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Gold Continuing Basing Action #80

by Barry Dawes

Key Points

  • US$ Gold price continuing basing action after breaking 2011 downtrend
  • Gold in other currencies showing strength
  • Australian Gold Sector operating very well
  • Australian gold mine production, resources and reserves growing strongly
  • New record gold mine output likely in 2018
  • ASX Gold stock prices firm and ready for further rises
  • A$ to remain firm and rise from these low levels.
Talk to me about resources bdawes@mpsecurities.com.au +61 2 9222 9111 Since the first publication of Dawes Points in 2013 the theme has been a global economic boom that would involve strong equity markets and commodities and weaker global bond markets and would lead to a higher A$ and a very much higher gold price. These projections were made against a backdrop of falling commodity markets, falling resources equity markets, a continual avalanche of negative commentaries on China and the `Greater Depression' unfolding in the US. This oncoming Dawes Points benign environment would simply support a very robust Australian resources sector with a strong A$ that would keep everyone honest and to increase the wealth of all Australians. The concept of a financial Armageddon was rejected and the driver of a strong US$ gold price would be demand/supply and not gold's role as the asset of last resort in some sort of collapse. It is pleasing to see that most of projections have come to pass.  The US, German and most major Asian equity markets have continued to rise and even managed to produce new rally and/or all time highs in this Dec Qtr 2018.  The recent correction should be just a correction. Economic growth is strong and commodities are rising from their previous lows as they achieve continuing record high consumption levels and limited new supply. Even iron ore seems to be on its way to the forecast (Dawes Points #51 July 2016) of new highs over the next few years. The Dawes Points Wave View is still looking very good although it is taking longer than expected. The impact of good economic data on the Australian resources industry has been mixed.  It has generally disappointed in share market performance and has suffered from low market participation and, in my view, from a complete misallocation of capital.  Why is it that the A$2800bn in superannuation money is so risk averse and unsupportive of new resource or agricultural investment in Australia? The market requires more participants and capital to more accurately reflect the underlying value generated by managers in the current commodity environment. The big companies have reported strong earnings, balance sheets and dividends but market interest has been limited. From my long experience in this Australian Resources Market it has been perpetually clear that it is truly a rising US$ gold price that really drives market interest. And we are waiting. Shortages in nickel, rare earths, uranium, graphite, cobalt, iron ore, oil or copper can provide short term fluctuations and excitement in a particular sector but it is the US$ gold price that brings in investors to expand the overall market participation. So hence the preoccupation with the meanderings in gold prices. So where are we now? The long term view for us here starts with the abandonment of the 1944 Bretton Woods Agreement in August 1971 when President Nixon shut the convertibility of US dollars into gold in August 1971 and thereby ending the Gold Standard. This allowed currencies to float and gold to determine its own level.  It also allowed politicians and bureaucrats to play and meddle with currency and bonds. This graphic says after the 1980 US$887/oz gold price highs, a 20 year pullback brought gold back to sub US$250/oz in 2000/2001 before resuming the bull run. The 2011 downtrend has been clearly broken but US$ gold has pulled back to retest that downtrend.  This action is very positive even if the 2001-2018 uptrend has apparently been broken. Notable here is that the time frames involved in gold moves are substantial and for many, patience does run out. It is now late 2018 so we have had a bullmarket that began almost 20 years ago, the most recent spike high was over seven years ago and we have had five years of trench warfare in the US$1050-1375 range. This five year base has been grinding and the trench warfare has discouraged many investors and followers. Nevertheless, as discussed previously, markets often exhibit a symmetry and in this five year base we had about 30 months from the July 2013 low to the important December 2015 low.  It was a further ~30 months from that Dec 2015 low until the August 2018 low. So to keep this symmetry we should see US$ gold meander but then move up to ~US$1370 for another test, then a short pullback and then hopefully much higher. Time frame is about 3-4 months, but, who knows.  The runups in 2017 were suggesting breakouts then but we saw no follow through then so we do have to just wait. Gold also broke the April 2018 downtrend after forming and breaking out from a wedge.  This is very constructive. When US$ Gold does break out of this trading range, the speed and the price level in gold, will, in my view be powerful and high. So what will be the drivers? The Dawes Points view has been that demand from China and India has been absorbing all available gold from the West leaving it underweight and `short'.  This demand is likely to continue and also grows with rising living standards so that there will soon be very little freely saleable gold left in the West and thereby this demand will be driving the US$ gold price much higher. The demand numbers are large. Above ground gold is generally estimated at around 180,000 tonnes being all the gold ever mined. The demand from China and India since 2008 has been 26,000 tonnes or 14% of all gold in existence.  Annual demand exceeds Western mine production. Source:GoldchartsRus Global gold mine production of gold is about 3300 tonnes of which China contributes around 400t and Russia about 260t leaving the West producing about 2650t. Recycled gold scrap is about 1200tpa. Western demand for gold in the form of bars, coin, jewellery, industrial demand is around 1500tpa and Central banks are buying about 500-600tpa.  So this is at least 2,000tpa leaving only 1700-1800t surplus. The data shows Asia is importing over 3,000tpa. With the transfer of so much gold to Asia the net market in the West has been in demand/supply deficit over well over 1,000tpa for the past few years with the drawdown of gold coming from Western inventories from wherever. Strong evidence of this is available in gold flows of 400oz London Bullion Market bars from the UK to Switzerland to be refined into 1kg bars for delivery to Asia.  Little evidence is available of the flow of these 1k bars back to the West. The overall market is now in Deficit on the basis of this supply demand model. So the gold market is in this Deficit position with gold buying being `met' by sales of futures contracts that have no real physical backing. Hence, seeing the net position as well as 3000tpa to China and India it is clear that the West has been running down its available gold inventory.  Who used to own this inventory and is there any left? Demand/Supply should soon lead to a short cover rally in gold that should bring prices up to US$1375 and then drive it much, much higher very quickly. Gold ETFs are expected to see rising holdings in a rising gold market so this will add even further price pressure.

Gold in Currencies

It has already been noted that gold in US$ has already broken its 2011 downtrend. Gold in Swiss Francs has also broken its downtrend as has gold in British Pounds. However, gold has not broken this downtrend in Euros (but it is certainly getting ready to do just that). Nor in A$, but also the trendline break seems to be very close. Australian gold mining producers have done very well. However, the gold price in various currencies is really relating to the US$ itself. Where are we going here with this US$ Index?  I really don't know. This DXY Index at 97.38 is still below the 2017 high of around 104 and the technical pattern here provides no real indication of future direction. However, there are several factors worth noting here that may influence future levels of the US$.
  • Treasury Bonds prices are weakening due to
      • Increasing deficits increasing supply of bonds
      • Inflation rising
      • Less need for safe haven for funds
      • The US Fed is allowing its T-bonds to mature and not rolling over
It is hard to see a strong currency when its bonds are falling.
  • Leveraged hot money inflows to the US$ from currencies with very low interest rates
      • GoldMoney estimates US$5tn of this inflow – some unwinding possible
  • The Euro makes up 57% of the DXY and debt problems from Italy et al may weaken that currency.
    • Note that the now-sub 113 Euro is making 17 month lows against the US$
  • A strong US economy will help all other economies and encourage capital outflow from the US
Whatever is happening it is more likely to be inflationary outcome than a deflationary outcome. The next few months might clarify these issues as well and take the pre-occupation with US issues and bring the focus back to the Australian mining sector.

