rates with players cheering down the Euro and thumping commodities while chasing impossibly valued sovereign bonds and an overvalued US$.   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

Next upleg in gold sector underway – major upmove expected

by Alison Sammes

Key Points

  • Global equity markets surging to new rally or all-time highs
  • ASX Gold Index up 63% and now moving up again after consolidating
  • The bottoming and upturn process well underway­ for most resources stocks
  • Gold setting up for another surge into March
  • New gold Apple Watch could take over 350tpa (>12% of mine production)
  • Many excellent earnings and dividend results from resources companies
  • Bond yields bottoming and prices sliding
  • Do you want to participate in capital raisings?  Call me.
  • Did you benefit from the recent stock price rises?
  • If not, call me and get set.  THIS IS THE TIME!!!!
The last Dawes Points heralded the new Resources Sector bull market and the follow through is responding favourably.  Gold is leading the massive short cover rally.  Many Resources stocks have been exploding upwards.  Are you on board?  Asia is driving this next leg in the Resources Bull market. This is a major global economic surge that might just run for the next 10-15 years. Global equity markets making new highs daily.  The US is leading.  Germany is following.  The UK FTSE FINALLY made a new all time high last week.  India hit new highs and with the new business friendly Budget economic growth is accelerating and likely to hit 10%pa in the next year. China equity markets are surging and indicating speed up not slowdown.  New break outs noted after long consolidation periods by equity markets in Hong Kong, Singapore, Taiwan, Thailand and so on.  Everywhere.  Heed the markets not the commentators. It is pleasing to see markets are starting to get some order at last after such a long time of indecision and the story is becoming stronger and very favourable for investment if you have the time to listen. And truly fascinating.  Sure, the US is leading but it will be China and India and ASEAN that you will hear most from. The recent Dawes Points view on bond yields and prices is looking robust and with so many equity indices hitting new highs the outlook seems to be getting better with every day.  You wouldn’t think that of course if you read the press or watched the TV talking heads.  Will Greece leave or not? Will the Ukraine cause a major conflagration?   Will ISIS strike at the West’s heartland?  The markets are looking beyond these issues even if the commentariat isn’t. Look at these numbers:-
  Level 31 Dec Level 27 Feb Since 1 Jan Comment
NASDAQ

4635

4963

7.1%

15 Year high

S&P Small caps

500

520

4.1%

All time high in 2015

S&P 500

2058

2105

2.3%

All time high in 2015

Dow Jones

17823

18132

1.7%

All time high in 2015

Wilshire 5000

22212

22169

-0.2%

All time high in 2015

Russell 2000

1233

1205

-2.3%

All time high in 2015

German DAX

9805

11401

16.3%

All time high in 2015

UK FTSE

6566

6946

5.8%

All time high in 2015

Mumbai

27499

29220

6.3%

All time high in 2015

Thailand

1497

1587

6.0%

All time high in 2015

Manilla

7230

7730

6.9%

All time high in 2015

 

Shanghai

3234

3310

2.4%

New rally high

Singapore

3365

3402

1.1%

New rally high

Hong Kong

23605

24823

5.2%

New rally high

Taiwan

224

232

3.7%

New rally high

South Korea

1916

1986

3.7%

New rally high

All Ords

5388

5899

9.5%

New rally high

This really could give us the global economic boom I have been talking about. The last Dawes Points talked about record consumption in all metals and the move to deficits over 2013-2016 for copper, zinc, nickel and coal.  Global growth accelerating with insufficient capacity. Higher commodity prices are now likely. Thank You China. Thank You India.  And Thank You ASEAN. And also the long term fiddling in the gold and silver markets is coming to an end. The price discovery mechanism is being bolstered by newly established gold exchanges that require all sales to be gold-covered and that give more Asia representation at the pricing table.  No more midnight attacks of selling 50 tonnes of gold in 20 minutes in thin markets.  No more 100 contract oz on COMEX for every oz available for delivery. These scams are now having their use-by-dates enforced. Yes, and Thank You to the citizens of China (1,400m of you)  and India (1,300m) for becoming wealthier and desiring the beauty, majesty and longevity of gold bars and gold jewellery at a rate that exceeds global mine production and more.  The cultural demand for gold exceeds the incessant fears in the West of apocalypse that seems to have gripped so much of the investing professionals and public alike. Also, now Apple is to bring out an 18ct gold version (the Apple Watch) in its iWatch range that is due for release in March. Rumours suggest it will have two oz of gold (less than a gold ROLEX) and will be competing in that high end against ROLEX, Cartier, Breitling and Piaget at about US$10,000 but will have a phone and email.  Suggestions have been made that Apple could sell 1 million each month. 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.

Gold stocks performances

I am concentrating on gold because I consider that gold is leading all these equity markets higher. Gold and the Gold Sectors bottomed in November ahead of the bottom in December for other resources . The Big Picture for gold is still best shown by the US Philadelphia Gold Index that is now lifting itself off the bottom after breaking the 2008 lows and testing levels seen in 1986. It has been +29% from its recent lows. 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.  
NST  Daily 12 months (Source IRESS)  NBM  Daily 12 months (Source IRESS)
And these two, St Barbara (SBM) and Metals Ex (MLX) are looking very exciting.  
SBM  Daily 12 months (Source IRESS)  MLX  Daily 12 months (Source IRESS)
Many of the smaller golds are also warming up for good gains. Have a look at some of the various Gold Indices here and in North America and some of the Dawes Points recommended stocks.  Note PDAC is on this week in Toronto and the TSX Venture Exchange (CDNX) seems to be finally turning up as well after its own horrific bear market.
    Nov low 31 Jan 15 27 Feb  Gain to Jan Gain to Feb
ASX Gold Index XGD