Australian Gold Sector

The A$ gold price has averaged above A$1600 for a number of years and has helped the Australian gold sector to mine profitably again. There is also a renewed vigour in the Australian Gold Mining Sector that is a testament not just to a higher A$ gold price but also to the entrepreneurial skills of the sector and the recognition of the still substantial potential of the Yilgarn Archean Greenstone Belt in WA that produces over 50% of Australia's gold mine output. The activity is most impressive and gold mine production is increasing. Australia's gold mine production will exceed 300tonnes (~10moz) in 2018 and looks set to climb further in the next few years.  Quarterly data up to June 2018 shows this clearly. In addition, several new mines in 2018/19 will add significantly to output with Kirkland Lake's Fosterville likely to bring as much as another 300,000oz in 2019 from the Swan Zone (1.16moz @ 61g/t!) alone with stope ore grades of over 70g/t and average mill grades close to 30g/t. 2018 should also see record gold output and exceeding the previous high of 3012 in 1997. Dawes Points also sees considerable potential in WA coming from the Pilbara as well as the Yilgarn. New important hard rock resources have been established by De Grey Mining, Callidus and Kairos that are showing the Pilbara can deliver orogenic gold. The Pilbara Gold Conglomerates also have very great potential and I am a believer here.  Novo Resources may actually have three mining operations underway by the end of 2019. The use of ore sorters is likely to significantly lower processing costs by reducing the tonnage to be treated.  Conglomerate grades of even 1-2g/t can be significantly upgraded for mills having to treat just, say, 15% of the ore feed and yet recover 70-85% of the gold. Don't rule out another 1-2mozpa coming from the Pilbara conglomerates at very low operating costs into 2020 and beyond. I made a presentation on the Pilbara Gold Conglomerates at the Precious Metals Investment Symposium in Perth last month. The data is compelling.  Copies available on request. The key gold producers on ASX have also been providing an impressive growth trajectory with a selected group of 21 companies providing 4.5moz production in FY18 giving a 13% CAGR since FY14. Northern Star, Regis, Evolution, St Barbara and Saracen have provided most of the growth. Australia's biggest gold producer Newcrest has had a few technical issues that have limited its production growth but have produced another 2.3moz from its mines in Australia and elsewhere. The pace of exploration is also picking up with nominal exploration expenditures likely to make new highs during 2018. The commitment to exploration and development has seen the JORC Resources of these 21 key companies grow by 30% over the past four years to 135moz at an average CAGR of 7% with the share of Measured and Indicated rising from 63% to 70%.  This is net growth after annual production which is now over that 4.5mozpa. Newcrest hasn't been so fortunate but has one of the world's largest resources base with very long mine life at Cadia and Lihir and its time will come soon. This resources growth is almost always extending mine lives, not just adding new projects. Reserves have risen faster and for these 21 key companies are now 70% higher at 50moz than in 2014 with a 14% CAGR. Over the past four years, these 21 stocks in this sector have added almost 40moz give a net increase of 20moz after producing over 19moz. Again Newcrest is consolidating its resource and reserve base but has numerous exploration plays that should add significantly to resources and reserves over the next few years. These companies have reported excellent earnings and balance sheets are now in extraordinarily good shape with cash levels unheard of in the Australian mining industry over the past 30 years. CRA, MIM, NBH, WPL,  STO etc never had these cash levels in the 1980s, 1990s and 2000s.  It was usually debt that was the key feature of their balance sheets. Strong cashflows and good balance sheets allow continuing capital reinvestment and also a robust dividend stream. The dividend flow has been steadily rising as EVN, NST and RRL have paid out an increasing share of earnings and SBM, OGC and NCM have returned to the dividend paying list. The very profitable East Kundana Joint Venture between NST and TBR/RND has resulted in some very good earnings numbers and shareholder activism has forced a special dividends of a gross A$250m (before TBR/RND cross shareholdings).  Many MPS clients received TBR dividends in excess of their entry prices for the shares! Investors who picked up on Dawes Points mantra that `gold stocks will be better dividend stocks than banks' have done well. The ASX S&P All Ordinaries Gold Index has performed well since the Nov 2014 low but it has failed to properly reflect the Australian Gold Industry. The 2011 downtrend has been broken here as well and has done a good retest of the downtrend and is now ready to head higher again. Australian Gold Stocks have been leading the world in the current reflation after bottoming in November 2014 and after the pull back from the July 2016 highs the XGD is moving up to test the 5300 level again. This has been a very volatile market so getting the timing right is very important. A break through 5300 should signal a strong push through with the Gold Sector being well backed by production growth, resources increases and earnings with good balance sheets and rising dividends to further help drive this market. However, a strong US$ Gold Price makes it all happen much faster. This Correction Graphic shows that this XGD Gold Index is still playing catch up to the previous highs in 2011. As noted, this ASX S&P XGD Index does not reflect the Australian Gold Industry and the large weighting to major gold producer Newcrest together with some irrelevant companies like Alacer distorts the true picture further. It also gives no relevance to exploration companies or smaller companies. This unweighted index of ten important Australian based companies with predominantly Australian production has totally outperformed the XGD Index but also Australian based companies with offshore gold production. Being on board the Terrific Ten led by Northern Star has been the place to be but many stocks outside this Index have performed worse than even the offshore producers. Ask me about the stocks that might be best for your portfolios. The Australian gold sector is certainly outperforming its North American counterparts where the XAU is really struggling. This graphic suggests (who can really tell here!) a further test of the downtrend but it seems constructive. Nth American Gold Stocks are pretty well despised and ignored by investors there and are at horrendous lows against the S&P 500 general market.  A wedge is forming so there might be some strength showing through over the new few months. Don't forget this long term relationship between the XAU and the US$/A$ rate. And then what this looks like with the 1913 105 year downtrend only ~US$0.05 away at a time when calls for a lower A$ are ringing. And you might to ask yourself what does this mean for the world if the A$ against the Euro breaks this wedging and jumps up sharply? And here, also wedging against the British Pound? It probably means gold's strength will soon be showing. Call me to discuss Barry Dawes  BSc F AusIMM (CP) MSA AFA Executive Chairman Martin Place Securities I own NST, TBR, KLA, BLK RIO, BHP mentioned in this report. +61 2 9222 9111 bdawes@mpsecurities.com.au 13 November 2018

Fake News for Gold Sets up Low – It’s buying time #79

by Barry Dawes

Key Points

  • Needless fake-out for gold
  • New highs in US equity market
  • US economy roaring ahead
  • Sub-Sector evidence strong
  • Inflation picking up
  • US Bonds look vulnerable again
  • Emerging markets picking up after pullback
  • China doing just fine
  • No reason for current price of gold and gold stocks
  • Still like the best  in the big stocks  – BHP RIO WPL OSH
  • Gold stocks are so cheap
  • Massive cash build ups in NST, EVN, SBM, RRL, OGC, SAR, PRU, PNR
Talk to me about resources bdawes@mpsecurities.com.au +61 2 9222 9111
This 2018 year is passing very quickly and the middle of the September Qtr is now behind us. What an extraordinary year so far. News on the economic front is frequent and strong as US consumer and business confidence rises and all sorts of economic indicators are moving into hyperdrive. This is indeed a US boom that is now truly global and pointing strongly to the Dawes Points Global BoomTM thesis. Heed the markets, not the commentators. The US equity markets rightly get the attention of the world with Apple becoming the first company to have a trillion $ market cap but so much in the US just seems to be getting better. Look at these:- The S&P500 is working its way higher and has just made new intraday and closing highs. As is the Dow 30 mega stocks. This channel analysis allowed us to call that Dec Qtr 17 sharp upmove and also to see the support in the correction and now a probable new high is ahead soon too. And the Russel 2000 looks ready to burst higher into its next channel. Expect the microcaps to do much the same. The basis for the higher share prices is well founded. Earnings are good and profit margins in tech companies are high and rising. In addition, this group of US economy graphics from World Economics and the Wall Street Journal are confirming boom and inflationary pressures. > These graphics are also highlighting the ever tightening labour market in the US but other data is showing that labour is even tighter in Japan (no immigration there!) and Germany. Inflationary pressures could just be much stronger than you might be imagining. The performances of some old fashioned sectors are are doing very well – retailers:- Dow Jones US Food Retails and Wholesalers Index And consumer discretionary stocks are out performing the S&P500. Consumer Discretionary ETF vs S&P500 And the transports led by airlines are hitting new highs. Dow Jones Transportation Index The 4.1% June Qtr growth is unlikely to be a flash in the pan that so many are flagging. The bears are still growling 9 years into this massive bull market. Still growling!! It was interesting to note that Warren Buffet's Berkshire Hathaway is also still aiming high and could soon move into its next channel to further new highs. Interest rates are rising to better reflect borrower risk and inflation. You will recall this from Dawes Points #78 where the CPI is equal to the 3% on 10 and 30 year Treasuries and the 4% on Finished Goods PPI is higher. And bonds in my view are readying for another major fall in 2018.

The US$ - Where to now?

The US$ is very strong because of……… you can fill this in because I don't know. The emerging markets crises in Venezuela, Argentina and Turkey with US$ denominated debts might be a key feature but I don't consider higher interest rates to be the dominant factor in the long term level of the US$. I have been agnostic on the US$ over the past few years and whilst this DXY US$ Index is remaining firm, it is well off its highs and lower than it in early 2015. So much bullishness at lower highs? Might be just some more of that fake news against gold. US$ Index – downtrend broken but not with real conviction Now whilst the relentless torrent of bearishness over Emerging Market economies is OK for Turkey, Argentina and Venezuela the rest of the world's emerging markets are just pulling back to the breakout line. This graphic is telling me that China and India markets are in buying country for uptrend that will last a decade or more. Morgan Stanley Institutional Emerging Markets Portfolio This analysis of Emerging Markets from Oxford Economics paints a very different picture than that from the Commentariat. But look at Shanghai from this graphic. Just pulling back to a 26 year uptrend. Many years of upside ahead. Shanghai Stock Exchange Composite Index India is just surging along as an important long term global leader. No Emerging Market claptrap here. Just more new highs. India's Nifty 50 Index

So what does all this have to do with gold?

Stating the obvious, as people feel wealthier, so they buy more. For much of the world's population in China and India it is buy more gold as you get wealthier. These countries together with most of Asia, Africa and Eastern Europe have already seen currencies debased and debauched by inappropriate rulers so gold is very important. While some commentators might be concerned at gold priced in US$, just think of gold making strong new highs in the currencies of Turkey, Venezuela or Argentina. Just like Zimbabwe a decade ago. The demand for gold is still strong out of Asia and it is stronger than the ability of gold mines in the West to produce. Deficits run to market tightness and then to shortages. And then to squeezes. The fake news for gold has focussed on the US$ but stories of margin calls on Chinese speculators in gold and copper and a hundred other reasons were trotted out as to why some commodities had a pullback and that after a US$200 15% fall from US$1365 to $1165 gold should now collapse for another decade. Dawes Points bullish expectations on gold have not been met so far and the 15% decline wasn't quite what was expected. Ouch! Well sentiment as shown by this gauge has reflected that 15% fall and I have seen other gauges at even lower levels. Gold Miners Bullish Percent Index Gold itself has come down to test the 2011 downtrend again. And has bounced back over US$1200. Daily US$ Gold Price > The long term graph broke its uptrend but more importantly it has bounced off that 2011 downtrend line in a very important manner. And the RSI is very oversold. Long term US$ Gold Price 1980-2018 US gold stocks have been savagely hit and the XAU Index sent back to the 2008 lows giving a decade of nothing. This is definitely buying country. Philadelphia Gold and Silver Share Index Gold stocks against gold bullion have provided another round trip but this too is screaming BUY!. Van Eck GDXJ Gold ETF vs US$ Gold But this seems to be very positive in the symmetry that has been created. Surely there is some major upside developing here. This is now a typical reversal pattern extended over five years. Resolution of this to the upside would produce a powerful upmove. US$ Gold 2008-2018 Stepping back is possible to see here a very oversold market pulling back on the flimsiest of fake news to a major long term buying opportunity. Do keep in mind that today's PESSIMISM is high and that pessimism ONLY occurs during Wave 2. Pessimism and Wave 2s represent the building up of cash by investors and build up in value in stocks. Wave 2 pullbacks are followed by Wave 3s which are major surges and lead into that Optimism Leg. We are there right now! In Australia we have been much more fortunate with strong gold production growth, earnings and dividends boosting our key gold stocks. Dawes Points favourites NST and CYL made new highs in the weeks before the sad scene in North America where gold stocks made lows equal to 2008 and that great performer Kirkland Lake, with its Fosterville 1.1moz @ 61g/t masterpiece and its bold investment in Novo Resources' Pilbara Conglomerates, also made a new high. With clients having their NSTs and CYLs rising, it was hard to be bearish. RRL, SBM, EVN, OGC, RSG and SAR have done well although these have been caught up with the malaise despite many recently reporting outstanding operating and financial results. And major cash builds. I have never seen so much cash on the balance sheets of important mining companies. Never during the 1980s or 1990s did the leading mining companies CRA, WMC, NBH or NDY ever have this much cash. It was always a matter of how much debt! This cash is likely to make these good companies into great companies. Site visits have recently been made to NST's Jundee and KLA's Fosterville super mines and I can assure you there will be much more coming out about these two great mines. Many smaller stocks however have been savaged so bargains exist all along here. Why have stocks like PNR, BLK, GOR, GCY been treated so badly? The gold price in A$ has held up reasonably well and the 13 year uptrend from 2005 is holding nicely so it looks ready for a bounce and resumption of the uptrend. Another break through A$1700 should lead to much higher A$ gold prices. Gold in A$ 2000-2018 It has also been apparent that silver has been behaving in much the same way as junior gold stocks. I see it as an important weather vane to closely follow. It has been threatening to move higher against gold for a few years now. It could be emboldened to advance quite soon. 20 Years of Silver Vs GolD Well known silver bug Ted Butler has credibly concluded that JP Morgan actually owns about 800moz of silver bought cheaply by continually keeping the price down and also has bought multi million oz of gold. Waiting for the squeeze to come. Copper has been brought back on similar concerns out of China with speculators and also copper-backed loans getting margin calls. China consumes about 50% of all copper and also other metals so whatever happens there is important. However, the longer term issues of consumption growth and the lack of new supply and a very small inventory buffer still says copper prices will be higher. Long term Copper Price 1980-2018 Even platinum is back at important support. Dawes Points has highlighted the long term strong relationship between Nth American gold stocks (and also gold) and the A$. Also I have been a bull of the A$ vs the Euro and Sterling. This is what these look like. A$ vs Euro 1999-2018 A$ vs Sterling 1999-2018 And of course against the US$ itself. We are close to breaking the 18 year 2001 uptrend in a very oversold position but the 105 year downtrend is now at only US$0.78. A$ vs US$ 1999- 2018 So it seems that the past few months has provided loads of irrelevant fake news like the continuing decline of China, the peaking of the US economy (the recession bears just seem to ignore the data shown here in this issue) and the collapse of the US equity market just because it has gone up (most of these people have been short since 2009). This has brought about a four month correction in a major long term bull market for gold that has been consolidating for five years. The outlook is just as positive as ever and extraordinary opportunities are here for resources stocks of all sizes and sectors. Barry Dawes BSc F AusIMM MSAFAA +61 2 9222 9111 bdawes@mpsecurities.com.au I own BHP, RIO, WPL, OSH, NST, CYL, RSG, PNR, BLK, GOR 22 August 2018