1642

2530

2690

54.1%

63.8%

Philadelphia Gold Index XAU

61.39

79.37

76.94

29.3%

25.3%

Gold stock ETF GDX

16.45

22.29

21.28

35.5%

29.4%

Junior Gold stock ETF GDXJ

22.34

27.74

26.57

24.2%

18.9%

ASX Small Res* Dec low XSR

1325

1599

1772

20.7%

33.8%

TSX V  Index* Dec low CDNX

637.06

676.81

706.70

6.2%

10.9%

Newmont US$ NEM

17.75

25.15

26.33

41.7%

48.3%

Am Barrick US$ ABX

12.19

12.78

13.02

4.8%

6.8%

Northern Star NST

0.92

1.80

2.36

96.2%

157.9%

Newcrest NCM

8.51

13.56

14.39

59.3%

69.1%

Oceanagold OGC

1.92

2.67

2.47

39.1%

28.6%

Doray Minerals DRM

0.29

0.47

0.49

62.1%

69.0%

Medusa MML

0.48

0.83

0.98

71.9%

104.2%

Gold Road GOR

0.20

0.37

0.37

85.0%

82.5%

ABM Mining ABU

0.27

0.30

0.23

11.2%

-16.4%

Blackham BLK

0.08

0.10

0.14

20.0%

75.0%

Metals Ex MLX

0.68

1.10

1.24

61.8%

81.6%

St Barbara Mines SBM

0.10

0.21

0.22

110.0%

120.0%

Saracen Minerals SAR

0.21

0.36

0.42

71.4%

100.0%

Did you get on board any of these? Look at some of the leading players in the US –Newmont (NEM) is breaking out and Barrack (ABX) is not far behind.  
NEM  Daily 12 months (Source IRESS)  ABX  Daily 12 months (Source IRESS)
Northern Star is clearly a leader globally.  Currently on FY16 PER of 9x and with a 50% payout ratio gives 5.7% yield.  For a long time.  What would it be at A$1800/oz?  Keep watching the Kundana JV and especially the 1.1moz 11.6g/t Pegasus mine which started up last month.  NST has 7 other Pegasus style targets along this very important shear zone just out of Kalgoorlie. Kundana Golden 8km Corridor on K2 and Strzelecki Shears  - Significant discoveries made and excellent potential I expect the market will hear much good news from many of these companies as operations are properly bedded down and as the benefits of the lower A$ 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 report on Blackham (did you read it? And more importantly, did you buy some?) suggests that it should be worth A$0.90-1.57 with 12-18 months. BLK is not in the XSR but I can find about 10 other stocks actually in the ASX Small Resources that have similar upside potential. If 20% of the XSR has 8-10x upside based on current commodity prices then we go to new highs.  The other 50% only needs to double. These markets will build on themselves and go to new highs and then well beyond if commodity prices recover. Resources stocks are just like any company.  They need a business plan and the management needs to run a business that makes money for shareholders.  The business plan can be to create value in an asset (by exploration, resource upgrade, feasibility study, mine development or whatever) or to generate revenues (build a mine, link a hydrocarbon discovery to a pipeline).  Very few resources can support a 40 year production mine life (some of course certainly can) but many can support businesses that generate medium term income by whatever means. So management of wasting assets requires special skills and good management teams are what you look for in resources companies.  And many Australian resources companies have world leading management teams who are very experienced in coping with high volatility in commodity prices, currency and operating conditions.  The past three years clearly shows the volatility. So note the companies that have thrived through the past extremely difficult few years.  NST, MLX and EVN stand out in the gold sector and OSH, LNG and DLS in oil and gas. Good managers.  Good companies.  Good Businesses. Investors in the resource sector are now actually making money again after a very long and extended period of negative returns. I am seeing numerous opportunities coming up. It is also fascinating to see BHP and Rio up 16.5% and 13.1% respectively since 1 January and management at each is projecting a robust outlook.  Volumes up. Demand strong, competition fierce but the underlying numbers are good.  Earnings are good and yields are very attractive.  What is holding people back? Well, let’s look at the current scoreboard.  Note that gold and the ASX Gold Index bottomed in November while the rest bottomed in December. We are winning again at last but there is so much to make up.

Change from

Nov low

Dec Low

31-Dec

current

Nov

Dec

31-Dec

2014 Low

BHP

30.67

27.29

29.37

34.17

11%

25%

16%

25%

RIO

56.12

51.99

58

65.56

17%

26%

13%

26%

ASX 200 Resources

XJR

3471

3096

3344

3742

8%

21%

12%

21%

ASX 300 Resources

XKR

3455

3081

3365

3674

6%

19%

9%

19%

ASX Small Resources

XSR

1580

1324

1599

1772

12%

34%

11%

34%

Gold

US$/oz

1130

1141

1184

1213

7%

6%

2%

7%

Gold

A$/oz

1326

1418

1450

1553

17%

10%

7%

17%

ASX Gold Index

XGD

1642

1700

2530

2708

65%

59%

7%

65%

The recent earnings season has generally been very good with strong results for everyone except iron ore producers and a strong focus on dividends.  The current preoccupation with shareholder cash income is misplaced in my view as investment should be more about capital growth than capitalisation rates determined by manipulated US interest rates. But the more important issue is that most resources companies have completed their capex programmes, are reducing debt and having more free cash to reward shareholders in the future. Think of this trend as a return to normal when 50-65% was the right payout ratio for resources companies. We are getting there for most of these companies and it will be the gold companies that drive the story. The outlook and the operations of the resources sector is robust and excellent investment returns are to be expected from here. Barry Dawes BSc F AusIMM MSEG MSDA 2 March 2015

Blackham Resources Limited (ASX: BLK) Research Update – Moving To Mining

by Alison Sammes
The gold price is beginning to show encouraging signs of beginning the next stage of the long term bull market that will take it to new highs over US$2000/oz. The demand for gold from India and China already exceeds global mine production and is adding to high investment interest from Europe and North America.  Central banks are also now significant net buyers so the overall gold market is tightening up. We also have to ask `who will be the sellers?’ to meet this demand at today’s prices. Gold has already been rising in most currencies and the recent weakness in the A$  has pushed up the gold price up above A$1500/oz. The ASX  Gold Index has responded to the better gold market and is up 60% from its low in November but it is still 69% below the 2011 high when gold was only about A$1400/oz compared to A$1550 today. There is much to catch up. Some Paradigm gold stock recommendations from the2014 December Dawes Points are up over 100% (NST +117, EVN115%) with others up over 50% (SAR +95%, MLX +83% and DRM +78%).  The recent strong earnings reports from many of these companies and some with increased dividends can only get better in 2015 with a gold price A$150/oz higher. Blackham Resources is one company that has outstanding prospects from its Wiluna gold mining project that Paradigm considers will provide outstanding short and long term returns as the entire Wiluna Goldfield is revived.   With 4.7moz resources and a 1.3mtpa processing plant the project should have a long term future at gold production rates of over 100,000ozpa generating revenues of over A$150mpa. Most Paradigm account clients hold BLK and should do very well as long term investors. Risked milestones are provided to indicate an 18 month share price base target of A$0.90/share with potential of $1.57. If you don’t have BLK and don’t have account with Paradigm  you might be missing out!

Key Points

  • Engineering studies on mines and mill well advanced
  • Target of >80kozpa by mid 2016 then >100kozpa
  • Mill refurbishment  capital costs set at <A$16m
  • Mine development costs estimated at <A$10m
  • Total funding requirement is estimated at <A$26m
  • Cash flow positive five months after major funding drawdown
  • Initial resources base in excess of 4.7moz and growing
  • Additional potential of up to 3moz in near mine exploration

Summary

Blackham Resources’ 1.3mtpa Matilda Gold Project to produce 100-110,000ozpa is coming closer to fruition with progress made on the mill rehabilitation process and the finalising of ore sources from the current 4.7moz resource.   Exploration appraisals are also providing potentially significant new resources. Higher A$ gold prices and the fall in the cost of mining contractor equipment and fuel costs should give this project even more attractive margins. Paradigm has determined a Base Case Project NPV8at A$1,500/oz of A$173m   (A$0.90 /share fully diluted) and a Standard Case Project NP V8 at A$1,500/oz ofA$303m (A$1.57 /share fully diluted).  Risked milestones are provided to indicate an 18 month share price base target of A$0.90/share with potential of $1.57.

Download the BLK Report Now

Are You On Board The New Resources Bull Market?

by Barry Dawes
  • Gold price now in uptrend
  • Gold stocks jump after rallying from Nov 2104 lows
  • Downtrend breaks for several resources equities indices
  • Gold price encouraging broader short cover rally?
  • Price bottoms for oil and copper?
  • New paradigm applying to resources investment
  • Do have enough(any?) resources stocks?
  • Call me to discuss +61 2 9222 9111 bdawes@psec.com.au
As noted in the last Dawes Points further rises in gold have given strong support for gold mining shares and these are now acting to reassert reasonable valuations again after years of underperformance, especially against gold. Consider that the market place is extremely underweight gold and gold shares so the run may be longer than expected and the eventual pull back may come much later. Gains to date have been over 100% for some of our major gold stocks and the smaller companies have great leverage and will eventually join the party. And as was said, this rise is gold is extremely important and when put in the perspective of the BIG PICTURE so much is now becoming clearer. A couple of months ago I wrote a piece titled , What if  …a rising gold price forces a short cover rally? Well I think it is coming to pass. The gold price is rising in almost every currency. Equity markets are rising. You can get yourself tied in knots over the actions of the Fed, the ECB, The Japanese Central Bank and the PBOC or even the Swiss National Bank.  Do you really understand what is going on?  From the 10,000 views from 5,000 talking heads and economists I would say most of them don’t either. So let’s just look at markets and tonnes.  Prices for gold, oil and copper.  Iron ore, tin and zinc.  The Shanghai market, Mumbai, Hong Kong and New York.  Tonnes of production, consumption and inventory. What I see is truly fascinating.  I am bullish on gold and economic activity.  I am not a doom and gloomer who seems gold as the only lifeboat.  Not a bull of the US$ for the infinite margin call that might be coming on all the debt funds utilised outside of the US, especially the Emerging Markets (whoever they might be).  Not a bull of vastly over valued sovereign debt.  Not a Greater- Depression-Underway fan. Just a follower of tonnes and observer of markets. I have been saying that something is not adding up for gold stocks and whatever I said there applies multifold for all other resources stocks. This may be a very important Dawes Points. My view of the world has been for some time a matter of the flow of funds. The movement of capital from one asset class to another. The vast amounts of cash and the extraordinary commitment to government bonds has to flow from these vastly over valued sectors to those vastly undervalued.   All resources are grossly undervalued. Last week the focus here was the very attractive PERs and dividend yields applying to the Australian Gold Sector. The numbers were 4.0x for FY17 and a yield of 10.0% for the Paradigm universe of gold stocks. Under-owned, despised, hated, forgotten but such extraordinary value!  And dividends coming along. My clients have a portfolio of the best of these stocks. What do you have? As most of you know, I have been watching the resources sector for over 40 years and have experienced many cycles but just as importantly have researched many more as far into history as can be accessed.  I consider this allows me to have a different perspective than many others and has given me the experience to have remained long term bullish during this long period of falling resources shares and commodity prices. My 2014 non-traded 30 stock portfolio established in late 2013 was up 24% in 2014 compared to    -20.7% for XMM, -19.0% for XJR, -29.2% for XSR, and +7.9% for XGD. 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.  See the Investors Day Presentations from 10 Dec 2014.  Over 150 pages of graphs data and strategy. Enjoy. The link is here. http://www.glencore.com/media/speeches-and-presentations/p/2014-investor-day The oversupply issue seems to be ready to self-correct itself and for most resources commodities the swing from surplus to deficit is either already with us or due in the next 12-18 months. Can you see what is happening? Consumption/transport of major metals
  2013 2014 2015 2016 2013A 2014E 2015F 2016F Swing to deficit
Metals consumpn (mt)          % chg %chg %chg %chg  
Copper