Global Economy maintaining strong growth mode #78

by Barry Dawes

Key Points

  • US providing key market drivers
    • Economy exhibiting great strength
    • bonds prices seem ready for another sell off
    • CPI and PPI heading above 3%
    • Equity markets seem still robust
  • China crude steel output may be heading for 1,000mtbpa in 2018
  • ASX Resource Sector indices ready to advance strongly
  • Global energy consumption accelerating again
  • Gold sector pessimistic sentiment should fuel reversal
  • Recommended stocks BHP RIO WPL OSH NST CYL
Talk to me about resources bdawes@mpsecurities.com.au +61 2 9222 9111
The Global Economy seems to be maintaining a strong growth mode with some impressive figures from the USA with its 4.1% June Qtr and some remarkable numbers from China The Trump Administration is continuing to surprise conventional economics and the Establishment Bureaucracies with his efforts to reinvigorate the US economy and remove distortions in international trade.  This latest tariff arrangement with the EU is a remarkable feat with the intention of zero tariffs and removal of non tariff barriers in the trade between the US and the EU.  We can only expect more of this, especially with China, and perhaps the outcome will be just as positive. The activity in the US is clearly positive with the formal data at new highs:- US industrial Production And indirectly with stocks related to consumer discretionary spending outperforming the S&P500 general index. Additional confidence is being shown through the US Banking Sector Index which is performing well although not as strongly outperforming the S&P500 as in 2017. The banks were the main beneficiaries of QE and are now lending out that capital. US interest rates are continuing to rise and it seems that bond prices are lining up for another bout of weakness. This is not surprising given that real returns on bonds are negligible to negative now that the CPI and PPI are creeping up. The last two months (May and June 2018) have seen 2.72 and 2.80% yoy increases in the CPI and 3.9% for both May and June for the Producer Price Index. With 2.9% yield on a 10 year bond and almost 3.1% on the 30 year then these are arguably negative real returns. Importantly, the velocity of circulation of money (GDP/M2 money stock) is now strongly positive:- So with the 4.1% GDP figure yet to feed into this formula it should now rise even faster. The bearishness over the US equity markets still appears strong but I found this very long term (120 years) graphic worth looking at.  The trend still appears to be your friend. Source:@jatkinson33 Whilst the current move up from 18,000 in 2016 might seem overstretched, the shorter term suggests this is probably not the case. The strong steel production figures in China reinforce so much of the commodity bull market thesis that Dawes Points has been continually been presenting:- The commentary on China’s vigour in improving air quality by maximising Fe units (1 unit = 1% = 10kgs Fe (iron) per tonne) in iron ores by severely discounting prices on lower grade ores is well known but it is also having stronger impact on its own remaining domestic ore production.  China iron ore production is almost entirely lower grade magnetite ores requiring considerable beneficiation and often is accompanied by titaniferous magnetite(low grade ilmenite) and also some vanadium.   Alumina and silica as impurities are also attracting larger demerits for China sourced Fe units. Closure of these mines will make both low grade ilmenite and vanadium that much tighter markets. China’s iron ore imports can only increase and with global freight rates on the rise again, Australia’s attractiveness for better quality iron ores can only improve. BHP, RIO and FMG all reported strong June Qtr iron ore shipments to give record annual figures. The pricing of iron ore is still robust although higher freight rates are eating into the delivered price into China ports. The MPS commitment into Magnetite Ltd (MGT.ASX) with many billions of resource tonnes of high purity low mining cost magnetite ores remains firm although the timetable on achieving its merger has dragged on considerably. The outlook for industrial metals remains firm despite the sharp falls during the Trump tariff issues. The price falls appear to be now overdone and no impact is notable on the still-prevailing decline in LME inventories. These graphics of the ASX S&P resources sector indices show that technical breakthroughs have been achieved, retests made and the uptrends should continue. XMM  Metals and Mining  2006 -2018 ASX S&P 300 Resources  2006-2018   ASX S&P Small Resources  2006-2018 The Mining Sector of the Australian Resources Industry is doing well but the Energy Sector has a very robust global backdrop. The 3300million people in China, India and ASEAN have shown the world an insatiable demand for energy and now Non-OECD makes up 59% of global energy consumption.  China has well exceeded the US in energy consumption and now takes up 23% of all energy. Faster consumption growth by Non-OECD with 60% of total energy demand means global demand is now accelerating. As has been pointed out on numerous occasions this graphic on energy consumption by fuel type gives a useful pointer to future energy demands. The key features are the very small share from `renewables’, the massive future gas requirements of China and India (mostly LNG) and the renewed interest likely in nuclear energy. The uranium market is now showing strong signs of a major demand surge, a tightened supply availability and much higher uranium prices. Ask me about the opportunities in uranium stocks. The significantly reduced universe of ASX Oil and Gas stocks offer outstanding value. Oil is in excellent shape with record consumption at a time when OPEC is now capacity constrained and Iran and Venezuela have sharply declining exports. Prices have rallied nicely and a period of consolidation is likely before oil prices move much higher in 2019. Gold has been very frustrating for all but the CPI/PPI issues and the bond market positions could be the trigger that turns this market higher.  Pessimism on some indicators is at near record levels as is the level of short positions held. A sharp reversal is possible.  Seasonally it is time but we just have to wait for the markets to confirm. Northern Star (NST.ASX) made a new all time high last week and it is well on its way to probably becoming a 1mozpa producer by FY21.    This stock has over A$500m in cash and remains a Strong BUY. Our other favourite Catalyst Metals (CYL.ASX) is also up near its highs and is extremely well placed to make substantial new highs in the coming year. It should discover another Bendigo (22moz past production) and current drilling north of Kirkland Lake’s extraordinary Fosterville (Swan Zone 1.16moz @61.2g/t within 1.70moz @ 23.1 g/t) is well worth closely watching. Catalyst Metals’ extensive tenement holdings in Victoria.
  • Excellent high grade results along strike from Bendigo.
  • Greenfield gravity based drill targeting North and along strike from Fosterville  (EL006507)
Technically, CYL looks very positive. Barry Dawes  BSc F AusIMM MSAFAA +61 2 9222 9111 bdawes@mpsecurities.com.au I own BHP RIO WPL OSH MGT NST CYL mentioned in this report. 30 July 2018

Very positive Outlook – 15 years of Global Boom? #77

by Barry Dawes

Key Points

  • US equity market steadying to move higher
  • NASDAQ Composite at new highs
  • Small caps in US at highs and readying to rise further
  • Global equities confirming positive outlook
  • ASX small caps likely to follow suit
  • Technical revolutions underway
  • Resources to do very well
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111  
What extraordinary times we live in! In amongst the most bearish sentiment in decades the past few years have provided some of the most stunning equity market and economic performances of a lifetime. And it can only get better. Yet so many around the world are still on the sidelines. Long time readers might recall the references in Dawes Points a couple of years ago to the cabal of politicians, bureaucrats, financiers, welfare activists and recipients and the fawning media that feasted on the spinoffs from around the raising of almost US$100tn in bonds issued at `free money' rates to accommodate worried capital seeking refuge from the coming `Greater Depression'.  Bonds reached 35 year lows in yield (including bizarre negative yields) and highs in price but that was just a great confidence trick because the quality of the issuers was probably never poorer and the prospects of investor getting the `return of their money rather than a return on their money' (Samuel Clements) was never riskier. That game is now over and reality is that the refuge for capital was never really necessary and that the needs of individuals globally are rapidly confirming that rising living standards for at least 3300m people in Asia are more important than short term US or ECB Monetary Policy. The demand for capital to invest in basic infrastructure of accommodation, energy, transportation, food production and water together the myriad of new technologies that are now extending well beyond web-based applications to include transportation, energy, manufacturing, robotics and domestic technologies is very robust.  This demand will be funded by the vast reservoirs of cash bank deposits and redeployment of funds in bonds that are not being rolled over. An additional factor has emerged in the disruptive actions of one Donald Trump who just happens to hold the position of the chief executive of the world's most powerful nation. Like him or loathe him but `Cometh the time, cometh the man'. The markets themselves have been anticipating this disruption through their actions over the past few years and through the application of technologies such as mobile phones (are they really just phones anymore?), global reach media and the numerous goods and services that can be supplied or ordered online the disruption is here. They have also been suggesting a far better world is developing for so many people despite the problems of global debt, Islamic imperialism and the Axis of Evil being Iran and North Korea. Mr Donald Trump may be unwittingly (or quite deliberately – who can really tell) be the catalyst that removes the Iran-NoKo threat to global order and ushers in a global boom of major historic proportions. Readers might recall this from graphics from an earlier DawesPoints of how the Sth Korean KOSPI was by making new highs and anticipating reunification quite some time ago in Sept 2017 and how it ignored the missile launching hysteria earlier in 2018. The internal uprisings in Iran may be pointing out the end of another oppressive regime there.  Likewise for Venezuela. So many people have been reluctant to spend because the outlook was so forbidding. With markets up so much around the world, who's sorry now? Just look at the massive reduction in unemployment in the US as confidence is restored. In the US, which is just one of the leading economies, the strong performances of the NASDAQ Composite and the Russell 2000 have been overshadowed by the those of the S&P500 and the Dow Jones 30 which all the doomsayers and handwringers delight in telling us that a recession is imminent and a market crash is inevitable. Australian investors seem to like to listen to these doomsayer dummies which along with poor performances by the finance and banking sectors here have allowed the All Ords to be a chronic underperformer.  Nevertheless, it is reluctantly joining the global bull market. In contrast, the Dow has confidently bounced off its breakout line and is now ready to move higher. The implications of this, the commentary above and the graphics below are pointing strongly to the Dawes Points Global Boom ™. The NASDAQ Composite has ignored the bears and has made new highs and the recent successes of Apple, Microsoft, Amazon and Google  with growing global sales (Apple had 65% of March Qtr revenues from non-US sources !) give strong indications that there are many years left in this extraordinary bull market in equities that will bring commodities along with it. The channel analysis is indicating much much higher levels for many sectors as new technologies like Artificial Intelligence, VR/AR, Robotics, Electric Vehicles, Medical Technologies, High Speed Rail, Space Technology and new energy sources create important new industries. Note that despite the all time highs, many of these indices are at within the lowest of the uptrend channels ! This graphic for Apple is extraordinary.  It is at all time highs yet stiil within the lowest uptrend channel. This is not bearish ! And Warren Buffet recently purchased 75m shares for about US$13bn at around US$170per share to take his holding to 170m shares.  He wanted to own the whole company ! Apple with 5bn shares at US$190/share is closing in on US$1,000bn market cap and is just 14x EPS! This strong performance is not restricted to the mega caps. The Russell 2000 Index for small caps is doing well and also making new highs as stocks here embrace these new technologies. This index and the following Russell Microcaps Index are showing the spirit of entrepreneurship that these new industries are reflecting. This newly discovered Russell Microcap Index is also making new highs. The pressure on the upper trend channel line to get into the next channel is strongly reminiscent of the early September 2017 position of the Dow before that fabulous 4000 point run. Look at this company and its performance. Edwards Lifesciences There are many more like this. Not your usual widows and orphans conservative go nowhere dividend payers stocks. The doomsayers and handwringers can't even be bothered to look outside the S&P500 Index itself to see the lay of the land. In addition, while the tech sector may be leading, bricks and mortar in the pentup US housing requirement as the Millenials finally enter the market and raw material demand in Asia will ensure the commodity sector will also do very well. New Privately Owned Housing Units Started 1960-2018 So while the doomsayers are watching in the rear vision mirrors, the new waves of entreprenuers are globally changing the landscape and creating vast value while disrupting the old order.

The swamp IS being drained of the cabal alligators.