21.3

22.4

22.6

23.3

5.8

5.2

0.9

3.1

2015

    China

9.8

11.0

11.2

11.6

8.9

12.6

2.0

3.6

 
Aluminium

50.2

50.9

51.1

52.0

5.9

1.4

0.4

1.8

2013

Zinc

13.1

13.6

14.0

14.6

3.8

3.8

2.9

4.3

2015

Lead

11.1

11.5

11.7

12.1

6.1

3.6

1.7

3.4

2014

Nickel

1.8

1.9

2.0

2.1

6.8

5.6

5.3

4.0

2015

Tin

0.3

0.4

0.4

0.4

2.7

1.7

2.8

3.0

2010

 

 

 

 

 

 
Global Steel demand

1531

1562

1594

1640

2.0

2.0

2.0

2.9

 
China crude steel prod

822

807

840

850

12.4

-1.8

4.1

1.2

 
Seaborne trade                  
Iron Ore

1 225

1 360

1 435

1480

7.0

11.0

5.5

3.1

2016

  China imports

820

933

1000

1050

10.0

13.8

7.2

5.0

 
Thermal Coal

931

946

966

1019

3.4

1.6

2.1

5.5

2015

Coking Coal

 314

 320

 328

 328

8.4

1.8

2.6

0.0

2014

  And note the lack of increase in LME stocks that is usually associated with falling demand and recessions.   Note too that LME inventories are only a few per cent of annualised consumption and 2% is less than one week.
  000 tonnes

1-Jan-13

1-Jul-13

1-Jan-14

1-Jul-14

Current From Jan 13 From Jan 14 % Ann cons Ann Cons mt
Copper

320

665

315

155

248

-23%

-21%

1.1%

22.6

Zinc

1220

1061

854

668

630

-48%

-26%

4.5%

14.0

Lead

320

198

214

194

215

-33%

0%

1.8%

11.7

Tin

12

14

10

11

12

-2%

22%

3.3%

0.4

Nickel

139

187

261

305

426

206%

63%

21.3%

2.0

Aluminium

5210

5435

5458

5046

4049

-22%

-26%

7.9%

51.1

Nickel is an exception here. Iron-rich lateritic nickel ore from SE Asia has been used by stainless steel producers as a ferronickel product that has displaced pure nickel metal units.  How strange that nickel metal stocks are rising at a time of strong demand for total nickel metal units. A major deficit is predicted from 2016. And tin stocks are so low that even 1000 tonnes makes a big difference. There has been no high interest rate policy and restrictive credit action for most of the 5 billion people mentioned here. These has been no collapse in demand for commodities or manufactured goods.  No dramatic reduction in global employment. Almost every factor is unlike any previous cycle. And the internet is bringing us together into a global economy that offers extraordinary opportunities to everyone.  Almost unthinkable levels of new access to buyers for your product in almost every country in the world.  And so many new competitors against you and your peers. Commodity prices have been falling and the call is for deflation, depression and misery.  Is this the way it is to be? Glencore is the absolute antithesis of tonnes-up-the-shaft mining companies. It is a marketing company.  Mining companies need to be some version of Gerald Whittles’ Money Mining companies so marketing should be the critical issue to sell product and to optimise operational cashflows. Have a look at this graphic from Glencore. Interesting to see the strategy differences 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. I have provided updates for this occasionally.  Why have I done this?  I was amazed at the sentiment that applied to the Disbelief Leg 1 in this bull market.  Believe it or not, from my perspective as a corporate financier, very few players were on board and the lack of market breadth was quite extraordinary. Remember when oil was surging to its high of US$147 in 2008 after the Lehman Bros and the sub-prime debacle?  The 20:1 leveraged global hedge funds pushed the major oil stocks to very high levels but the local institutions and public yawned and stayed out of the market and ignored the small cap oil and gas companies.  Ditto gold stocks and almost all resources stocks.  The big stocks were making all-time highs while so many of the small stocks struggled in the cellars.  No market breadth and no participation. So a bull market that not many people came to. The GFC brought about a major fall in 2008 that saw +60% falls in the XMM, XJR, XSR and XGD into Dec Qtr 2008.  These sectors bottomed here, along with general commodities, Shanghai and Hong Kong, more than four months ahead of the All Ords, S&P500, Dow, FTSE, DAX etc that made their lows in March 2009. This is important. 2008 was clearly the end of some economic cycle in the US, with housing the driver.  Usual end of cycle action with commodities peaking then falling, debt levels rising, some interest rate rises, a brief and short-lived spurt of price inflation, corporate failure.  This followed into Europe, Japan and elsewhere. China with its centrally planned economy was able to stand and, with fiscal expansion financed by a major trade surplus, accelerated infrastructure expenditure activity from 2009 onwards.  Demand for iron ore, steel and copper surged to extraordinary record levels. This provided Australia’s Resources Boom with over A$400bn of capital spending mostly on iron ore capacity, new coal mines and ports and the new LNG gas gathering and export facilities. The performances of the major commodities showed US$ price peaks in 2008 or earlier.  Most commodities rallied from the 2008 lows to good prices that peaked in 2011.  Interestingly, four key commodities had the underlying strength to rally to new and all-time highs – Gold, Copper (as noted above) and Tin and Silver touched its 1980 high of US$50/oz. I consider these will be the leaders of the next upleg that is now already underway.  Nota Bene. So coming back to the Wave Two Pessimism.  I thought Pessimism had fully taken hold in 2013 and 2014 but the latest surge in the US$ and the US T-Bond market showed that Pessimism was still alive, well and thriving in 2015. Have look at these.  Who are the lemmings chasing yield on 10 year bonds?: US 1.65%, ( US$14 trn net debt (81% GDP) Budget deficit of 4% GDP) UK 1.33% (GBP1.4tn net debt (84% GDP)   Budget deficit 4% GDP) Germany 0.30% ( Euro 1.5tn net debt (54% GDP) Budget surplus 0.5% GDP Australia 2.34% (A$254bn (16% GDP) Budget deficit 3% GDP) Source: IMF data These markets are clearly in the final phases of a collapse in yields (and a surge in price). The timing for the end is uncertain but it is likely to be very soon. Samuel Clements (Mark Twain) was quite correct when he asked about return of money not return on money.
US UK Germany
Would you prefer this paper garbage managed by some of today’s impressive world leaders or the `barbarous relic’ of gold?  You tell me. And Australian bank deposits. A$1,679bn as of 31 Dec 2014.  Term deposits have flattened at about A$530bn but Savings Banks have increased by over A$70bn in the past year.   Lots of Pessimism here. Source: RBA What can we make of this and what do we do next. So let’s come back to the Australia Resources Sector. These are the four key indices. XMM Metals and Mining XJR ASX 300 Resources XSR ASX Small Resources And XGD ASX Gold Index As noted, XGD, the Gold Index, made a new high in 2011 but none of the others did. All these have done the Disbelief Rally that peaked in early 2008, the decline into late 2008 then the bounce rally into April 2011 and the unrelenting decline into the lows which I consider were in November 2014. They all bottomed on 16 Dec 2014 except for the Gold Index which bottomed more than a month earlier on 6 November. Now if all the above fundamental supply/demand data are correct (Glencore definitely thinks so) then there should at least be a good bounce in 2015 for all things resources. Now let’s take a further step. What are the global equity markets telling us now? Starting at the heart in the US.   S&P 500  - maybe overbought and concerns are developing over the strength of US$ 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.