Commodities are doing very nicely now and the big picture is for much more to come. The prices of the traditional LME metals are rising and nickel is rejoining the party. Price index Most of these metals have demand profiles that should exceed supply for some years yet. And look at China crude steel production in May 2018!  Up 8.9% on a year ago.  China recession ??  Where are those China bears ?  Stand up please and just leave. And who has been saying Global Boom TM ?? And whilst commodities themselves are good, this sort of thing where the producers are generating so much cash is much better! Whilst this is all good fun and is making money for the early adopters there is an express train running in many of the small to mid cap resources stocks. The Mining Boom of A$440bn of investment in iron ore coal and LNG is really paying off with strong earnings being reported by the major key players and Australia's resources sector export revenues are surging as well. But resources are far more than this. I have been a great supporter of the entreprenuerial sector of the Australian Resources Industry. The results have been very impressive and can be best seen through the gold industry. Exploration is up And Australian gold production is heading for a record in 2018. The appalling and totally unrepresentative ASX.XGD Gold Index has maintained its uptrend, broken its 2011 downtrend and has broken above the critical 5000 level. And look at this seasonal pricing structure.  That's 30 years of data saying June often provides a low ! The opportunities in small gold stocks are numerous.  The EOFY Sale opportunities are extraordinary ! But those in the copper, battery metals, oil and gas have been busy as well. Exploration data figures are now flooding in with many impressive results announcements in such volumes that are difficult to absorb. This is indeed a boom. So just think about those hundreds of ASX small cap resources that are remarkably cheap.  Gold, battery metals, oil and gas, industrial metals, mineral sands, uranium, rare earths, iron ore and coal. It is all there and reflecting the resource sector and its special brand of geotechnical entrepreneurs. ASX Small Resources is ready to fly! Make sure you take advantage of the current End of Financial Year Sales !! Value is remembered long after price is forgotten but those low price purchases early in bull markets are never forgotten. Could you forget CDU at A$0.40 on its way to A$10, or MMX A$0.25 at A$6.40, SMM at A$0.046 to A$6.47, CMR from A$0.10 to A$6.25?  Custom Mining from A$5 to A$105 plus MacArthur takeover?

Where will these be in five years time ?

PSA MGT HPR CTP RIO BHP MLX WGX IMA BLK ARV DEG ASP NST Sitting and growing richer. Will you be there with me? Call me to participate +61 2 9222 9111 Barry Dawes BSc FAusIMM (CP) MSAA I own all the stocks mentioned in this report. 21 June 2018

Gold is now poised to rise #76

by Alison Sammes

Key Points

  • Australian Gold Sector leading global reflation
  • ASX XGD Gold Index pushed through 5000 and breaks 2011 downtrend
  • A$ Gold Price at ~ A$1750 also breaking 2011 downtrend
  • Australian gold production reaching new record in 2018 >310tonnes
  • Australian gold resources rising
  • Exploration and development increasing
  • Gold sector earnings rising
  • A Corporate M&A rush likely to unfold
  • Global macro outlook outstanding for gold
  • Large cap golds well ahead of minnows – time for catch up
The past few years in gold have been fascinating for those who can take a longer term perspective beyond the weekly and daily gyrations in the markets and see that the time has come for gold to reassert itself in the market place and for the value in gold mining and exploration companies to become better recognised. The key longer term undercurrents come down to supply & demand and for gold, with that unique position of having all its historic output of around 180,000 tonnes still available, it is the what and the wheres of gold inventory transfers that are most important. The price itself of gold may be an important driver in stock valuations in this sector with movements due to US$, interest rates and wars etc but to me the most important matter is the transfer from the West of most of newly mined gold and freely tradeable gold bullion inventory to the East being India and China predominantly but with Turkey, Russia and the Middle East also as key gold purchasers A time will come, and soon I expect, when the rundown of the this freely tradeable physical gold in the West will actually be felt.  The tightness in gold will become unprecedented. Looking at the overall market place it is clear that the gold bull market thesis has not yet been embraced as indicated from the generally weak performances of gold equities around the world and in particular in North America. The important Philadelphia Gold Index (XAU) bottomed in early 2016, had a rapid 6 month 200% surge and has spent the last 18 months causing emotional stress to the bulls and nothing clear for the bears.  The TSXV has been a Blockchain and Cannabis sorry story where small resources have been all but ignored. That is also obvious from the broader ASX gold sector because many quality gold stocks are still quite friendless and the ASX XGD Gold Index has also been going sideways for over a year. But that is not quite the reality. The A$ gold price and a rejuvenating Australian gold industry have generated some outstanding returns from Australia’s geotechnical entrepreneurs. This graphic shows the strength of the Australian Gold Mining Industry over the past five years with my unweighted index of ten Australian gold producers (ex Newcrest) with operations in Australia. This index made its low in June 2013 and is almost 500% higher today. In contrast the ASX All Ordinaries Gold Index didn’t make its low until November 2014 and is up ~200% from that time but it is just 150% from June 2013. This graphic presents a wholly different view of gold sector in Australia. The Terrific Ten have been wonderful with earnings and dividends flowing and are a great credit to the Australian mining industry. These figures on growing cashflows and cost reductions from Evolution are typical of the results from NST, RRL and SBM so far. Evolution Mining Ltd operating results FY2013-18 But the ASX XGD only looks like this. Importantly however, the 2011 downtrend has now been broken and the 5000 level has been breached again in this latest surge. This should lead to a rapid move in the XGD and is likely to be leading the US$ gold price higher. These Australian gold producers have been leading the whole global economic recovery since their lows in June 2013. From these contrasting graphics, the ASX XGD has failed abysmally in providing a proper picture of the true state of the Australian Gold Mining industry. A gold index undiluted by pointless inclusion of foreign companies with no Australia assets would be a start. The underperformance of Newcrest over this period, particularly since early 2015 has held back the Index but it has been the woeful makeup of this index. The index has simply not reflected the remarkable gains made by the likes of NST, EVN, SBM, RRL, GOR and SAR. The numbers look like this
Low + from 2013 + from 2014 low
MPS Terrific Ten stocks(ex NCM) Jun 2013 498% +390%
Eight dom-based with OS assets Nov -49% -13%
ASX XGD Gold Index (25 stocks) Nov 2014 +149% +205%
The Australian gold industry has been severely handicapped by this Index. But looking at this performance it is the Australian mining industry at its best.  Entrepreneurial geotechnicians who have found new deposits, reopened old mines, revitalised existing operations and earned cashflows that have built excellent balance sheets and rewarded shareholders. And done it quickly and efficiently. WA has been the leader with the services and infrastructure well in place. The reinvigoration of Kalgoorlie, Leonora and now the Yandal-Wiluna Belt is providing excitement. Western Yilgarn from Boddington and Katanning and out East to Gold Road’s Yamarna Belt are also providing new resources and new output. Kalgoorlie has had the Big Pit, Kanowna Belle and the Zuleika Shear and NST and EVN are key players in this reinvigoration. NST has two milling hubs to treat ores from all around the Kalgoorlie region. Leonora has the most impressive Gwalia Mine. And now with the rejuvenation of Jundee, reopening of Wiluna, action at Bronzewing and new management for Darlot, this Northern Yilgarn Wiluna-Yandal region can only get more exciting. The net effect of this has been a remarkable recovery in WA gold production, producing around 70% of Australian output, such that a new quarterly record is likely to be set in 2018 and 2018 exceeding the previous high of 312t in 1997. It is ironic that WA did not really participate in that US$250 to US1032/oz rally in 2008 as its output plummeted 48% over that decade but the recovery is well underway.  The sharp increase in Australia’s gold output in Mar Qtr 2018 to 317tpa is a promise of more to come in 2018 and 2019. This Dept of Industry graphic provides a useful summary of the distribution of the Australian gold industry and outside of WA. The rising A$ gold price has also stimulated exploration and discoveries, brownfields and also some greenfields and we can expect more discoveries over the next few years.  We are seeing the opportunities and the results now on a daily basis. Despite these strongly upbeat numbers we have a true dichotomy of the likes of the Teriffic Ten and a few hundred smaller companies that are still doing it tough. This graphic contrasts the Terrific Ten with 15 smaller stocks closely followed by Dawes Points. Clients have strict orders (wisely) not to sell any NST EVN SBM RRL etc but the pressure of the difficulties some of the smaller stocks are facing purely because there is insufficient capital committed to the sector and trading liquidity is still low. The market has clearly not yet embraced the big gold bull market thesis here in Australia. The excitement over 2015-16 was strong for all types of gold stocks but since the highs in July 2016 the dichotomy has been strongly pronounced. The reluctance of fund managers, financial planners and investors in Australia to embrace the now very obvious Dawes Points Global Boom TM and invest in Australian Resources Stocks has meant that this has been a much delayed bull market but much delayed markets have a habit of catching up quickly and running for much longer. The picture for Dawes Points has been very clear for some years and it is all unfolding as suggested although the time table for the general resources market has been longer than anticipated.  This has been unfortunate for traders in the markets but those with an investment approach these past few years in the better quality gold stocks have been outstanding. Coming back to ASX XGD Gold Index while we can be critical that its 25 stocks is unrepresentative of the Australian gold industry it still is a published index and can be interpreted accordingly. The ratio of the Gold Index to A$gold is probably meaningless overall but it does seem to have some meaning to the marketplace because it has provided support and resistance over the past 16 years or so. < The market happily played 4, 5 and 6 times the A$ gold price previously. The numbers for the ASX XGD Gold Index become:
A$ Gold Price 3X 4X 5X 6X
A$1750 5,250 (now); 7,000 8,750 10,500
A$2000 6,000 8,000 10,000 12,000
Interesting thoughts. Keep in mind that over 2000-2008 the earnings of the Australian gold stocks would have been almost non existent.  Most of the action was in Africa and Sth America and with loads of overseas stocks listed on ASX for……(?) what reason? Gold itself in A$ is creeping up and has also breached the 2011 downtrend line and A$2000 is quite realistic target. Gold in a number of currencies is also above their respective 2011 downtrend lines so the the move in all currencies can’t be far away now. Gold Sector turnover as a share of total ASX All Ords turnover is still a respectable >3% and likely to move higher along with the better A$gold price. To better appreciate the overall mood of the current market place it can be seen that only a handful of gold stocks are up in 2018 with the Terrific Ten figuring prominently. The average is only 7.5% whilst the XGD did 4.3%. The past four quarters have been very tough for most of these stocks. Amongst 53 other stocks monitored by Dawes Points, less than 40% were higher in 2018 and the average was -14%. There was a lot of volatility in these stocks over the past four quarters but few were through true operational disappointments and most were trading liquidity issues. A lot of gold resources have been discovered or delineated by dozens of these companies. How many will become like the Terrific Ten?  With the Australian mining sector entrepreneurial spirit there will be many winners here and given the strong difference in market ratings of the big stocks and these it is certain that M&A activity can only increase.