Conclusion

There can be only one conclusion. Equity markets are telling us that sufficient liquidity exists for the world economy to survive.  The dive to unsustainable bond yields is coming to an end and will bring about the final stages to a 33 year bull market in paper financial assets. The supply/demand picture for commodities is still tight and as the flow of funds runs from cash and paper into equities and commodities the resources stocks will be the greatest beneficiaries. Are you set for the Wave Three (Optimism) Upleg? Gold and gold stocks are leading. BHP at 4.5% yield is coming next. Then all the second and third liners.  Copper, oil, uranium, zinc, tin, mineral sands and of course iron ore. Do you hold enough resources stocks? 2 February 2015. Barry Dawes  If not contact me to see how you can benefit.

Gold Index up 60% since November – Are you on board the new Gold Bull Market?

by Barry Dawes

Key Points

  • Gold price now surging – up 15% from US$1130 low
  • Gold stocks jumping - ASX Gold Index 61% from Nov 2014 low
  • Rising dividend streams now apparent
  • 23 ASX stocks Gold sector universe FY16 PER of 4.0X and high yields
  • Did you get on board?
  • Long term gold bull market Stage II still only in infancy
  • Industry costs tumble for energy, labour and equipment
  • Opportunity in Blackham Resources (BLK.ASX) for eligible investors (see at end of note)
Further rises in US$ gold prices have given strong support for gold mining shares and these are now acting to reassert reasonable valuations after >3 years of savage underperformance against gold and general equities. A pullback is possible after such as strong rise but these stocks are so underowned that pullbacks in this bottoming and upturn process should be shallow and short-lived. The December Qtly and Half Yearly Reports are now coming through so more output and earnings surprises should be expected. This rise in US$ gold is extremely important and when put in the perspective of the BIG PICTURE so much is now becoming clear.  Gold in many currencies is now surging.  I strongly consider a US$ gold price of $5,000 is achievable in the coming cycle. First of all, do you have enough gold and gold mining shares?  A gold holding is ESSENTIAL for everyone and quality dividend paying gold stocks should be there beside your Telstra shares. If you don’t hold gold or these gold shares contact me NOW!  bdawes@psec.com.au The Australian Gold Sector over the past two years has been forced to adjust to very difficult conditions after the sharp escalation in costs for capital, equipment, labour and energy and it has recovered so very well since mid 2013.  The benefits were already being shown in 2014 but low gold prices deflected the gains.  So now the Dec 2014 Quarterlies to date are showing some excellent cost reductions and with a A$1600/oz gold price the operating margins are often over A$500/oz (for a 100,000ozpa producer this is A$50m pretax and A$35m after tax.) and PERs are low single digits for many. The Australian Gold Industry has also completed  most of its capex for the last cycle and much of its debt has been repaid. Now, A$ gold prices in the past two months have averaged about A$100/oz (~8%) higher than for the whole 2014 year average of around A$1400/oz. With capex completed and banks being repaid it is now the time for shareholders. Everyone needs to keep in mind that resources stocks in steady times (have there ever been steady times?) traditionally paid 50-65% of earnings as dividends.  This is what should happen now. And if gold prices continue to rise as I expect over the next few years then the dividends should only grow.

Strong market performance

The ASX Gold Index is now up 61% since the November 2014 low at 1642.  A strong move that I have suggested could occur and that if it came it could be violent.  Violent, yes.  Many large stocks have had +10% daily jumps.  Look what has happened in the ASX Gold Index since then.
Week Ending

Weekly Close

Weekly Change %

Cumulative % gain

7-Nov-14

1642*

14-Nov-14

1746

6.4

6.4

21-Nov-14

1852

6.1

12.8

28-Nov-14

1922

3.8

17.1

5-Dec-14

1913

-0.5

16.5

12-Dec-14

1968

2.9

19.8

19-Dec-14

1972

0.2

20.1

26-Dec-14

1932

-2.0

17.7

2-Jan-15

2069

7.1

26.0

9-Jan-15

2315

11.9

41.0

16-Jan-15

2504

8.1

52.5

23-Jan-15

2643

5.5

61.0

* XGD low But this index is still 70% BELOW the 2011 high which occurred at about A$1403/oz and the current price is A$1630.  Something is not adding up so the solution is gold stock prices at levels above the 2011 high again in the next few years.  Or sooner. Have a look at the performance of the 17 chosen stocks from 1 December 2014.  And look at my targets from 7 January 2015. Please note these are initial targets for end 2015 but many should be exceeded well before.

Stock

Price 1 Dec

Price 23 Jan

Change

Target

Potential

1

BDR

19

38

100%

40

5%

2

DRM

27

59

119%

110

86%

3

EVN

43

94

119%

180

91%

4

KCN

62

79

27%

180

128%

5

MML

57

90

58%

250

178%

6

NCM

918

1362

48%

2000

47%

7

NST

96

214

123%

450

110%

8

OGC

207

260

26%

600

131%

9

RRL

129

204

58%

450

121%

10

RSG

23

42

83%

60

43%

11

SAR

21

40.5

93%

90

122%

12

TBR

265

330

25%

450

36%

13

GOR

20.5

39

90%

200

413%

14

CGN

12.5

11.5

-8%

50

335%

15

ABU

22

33

50%

60

82%

16

MLX

70

106

51%

180

70%

17

BLK

6.7

10

49%

25

150%

Has the market run too far too quickly?  Possibly.  A 60% move certainly needs some correction but consider that the market place is extremely underweight gold and gold shares so the run may be longer than expected and the pull back may come later.  Who knows? A 60% rise after a 80% fall to a very low base ( ie to the levels of 2002) is not a big move when you consider we are still 70% below the 2011 high. Looking at a collection of many companies shows some very attractive sector investment arithmetic. How is a sector average of 4.0xFY16 EPS with an average yield of 10.0% at the current A$1630/oz? That is the average so some PERs are actually very low indeed. The matrix below gives a fair view of 23 mostly producing stocks that I follow. I cannot over emphasise that there are dozens more out there but you can’t follow them all and many are too early.  However, this is a very long term bull market now and there will be time for them to catch up. The first item to focus on is annual gold production.  Then look at market cap.  Note the revenue.  Note the Revenue/Market Cap.  This is your key to leverage.  The higher the better.  If a stock has revenue equal to market cap and has average A$1100 AISC costs (All In Sustainable Costs) it will have a 30% operating margin.  Price to Operating Cash Flow ratio of 3.5x. My model takes the current A$ gold price, annual production, AISC costs, total pre tax costs and applies a 30% tax rate to give EPS and generate the PER.  A dividend of 50% is assumed unless a company has otherwise stated. Many companies have some forward sales but these are generally small and are unlikely to statistically change the received annual price averages. This universe has A$7bn revenue from 4.5moz in FY16 and a market cap of A$7.5bn. Earnings could be A$1.6bn after tax. Are these attractive enough for you now at A$1630? PER 4.0x FY16  and 4.1x FY17 this universe? And yields of 10.0% and 15.0%. And at a range of higher prices?
Gold Price PER FY16 PER FY17 Yld% FY16 Yld%FY17

A$1200

18.1

57.1

3.5

2.1

A$1300

10.8

14.2

5.0

5.1

A$1400

2.9

5.1

6.5

8.1

A$1600

4.1

4.3

9.6

14.2

A$1700

3.3

3.4

11.1

17.2

A$1800

2.8

2.8

12.6

20.2

A$1900

2.4

2.4

14.1

23.2

These figures are very attractive but these next few figures put them in perspective. The ASX Gold Index fell 80% from the April 2011 high at 8499 to the low in November 2014 at 1642. It is still 71% below that high.  Cheap here. And gold stocks have fallen against the A$ gold price.  About 73% from the April 2011 highs and 78% from the 2008 relative value.    Very cheap here. And with XGD market share so low at about 1.5% of ASX All Ordinaries turnover (it was down to just 1% in August 2014!) compared with 4.5% in 2011-12 and over 6% in 2010, NO-ONE owns these stocks.  A downtrend break has occurred. Huge pent up demand coming here.  Remember the A$1,660bn in bank deposits. And just remember the ASX Gold Index history. Well, did you get aboard?  And do you have in your portfolio these producing stocks that will be big dividend payers in 2015 and beyond now that most sector capex is complete and debts are being paid down? If not, contact me.  bdawes@psec.com.au Here is another perspective from Avi Gulbert, an Elliot Wave aficionado, who thinks we might get another sell off to new lows before his BIG PICTURE comes into play. He is open to the turn having occurred already but his interpretations are useful. The concept of the `irregular B wave’ for the rally into 2011 for gold and gold shares gives a powerful underlying force that reflects all the previously raised concerns about public sector debt and the debasement of currencies.  This wave model projects the US HUI (Gold Bugs Unhedged Index) out to a level 20 times higher by the mid 2030s.   You might need to enlarge this diagram to see the targets. https://www.elliottwavetrader.net/images/charts/full-dshel4r7qDCriXl8CP5xP.png Those large dividend blue chip gold companies should be making shareholders very wealthy over a very long time.  Have you enough gold and gold shares? I am going to come back to this concept in another Dawes Points very soon.  The implications are extraordinary.

Gold Outlook

Rising gold and rising gold stocks are a welcome and long overdue experience. Nice to be making money again. But why is gold now rising? The price history of US$ Gold since 2000 shows a long term uptrend with a 38 month decline. The 10 year bull market was saying something and something big was afoot.  Many reasons.   Currency, debt, inflation, wars and deficits.  All contributed.  Many more reasons out there too. For me, the build up in public sector debts and the gyrations in currencies are my preferred reasons. Who can really trust politicians or their government bureaucracies and their welfare recipient supporters to protect a currency and the population’s wealth? But then we had the extension of the 30 –year rally in the US T-Bond market that brought yields down even lower and bond prices into the sky.   And a US$ that rallied hard. Do keep in mind that the US$ Index is made up as follows:- Not a good index because weightings make it Euro dominant and the US$ has fallen against the Swiss franc and also the Indian rupee and the Chinese Yuan is not included.  Nor the A$.

I don't buy the US$ strength argument but then I have not got it right on either the US$ or the Tbonds. Gold in Yen, Euros, Pounds and A$ has broken 3 year downtrends and is heading up sharply.

These suggest the rally is real and, even with some technical pull back, gold in these currencies will be heading higher. This `market breadth’ says buyers everywhere are buying gold not just arbitraging currencies. The big buyers throughout 2014 have been India, China and, surprisingly, Turkey. Here we have gold in Indian rupees, Chinese yuan and Russian roubles. http://www.24hgold.com/graphiques/picturedata.aspx?graphParam=Gold%2bUSD-INR%2boz%2byy%2b1&format=172 Source:24hGold.com Demand from China has continued to explode with recent figures indicating 70 tonnes of gold withdrawn (i.e., acquired by Chinese citizens) from the Shanghai Gold Exchange in Week 2 of 2015 and have brought the year to date figures to 131 tonnes ahead of the Chinese 2015 Spring Festival starting on 19 February. Source: Koos Jansen Bullionstar This is 3400 tonnes annualised from China alone and EXCEEDS annual global gold mine production of 3100 tonnes! The numbers from India are reported to be even more after the new Modi government made major changes to import restrictions.  More market liberalisation could take place and further increase demand for gold from India. Note that the Shanghai and Mumbai equity markets have been on a strong tear in the Dec Half of 2014.  Shareholder wealth has increased and demand for jewellery has been boosted. I have adjusted my Supply/Demand graphic to show this increased demand from China and India. Demand for gold from Europe in recent months has also increased sharply to reflect fears of Islamic State terrorism, QE threats by the European Central Bank and the continuing general European malaise. I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections. I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections. The `Deficit’ may also in fact be exacerbated by a decline in the 1400t annual availability of scrap.  The GFMS numbers indicate that high prices in 2008-2012 drew out an extra 3000 tonnes of scrap gold.  Aunt Audrey probably doesn’t have any scrap jewellery left now. Where will the gold come from? These numbers do show that there is a real game in play for physical gold and the market manipulators in gold futures markets do not have much more time to cover before the final whistle is blown.  If large short positions do in fact exist it will be very difficult to buy back any such gold. The playground is also being tested by the emergence of the new gold exchanges in Dubai (for Indian demand), Shanghai and Singapore.  New gold only contracts are now being used so unless traders have the gold, they can’t sell.  In addition a new 24 hour COMEX 1 kilo physically-delivered contract is planned to accommodate Asian buyers who will now be able to have a real pricing presence in the US time zone with physical delivery in Hong Kong.  It will be interesting to see if the gold price manipulators try to attack the futures market while the physical market stays aloof.  No gold to sell, no play. The retreat by Switzerland from its peg to the Euro has added another dimension to the declining trust in central banks and fiat currencies.   I understand it has been an important game changing event in Europe. The demand for gold keeps rising, the supply is inflexible and so the gold price must rise. A major turning point was probably seen in the Dec Qtr of 2014 and the outlook for gold is very strong. Account Opening forms for Paradigm Securities are available to download here. Barry Dawes 27 January 2015 I own TBR, BLK, DRM, GOR, NST, CGN, MLX, ABU, KCN  

Blackham Resources Placement stock offer to eligible investors

Blackham Resources (BLK.ASX) is in Trading Halt to raise A$2.5m through the issue of 27.8m shares@ A$0.09 (close A$0.098 on 23 Jan). BLK has 4.4moz at its Wiluna Project and is seeking equity and debt funding to reopen the Wiluna Plant using nearby off site ores from the Matilda Project and from newly recognised high grade quartz reefs.   A full year production would produce over 80,000ozpa at <A$1000/oz ASIC. Contact me if you are interested  bdawes@psec.com.au BLK Term Sheet Download | BLK Jan 2015 Presentation Download  

Gold sector activity

by Alison Sammes
Recommendation to buy gold and best quality gold producers The ASX has hundreds of gold producers, developers and explorers listed with companies holding assets in Australia and throughout the world.   Should the US$ gold prices rise further as I expect then many of these stocks will be recover and make new highs.  It is encouraging to see that most gold producers have completed their capital expenditures and now have fully operating mines.  The shake out in the mining industry has cut operating costs everywhere and open cut mines in particular will benefit from the lower oil price.   Earnings will rise and these companies will soon be paying or increasing dividends. Paradigm considers that these producers and a few near term producers offer the best risk adjusted returns  at this stage of the market cycle and of course as the gold price increases the number of opportunities in higher risk/return plays surges.  Recoveries from stocks that have fallen 95-98% over the past several years could give some very high returns as they are revived.   To begin with Paradigm suggests buying a gold share portfolio from 16 recommended stocks.
  • Call me or Les Szancer on 02 9222 9111 to discuss these opportunities
The Resources Sector around the world has experienced a long and difficult bear market that has resulted in major declines in stock prices for almost all resources companies. You would be aware of the well-publicised price declines in iron ore and coal and most recently with oil as increased commodity supply has exceeded growth in demand.  Other commodities have been weak but not significantly compared to iron ore and oil.  Many resources commodities have real supply side issues over the next few years as key mines are exhausted and LME inventories are at historically relatively low levels. Consequently, Resources Markets have been difficult to read given that, in contrast, the major economies of USA, China, Germany and India are reporting robust economic growth rates and global equity markets are at or near all time highs.  Indeed, the two most populous countries, China and India, are continuing with substantial infrastructure programs that require many of Australia’s mineral exports. However, there is now some encouraging evidence that gold and the precious metals may be bottoming after over three years of decline and the shares of companies that produce them are now moving up.  Physical demand from India and China now exceeds global mine production and central banks around the world are buyers of gold so that the gold market is now tightening up.  Where will the new supply of gold be sourced? In addition, threats from the Islamic State terrorists are affecting Western civil safety and financial markets can be unsettled by  physical and cyber threats.  Gold bullion prices may have this crisis factor now creeping.  Gold is rising in most currencies and especially with the current strong US$. The key markets for gold stocks in North America are showing good signs of accumulation by new investors and strong rises have been achieved. Here in Australia, the ASX Gold Index has risen over 40% from its lows in November 2014 which were at levels last seen in March 2002.  This Index is still 72% below the 2011 high so there is still much upside. The US$ gold price has moved up to over US$1220 after falling to US$1130 whilst the A$ which has fallen over 20% to around US$0.81 has pushed the A$ gold price to over A$1500. It is notable that the ASX Gold Index peaked in April 2011 with a gold price of A$1404/oz but is now 70% lower at 2220 yet the gold price is currently around A$1500/oz.