The Macro Scene for Gold

The Dawes Points official view is that demand from China and India et al is tightening up the gold market to an extent that physical gold will be relatively difficult to come by in the West. This drive for gold comes from rising living standards amongst 1400m people in China, 1300 m in India and another 600-800m in ASEAN and the like. The rising living standards are also driving economic activity and the attractive economies and equity markets are reducing the need for capital safe refuge in US TBonds. The conclusion is that long term gold prices will be much higher and probably driven by a tight squeeze on available gold. Gold in US$ is hopefully completing the very last stages of its basing and reversal from the decline from the US$1923 in September 2011 and the next move up that passes through US$1370-80 should produce a powerful surge. The long term shows the rapid and powerful from the 2000 lows around US$250 to US$1923 in September 2011.   Completion of the 6-7 year pullback and resumption of the bull market gives very high technical targets. Bond prices and yields need to normalise to properly reflect a true market and so higher bond yields are necessary to match risk and it is likely that bond prices will continue to fall for years yet with occasional bear market rallies. Total Global Public Sector debt is US$61trillion in this World Data graphic and growing. The issue is complicated and exacerbated by the whole debt matter of bond issuance by governments to fund current social spending. Current refuge capital parked in these bonds is likely to leave for better opportunities as the bonds mature. Who will buy the new issues?  Pension funds will still have a growing need for income to match obligations and central banks will buy the rest.  But even US$2-3tn leaving and going to property, equities, commodities and gold will send up prices here. This graphic is disturbing for Europe.  France has 30% of GDP as spending as public social spending. Its total budget is now 52% of GDP. As interest rates rise, so will government budget interest payments. Note this yield for the US 1 year Note:- The last maturity schedule for the US Treasury bond portfolio that I have seen was 2016 and the overwhelming majority of the portfolio was less than 7 years.  Very little had locked in the low 20 and 30 years rates when they were well under 3%. Most of the portfolio was taking advantage of the low short term funding rates. This is likely to have been a dangerous gamble as these yields rise and new bonds need to be issued at higher yields and coupon costs. Let’s say US$1tn of theUS$21tn was for 1 year bonds. In mid 2015 this 1 year rate was 0.4% so the interest bill was US$4bn. Today, that 1 Year money will cost US$22bn. At 5% it is US$50bn. Across US$21tn of mostly short maturities a 2% interest rate rise is US$400bn.  Good bye Budget. In Europe and Japan where yields have been lower than in the US and bond maturities generally shorter then the impact will be greater on budget interest expense outlays. So this issuance of bonds will need to accelerate and so bond prices will continue to fall – for many years yet – as supply increases. Some swamp draining will be required but it is probably already too late. The rise in rates at the longer end of the bond maturities will just continue and at a faster rate than at the short end. While this is all happening we are finally seeing an expansion in the velocity of circulation of money as the banks increase their lending of all their previously hoarded QE funds into a booming economy. The impact on the economy will be positive and the Trump tax cuts, capital repatriation and technological revolutions will be inflationary. The banking sector is now outperforming the S&P500 so there is not yet concern about failing banks here. And so when we see strong housing in the US as the MIllennials finally make that housing commitment and that 6 million dwelling shortage becomes really visible, the result is clearly inflationary demand for housing and housing raw materials and furnishings and appliances etc. At this stage individuals and funds everywhere will be looking to buy gold. Will they find it? May be in China or India.  Or perhaps not. This combination is likely to lead to much higher gold (and silver) prices than you had imagined. Do you have enough of the Terrific Ten or those ridiculously cheap minnows? Call me to discuss +61 2 9222 9111 Barry Dawes BSc FAusIMM (CP) MSAAF I own many stocks mentioned in this report. 7 May 2018 bdawes@mpsecutities.com.au +61 2 9222 9111 I own or manage in portfolios I control: NST EVN SBM NCM GOR DCN PNR CLY WGX