Time for action

You have been receiving my Dawes Points newsletter and if you have been reading them you would have noticed the recent emphasis on gold and gold stocks.  You can download the last two letters here.   2 December 2014   Gold – Now ready to rise?  7 January 2015  Gold stocks up >35% in continuing recovery – much more to come Since the 4 December newsletter the ASX Gold Index is up over 35% and up over 40% from the November low. Some of those recommendations are up over 50% in just 5 weeks. I expect to see much higher prices for gold and gold stocks in 2015 and made recommendations and gave price expectation targets for 16 key gold stocks. Outstanding value exists in the sector amongst scores of companies but for now it is best to focus on the best of the current gold producers and a growing number will be dividend payers with yields well in excess of current interest income rates. The stocks are
Company Code Price Year end Target
Current producers      
Doray DRM 0.53 1.10
Evolution* EVN 0.80 1.80
Kingsgate# KCN 0.75 1.80
Medusa# MML 0.79 2.50
Metals Ex* MLX 0.84 1.80
Newcrest# NCM 12.12 20.00
Northern Star* NST 1.70 4.50
Oceana Gold OGC 2.41 6.00
Regis* RRL 2.14 4.50
Resolute RSG 32.5 0.60
Saracen SAR 0.31 0.90
Tribune TBR 2.94 4.50
Near term producers      
Gold Road GOR 0.27 2.00
Crater Gold CGN 0.115 0.50
ABM Mining ABU 0.315 0.60
Blackham BLK 0.075 0.25
*Dividend payer  #dividend currently suspended The improvement in the gold price and gold stocks may be a leading indicator for recovery in other resources sectors but there may yet be time for this to unfold before we need to commit. For those wishing to have exposure to gold bullion itself the Paradigm/Bullion Capital arrangement allows clients to acquire gold bullion through taking delivery or having safe custody in segregated accounts in secure vaults in various capital cities. Please call me or my colleague Les Szancer on 9222 9111 to discuss your needs in gold shares or gold bullion. 13 January 2015 Barry Dawes   If you are on our mailing list you would have received this recently, to you to encourage you to participate in the recovery of gold bullion and the ASX Gold Sector and, hopefully, later, the recovery of the entire Resources Sector after a bear market that has lasted almost eight years. You can do this by opening an account with Paradigm Securities for stock market transactions and also through Paradigm’s arrangement with Bullion Capital for gold bullion. A link to Paradigm Securities account opening forms is here.  Please call me to discuss a precious metal bullion account through Bullion Capital. Please note the account opening process can be complicated by the compliance process so please follow the instructions given in the package.

Gold stocks up >35% in continuing recovery – much more to come

by Alison Sammes

Key Points

  • Australian Gold Index up 7.8% in 2014
  • Australian Gold Index up 35% from November 2014 low
  • Nth American gold stocks testing downtrends
  • US$ Gold price still holding around the US$1200 level of a year ago
  • A$ gold price closed up 7.5% for 2014
  • Gold in other currencies moving higher
  • Gold stock recommendations NST, TBR, NCM, GOR, OGC, RRL, EVN, ABU, BDR, KCN, MML, SAR, MLX, RSG, BLK, CGN, DRM  
The technical evidence is mounting for a significant change in market sentiment for gold and the gold sector in North America and here.  The evidence may still be tentative but important changes seem to be underway in a number of markets.   The long overdue new bull market in gold and gold stocks looks promising for 2015. After 2014’s annus horribilis for resources stocks I look to enjoy 2015 as an annus mirabilis, one that is "amazing, wondrous, remarkable". Gold itself had a tough time in 2014 with early 2015 US$ prices barely higher than a year ago and the US Gold Index (XAU) was down 18% (after a 49% fall in 2013).  The ASX Gold Index (XGD) benefitted from a lower A$, improved operational performances and some better market sentiment to actually achieve a 7.8% gain with almost all of it in the last week of December.  Falling oil and other energy prices can only cut costs further and help operating margins. This is all very encouraging. The evidence shows that US$ gold is much the same as a year ago.  It was some times higher and sometimes lower but the low at US$1130 in November may prove to be the low for the correction from US$1923 in September 2011 in a 38 month bear market.  This is a good overall performance for gold against the very strong US$ and with so much pessimism about. Steady gold in a strong US$ meant that gold in other currencies in 2014 was much higher, particularly in Japanese Yen and Euros.  The technical evidence here is suggesting higher gold prices are coming in these currencies.   And this is the main reason people should hold gold  -  debasement of currency.  Just ask the holders of Russian Roubles.
Gold in Japanese Yen    Gold in Euros
US gold stocks have fallen a long way and this graphic from last month still offers an indication that the worst may be over and that if it is over then the upside is substantial. It would be good if the turn was here, but some bearish views still consider the bottom test should be the lows in 2001 with a much lower gold price! The gold stocks here are suggesting that the low is probably in place and should rally to new highs. The performance of gold stocks against gold has also been a disaster of epic proportions.  The key North American index XAU has fallen over 85% against US$ gold, since a peak in 1996, and is now still less than 25% of its long term average rating.   Encouragingly, the XAU has just made a tentative break of a short term downtrend against gold.  A rerating here would be very significant and particularly so if gold does move higher in US$. US Gold Stocks vs Gold
- Long Term    - Short Term
Another measure of gold stock valuations has been that against the general market.  After a magnificent ten year run of 16%pa against the S&P500 from 2000 to 2011 these golds stocks fell 85% to give up almost all of that gain over the ensuing next three years.  Extreme relative value now exists.  Also a short term downtrend is being tested and broken here too. US Gold Index against S&P 500
- Long Term - Short Term
Moving from the indices to the ETFs where volumes can be noted, both the GDX and the GDXJ (smaller companies) ETFs have seen a massive increase in accumulation in the past three months.
These are indeed tantalising and stock standard technical market-bottoming developments.  The implication is that gold stocks could strongly outperform both gold and the S&P500 for an extended period if the trends get momentum and strength.  Let’s keep watching carefully.

The US$ and T Bonds

Gold and the US$ often act divergently and T Bonds are really US$ with a coupon so should act as US$.  But gold has risen with a strong US$ over the past decade on a net basis. The strength of the US$ has been amazing, as has the performance of the US 30 Year T-bonds with yields down to just 2.5%.  Looking at the long term and the most recent market action suggests that a spike high may be developing. These markets have been far stronger than ever imagined so clearly no superior knowledge lies here with me!!  But. But. But. How long can this go on? US$ Index is overbought and is approaching the 30 year downtrend.  Short term it is `gapping’ in a strong move but this can lead to an overextended market and a trend reversal.
T-Bonds have rallied toward the top of the 33 year uptrend resistance line. I had expected a weak bond market in 2014 but we have had a surge. Short term trends show the same overbought market as the US$ Index – complete with `gaps’.   Possible trend reversal action.  But how high can the biggest markets in the world go?

Gold Sector - Annual volatility

The gold sector is also very volatile with gold having a 10 year average annual following volatility of about 30% (high less the low, divided by opening price) and gold stocks about 50%.
Gold Gold A$ XAU XGD
2015 3% 1% 7% 10%
2014 22% 15% 54% 57%
2013 31% 21% 56% 71%
2012 17% 15% 36% 44%
2011 43% 35% 26% 31%
2010 35% 27% 52% 58%
2009 49% 35% 82% 48%
2008 37% 46% 83% 68%
2007 38% 25% 53% 54%
2006 39% 32% 42% 23%
2005 30% 32% 52% 61%
10 Year Ave 34% 28% 54% 52%
It would be nice to see the volatility being positive from here and making January 2015 the low period.  The average as a positive gain of 30% for gold and 50% for gold stocks would represent major technical breaks of downtrends.

Gold demand

The importance of the rising middle classes of Asia, especially India and China, on gold demand for jewellery cannot be overstated.  The recent monthly demand statistics continue to show growth in imports to India and China at a rate that completely exhausts annual global mine production and recycled scrap supply and then eats into `inventory’.  The graphic was in last month’s issue. Who actually owns this inventory will be important.  Central banks are net buyers, China and India are unlikely to be sellers and the ETFs are down to just the true believers.  Indeed, rumours are circulating that the central bank in China has also been a very large buyer of gold. Perhaps some Middle East players may feel the pressure of lower oil prices.  Government to government sales to China would help. Recent data on sale of gold coins in the US and Australia shows lower figures but these have always been very small beer compared to India  and even much smaller against combined China and India.

A$ gold sector market

The weaker A$ has assisted the A$ gold price to over A$1500/oz so it has broken a downtrend and is now in an uptrend again. Gold in A$   The XGD here in Australia has provided some relief to the 43 month and 81% down bear market by ending with an annual gain in 2014 of 7.8%.  But only after making a new 152 month low in November at 1642 (last seen in March 2002) and making 6.5% of 2014’s gain in the last few days of December. It is worth keeping in mind that the A$ gold price was A$1408 at the 8499 peak of the ASX Gold Index in April 2011.  It is about 75% lower now with a 7% higher A$ gold price at A$1507. As noted in the last Dawes Points, the `wedging’ in the ASX Gold Index and many key gold stocks was suggesting a change was coming.  The move could be strong and `violent’ from here.  The latest portion of the XGD rally has broken a 20 month downtrend and acceleration could take place now. Hopefully it will be the Wave 3 that takes the XGD to new highs. ASX Gold Index (XGD) The table in the December Dawes Points gave some price targets for these gold stocks and the performance since 1 December 2014 has taken us part of the way. The market leaders were identified as NST, TBR, BDR, TRY, MLX and ABU with OGC, GOR, DRM and SAR as stocks with good market potential. In addition, important stocks such as NCM, KCN, EVN, RSG, MML and RRL had strong rebound potential from oversold positions where former market leaders may have had stale institutional shareholders bailing out.
Dec’s preferred stocks in bold 1 Dec Price 5 Jan Price Change
Index XGD 1701 2221.3 31%
Anglo Gold AGG

221

218

-1%
Alkane ALK

20

23

15%
Alacer AQG

205

277

35%
Beadell BDR

19

26

37%
Doray DRM

27

47

74%
Evolution EVN

43

74

72%
Focus FML

1.6

0.8

-50%
Kingsgate KCN

62

75

21%
Kingrose KRM

25.5

27.5

8%
Medusa MML

57

76.5

34%
Newcrest NCM

918

1173

28%
Norton NGF

14

13.5

-4%
Northern Star NST

96

167

74%
Oceana Gold OGC

207

230

11%
Perseus PRU

24

28

17%
Red 5 RED

8.7

9.0

3%
Regis RRL

129

198

53%
Resolute RSG

23

30

30%
Saracen SAR

21

28.5

36%
St Barbara SBM

8

13

63%
Silver Lake SLR

22.5

23.5

4%
Tribune TBR

265

290

9%
Troy TRY

46

52.5

14%
Gold Road GOR

20.5

28

37%
Crater Gold CGN

12.5

12

-4%
ABM Mining ABU

22

32

45%
Metals Ex MLX

70

82.5

18%
Blackham BLK

6.7

7.5

12%
Looking ahead, the gold stocks that interest me for the next six months are set out below with 12 month targets.  More will be added later.  Stocks are listed alphabetically.  All except GOR are producers or very near producers.  With most capex now finished, costs under better control and a high A$ gold price, cashflows should soon allow new or increased dividends. Top ranked are the best companies with the best prospects.  Second ranking is for stocks with operating or locational risks.  Speculatives are two house stocks with resource upgrade potential but likely to require additional capital over time.
5 Jan Price Target Dec 2015 Gain
Top rank
EVN

74

180

143%

GOR

28

200

614%

NCM

1173

2000

71%

NST

167

450

169%

OGC

230

600

161%

RRL

198

450

127%

SAR

28.5

90

216%

TBR

290

450

55%

Second rank
ABU

32

60

88%

BDR

26

40

54%

DRM 47 110 134%
KCN

75

180

140%

MLX

82.5

180

118%

MML

76.5

250

227%

RSG

30

60

100%

Speculatives
BLK

7.5

25

233%

CGN

12

50

317%

The platform is being set, from all the evidence I can gather together, for a strong gold price uptrend to soon take hold.  Physical demand is strong, sentiment is very poor, gold prices are rising in many currencies and the gold stocks may yet again be proving to be the key indicators of future direction of gold.  The relative performances against the major indices are also strong evidence and here in Australia we actually have some good gains in gold stocks that are showing recoveries and downtrend breaks. Keep in mind there is only very minor Australian institutional interest in the gold sector.  Potential for a robust catch up is strong. And Australian bank deposits are A$1,661bn as at end November 2014 with A$534bn in term deposits and A$632bn in savings accounts. Let the markets tell us the true story and if what Dawes Points hears is correct then a strong market should ensue. Keep in mind also that where gold stocks go, so do other resources.  It may take a little more time but resources will probably improve significantly in 2015.  Even iron ore and later oil will participate. Sydney 7 January 2015 Barry Dawes I own TBR, BLK, DRM, GOR, NST, CGN, MLX, ABU, KCN

Gold – Now ready to rise?

by Barry Dawes
  • Gold stock extreme negative sentiment readings dominant
  • Demand for gold and silver coins strong at lower price levels
  • Increased `open interest’ on COMEX gold and silver
  • `Wedging’ of gold stocks and indices showing probable trend change
  • Be prepared for a major upmove
  • Preferred gold stocks are NCM, NST,OGC, KCN, DRM, MML, GOR, ABU, CGN, BLK

The extreme poor sentiment readings for gold indices and the rebound of the US$ gold price from the important US$1137 low give good indications of the probability of an improved medium term outlook for both gold and gold stocks.  The technical picture for gold stocks has been encouraging and the valuations for gold stocks are extraordinarily attractive. The move could show considerable violence.

Demand for physical gold and silver has been very strong throughout the world and particularly in China and India where monthly imports appear to be well over 300 tonnes per month and so in excess of monthly mine production.  This graphic shows the robust increase in end-user/investor gold demand in China that was about 40 tonnes per month in 2009 and is currently over 200 tonnes per month.  This graphic shows essentially just gold imports and not Chinese gold mine production where China is also the world’s largest producer at well over 400tpa. Changes to India’s gold import rules under the new Modi administration have allowed imports to be over 150 tonnes per month. Perhaps even higher.  
Source: Koos Jansen   BullionStar

Demand for coins from the major mints has been very strong and supply has faltered.  As the gold and silver prices decline the market increases its physical demand. US mint sales have been very strong and Bloomberg recently noted gold sales from the Perth Mint (Australia at about 280 tonnes is the second biggest gold producer after China) climbed 89 percent in September to the highest level in almost a year as gold prices declined. Sales of gold coins and minted bars rose to a 12 month high of 68,781 ounces from 36,369 ounces in August.

Bringing these all together gives a model that says demand for jewellery, bar and coins is firm and rising and when combined with growing central bank purchases and a minor increase in ETF holdings now exceeds supply from new mining and a declining availability of scrap.

Gold has about 177,000t of above ground stock so any or all of this may be available for sale at any time.  Nevertheless, outside the ETFs any holder of gold in size is a central bank or a true believer and unlikely to be a seller and certainly not engage in dumping in the large quantities we have seen in recent years.  So the market could be remaining tight.  

Interestingly the US COMEX gold exchange is providing some fascinating data of the activities of traders in the futures market. 

As of late November over 50,000  100 oz gold contracts (5 million oz) had not been rolled over and might suggest party or parties were looking to take physical delivery of gold on COMEX.

Moreover, data from the Commitment of Traders (COT) has shown a 25% increase in new short positions over the past month or so.  Demand for delivery of gold could be a very important issue here and could lead to some real shortcovering.


Source: Mark Lundeen

The latest weakness in gold in October has coincided with a recovery in the US$ Index against an especially weak Japanese Yen and lower Euro.   These currencies make up around 13% and 57% of the USDX and both seem to be ready to retrace at least some of the recent falls so USDX might pull back here.  I am sure you are aware of the UNIVERSAL bullishness on the US$. 

The technical position on gold still seems reasonable even though it has been quite difficult in recent months.  Down but not out and today’s sharp rally may be suggesting lot more to come!

Market cross currents continue to make forecasting anything more than an uneducated guess but for gold stocks the `wedging’ of gold indices and many stocks makes for a greatly improved technical position despite that sharp fall on Friday 28 November and on Monday 1 December after the negative Swiss referendum result. The XGD here in Australia suggests a strong upmove is coming.

ASX  XGD Gold Index

Two key stocks are Newcrest and Kingsgate with strong wedging patterns and very high volumes.

However, overall trading volumes on ASX have been low compared to the MASSIVE volume in the GDX ETF in Nth America.

 

Of perhaps greater interest is this graphic of the Philadelphia Gold Index (XAU) which has an Elliot Wave interpretation that finished Wave 1 at the beginning of 2008 then fell into its GFC hole for wave A only to rally to new highs in 2011 to an irregular B wave.  The C wave exhibited a perfect 5 wave down process that should soon see the end of Wave 2 in this horrendous 44 month bear market.

 

Note that C waves into Wave 2 occur at the period of greatest pessimism and Pessimism ONLY exists at the end of Wave 2.   Every reason for gold to fall is out now on the front pages and gold shares are absolutely unloved.  The extraordinary build up of cash in Australia and globally is clearly Wave 2 Pessimism writ large and it can only go one way from here!

And after Wave 2 comes Wave 3!  The Optimism upleg.

Hopefully the improvement for gold and gold stocks will play out over other sectors so it should also mean better times eventually for all commodities and resources equities in particular.

Indeed the short cover rally in gold suggested in the last Dawes Points will probably follow through to all markets led by the strong US equity markets, Europe, India and China.  Australia, if it wakes from its torpor, just might follow.

But stepping back for while the observation is made that over the past several years of these volatile resources markets I have been very intrigued by market sentiment.  Markets are simply the meeting of buyers and sellers of goods and services and changes in price are all about the simple emotions of fear and greed.

I have previously quoted the words of the legendary investor Sir John Templeton (1912- 2008) who famously described fear and greed in markets by saying:-

`Bull-markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.’

For the resources sector we have had a lot of Pessimism for a long time and we have had no Euphoria let alone Optimism.

I attempted an embellishment of Sir John’s assessment by involving some Elliot Wave analysis and labelling the first leg (Wave 1) in the new bull market `Disbelief’, the first major correction `Pessimism’ (Wave 2), the second leg `Optimism’ (Wave 3), the next correction `Opportunity’ (Wave 4) then the final upleg being `Euphoria’ (Wave 5).

This then gave us this roadmap diagram which was first presented exactly six years ago on 1 December 2008 at Australia Day at Mines and Money in London.

It worked OK for quite a while and has worked wonderfully well for US and many other equity markets but certainly not for resources since April 2011.

So where are we now?

As we are all aware,  the Resource Sector here in Australia has had thumping after thumping for the 44 months as the industry is demoralised and investors have been savaged. Demand for most commodities have been robust over this time despite the calls for downturns in all the US, Eurozone, Chinese and Emerging Markets.  Most have had good GDP numbers and the PMI for China yesterday showed yet again a still expanding economy. It is notable that the commentariat has recently switched from claims of declining demand to claims of excess new supply from producers as the reason for the perceived weakness in commodity prices.    

The falls in oil and iron ore are very real and not perceived but many other commodities the supply/demand positions appear robust.

It would be easy to accept the conventional wisdom and take the bearish course but six major issues need to be considered and resolved.

  • the major global stock markets have achieved record highs
  • the world is awash with cash
  • the world’s bond markets have had over 30 years of falling yields
  • the current oversupply in some resources could still turn to shortages very quickly
  • the general public is typically out of the stock market worldwide
  • the resources sector is already priced for a global depression  

Taking a very strong US equity market and economic data that is very encouraging with very robust physical demand for gold certainly suggests a positive outcome is possible.

The bond markets continue to suggest `end of 30 year bull market’ characteristics and could  soon reverse sharply. 

So if the above analysis of gold stocks is correct (in today’s volatility who would ever know) then my roadmap becomes a little bit different but indicates basically the same outlook.

The market upleg began in Dec Qtr 1998 at the bottoming of the commodity market and peaked in 2007/08 and the GFC correction has extended over seven years.  The first leg and the correction have taken 16 years.  Note the long time frame.

The Optimism upleg if it does indeed occur could last at least 10 years and not just to 2020.  China has not fallen over and India will be there over the next few years to add to demand for bulk raw materials.  The Euphoria was expected to coincide with the peaking of aging demographics in China in about 2030.  

Coming back to gold.

We all know gold is a topic of hot debate with the protagonists of both the bull and the bear cases having a remarkably broad range of bases for discussion.  Inflation, currency debasement, hostilities, debt, interest income (or lack of it!), inverse US$, interest rates, jewellery demand, whatever. 

The arguments are fascinating and would keep us all engaged forever if we had the time.  In these notes I do try to keep the issues simple and with gold, complex as it is, it is a matter of fear and greed and thereby supply and demand.  Gold, with about 177,000 tonnes or about 50 years mine production available, is unlike any other market in that supply can’t be affected by weather, floods or  strikes and a few local hiccups in mine production here and there doesn’t have much effect  so it is mostly about fear and greed.

Gold stocks in the US and in Australia have declined sharply over the past 44 months and are trading at very low levels as shown in the graphics above.  Sentiment is clearly poor for holders of these shares and any potential buyer is gun shy and particularly very wary of risks associated with clear market manipulation. Short positions in some stocks are considerable.

When measured against gold itself these gold stocks are at massive discounts to the long term averages.  Some higher input costs, inadequate accounting for total costs, lower long term ore grades (as new mines have high volume low grade ore throughput) and bad management decisions have undermined relative values but however we look at them the positions are extreme.

Here in Australia the ASX Gold Index is still down 80% from its April 2011 highs and made a new low below that of Dec 2013 which I previously thought had to be the real low.

The shorter term market is best seen in this wedging pattern shown again for the XGD.  Technical patterns like this can be resolved with sharp upmoves and a two year view could put XGD at about 5000 again, up about 150%.

The same `wedging’ can be seen for so many gold stocks and with all the November AGMs out of the way now we have a good collection of presentations that give up to date data on output and costs forecasts.

In noting the 24 stocks in the XGD and a chosen few from outside it is possible to ascertain the market leaders with best relative strength.

NST and TBR have excellent operators and have made new highs in recent months so are clear market leaders with BDR, TRY,MLX and ABU also having relative strength.

OGC, GOR, DRM and SAR have good market character and are also BUYs.

Many stocks are just oversold and are wedging to give strong rebounds.      NCM, KCN, EVN, RSG, MML and RRL are BUYs.

I have given some notional price targets based simply on technical character and backed up by reviews of the latest AGM presentations.  The issues for individual stocks are far more complex of course but we are talking about stocks down 80% and at the start of a new bull market in gold.

Risk is low, reward is high!  

Gold Sector Dec 2014

 

Last high

Downtrend months

Price decline

Current price

2 Year target

Gain %

Rank Technical

Comment

   

 

 

 

 

 

 

 

XGD

Apr-11

44

80%

1701

5100

200%

9

Strong

ALK

Apr-11

48

93%

20

100

400%

9

Strong

AQG

Dec-11

42

82%

205

350

71%

9

Strong

BDR

Mar-13

18

83%

19

70

268%

9

Rebound

DRM

Nov-10

50

84%

27

100

270%

9

Rebound

EVN

Nov-10

50

81%

43

130

202%

9

Strong

FML

Apr-11

44

85%

1.6

3

88%

6

Avoid

IAU

Apr-11

44

94%

15.5

?

 

6

Wait

KCN

Apr-11

44

95%

62

400

545%

9

Strong

KRM

Apr-11

44

87%

25.5

60

135%

5

Rebound

MML

Apr-11

44

93%

57

250

339%

9

Rebound

NCM

Apr-11

44

78%

918

2400

161%

9

Strong

NGF

Dec-09

50

60%

14

25

79%

5

Avoid

NST

Sep-14

2

50%

96

300

213%

9

Strong

OGC

Dec-10

50

50%

207

400

93%

9

Strong

PRU

Sep-11

38

94%

24

200

733%

9

Rebound

RED

Sep-11

38

96%

8.7

?

   

Wait

RRL

Dec-11

38

78%

129

250

94%

8

Strong

RSG

Dec-11

38

89%

23

60

161%

9

Rebound

SAR

Dec-11

38

78%

21

90

329%

9

Strong

SBM

Dec-10

50

97%

8

?

   

Wait

SLR

Dec-11

38

94%

22.5

85

278%

6

Rebound

TBR

Aug-14

3

33%

265

500

89%

9

Strong

TRY

Dec-12

23

91%

46

200

335%

9

Rebound


Non XGD stocks I like

GOR

Apr-11

44

76%

20.5

150

632%

9

Strong

CGN

Sep-09

62

97%

12.5

50

300%

9

Strong

ABU

Nov-11

36

82%

22

90

309%

9

Strong

MLX

Dec-10

50

56%

70

300

329%

8

Strong

I own NCM, NST, TBR, BLK, ABU, CGN, GOR, DRM, MLX.