Gold Outlook #75

by Barry Dawes

Key Points

  • Australian Gold Sector is leading global resources recovery
  • Earnings, gold production and dividends rising
  • Gold Price Volatility very low – but likely to rise again
  • XGD.ASX Volatility also very low - calm before renewed action?
  • Gold price technicals very strong in medium and long term
  • A$ gold price ready to break 7 year downtrend
  • Australian Gold stocks prices appear to be ready to rise
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
The Australian Gold Industry has been a global leader in operational activity and profitability over the past five years and, according to the Dawes Points data base, it has been the leading sector amongst most things raw material globally. The XGD.ASX Gold Index bottomed and turned up in November 2014, more than 12 months ahead of general resources stocks, North American gold stocks and US$ Gold itself which essentially all turned in Dec 2015/Jan 2016. The XGD.ASX rallied 250% from that Nov 2014 low of 1642 to reach 5760 in July 2016 before pulling back to 3345.  The Index has since slowly made it way higher and has been flirting with the 5000 level and wanting to move higher as the company operational actions continue to show the creation of shareholder value. The hard evidence is being delivered as rapidly increasing cash balances across the sector. Gold production is at 18 year highs and on course to make new record highs above 1997's 314 tonnes in 2018 and beyond. Western Australia is indeed the Golden State and is now participating fully in this great bull market in gold. Note that WA basically did not participate in the 2000-2008 section of the bull market.  Gold production here declined almost 40% while the gold price rose from sub US$250/oz to over US$1000. But the Australian Gold Industry operators are made of stern stuff and have brought about that brilliant recovery after taking back mines operated by overseas companies driven by different agendas. The leading companies, NST, EVN, NCM, SBM, RRL and SAR have done marvellously well. Gold production has risen, operating costs have generally fallen, ore resources have grown and mining reserves increased for longer mine lives. Stock price performances have been good with NST, the star, hitting all time highs and being closely followed by SBM which has also done exceedingly well by passing its July 2016 highs.  But all the leading (and many more emerging) companies have done well and are poised to do very much better. Very soon. These leading Australian gold companies are now paying dividends and many of the smaller players will also join the list of dividend payers.  And so they should. Gold mine resources are a wasting asset and shareholders need to be paid for providing the capital. The better news though for shareholders is the GROWTH in resources and reserves of these companies primarily through near mine exploration. This means that dividends from current operations will be paid for longer and at a higher rate. This increasing maturity in the Australian Gold Sector is likely to lead to corporate M&A activity. The current corporate activity seems is fascinating. Market Leader NCM is very actively upgrading its own operations and also acquiring strategic holdings in some very attractive large scale development JV plays.  Investment in Ecuador for Solgold's Cascabel and Lundin Mining's Fruta del Norte in are high quality high volume projects.    The joint venture with RandGold in the very important Birimian Belt in Cote D'Voire West Africa offers access to additional large scale gold projects. NST has been driving an internal operational programme that is increasing resources at Jundee, Kanowna Belle, Zuleika Shear and Tanami. Resources growth has been rapid so the corporate objective is to increase milling capacity.  The acquisition of a 20% stake in Echo (EAR.ASX) will underpin the reopening of the Bronzewing mill as a low capital cost option to treat new NST open cuts ore from Jundee.  Acquisition of WGX.ASX's Southern Operations will provide mill capacity for a substantial lift in Zuleika Shear ore production. SBM is focussing on the continuation of the great Gwalia mine, operations at Simberi, some additional exploration plays and investments in our favourite CYL.ASX at Bendigo and with PEX.ASX deep copper plays in NSW. EVN is focussing on near mine exploration at a very prospective Lake Cowal, at Mungari in the Zuleika Shear and at Cracow. These companies are now cashed up but are currently and prudently sticking to the knitting of concentrating on improving present operations. I imagine this will be a very different discussion in 2019. Exploration is picking up and the Australian Gold Sector geotechnicians are delivering. The near mine action from NST, EVN, RRL and SAR in particular has been very successful but it is notable that new exploration models in WA have provided some interesting outcomes.  The SW Yilgarn is seeing success in high grade metamorphics by AUC.ASX, EXU.ASX and CY5.ASX. This region is vastly underexplored but is delivering some outstanding results. The XGD.ASX Gold Index is really performing well and is being shown in this graphic. This says a major change is coming as the uptrending forces defeat the downtrending forces. XGD.ASX 2003 - 2018 The technical tension developing here will most likely send the XGD to a new high and I expect this in 2018. It will be mostly, as I see it, new incoming investor buying that pushes this index higher. The gold price in A$ has been reasonably steady over the past several years but here again the uptrending forces are meeting the downtrending forces.  The downtrending forces have been winning for the past SEVEN years but it will have been a pyrrhic victory for the bears as they now get mauled.  The pressure on gold to the upside is looking increasingly strong.  A good break here should see a sharp move to A$2000/oz.  Keep in mind that the A$ rises with US$ Gold so I don't expect a lower A$ to be driving this. This steadying of the A$ gold price has had a stabilising effect on the XGD.ASX which is exhibiting very low quarterly volatility ( ie (qtly high - qtly low)/opening qtly price). The average qtly volatility here is 26%.  The past 12 months has been well below this average. A change is due and likely.  Could we get another 50% volatility here?  To take the XGD to >8500? I think so. I still expect a new XGD high in 2018. Now come look at the individual stocks. NCM is the biggest producer with the longest mine life.  It is still emerging from corporate wilderness but it is now doing very well.   Production is being expanded, debt is being (slowly) reduced, costs are being reduced, dividends reinstated and the corporate strategy is, as noted , giving Tier 1 growth prospects. NCM 1999 - 2018 Being a very large cap stock (~A$16bn), NCM makes up a larger part of the value weighted XGD Index, and so NCM reflects the Index. A resolution of its ups and the downs is now due. Soon. Stop Press : Tailings Dam issue at Cadia has affected NCM but this should not be more than a short term issue. NST has performed spectacularly well and has made a recent new all time high. The success at Zuleika Shear/Kundana and the wonderful achievements at Jundee will ensure this stock continues to rise. Long Section of Jundee showing the potential doubling of the 10moz My three year target of >A$20 should be easily achieved.  Expansions with the newly acquired extra milling capacity will push both Jundee and Kalgoorlie above 300kozpa each and Tanami will provide some further production growth.  So much development has taken place at Zuleika and now we should see stope grades rising to reserves grades as development ore share declines. An excellent balance sheet including almost A$500m in liquid assets just makes this stock brilliant. NST 2003 - 2018 SBM has also performed spectacularly well as its debt has been paid down and the Gwalia mine has hit its straps.  The exploration potential is being examined through the application of seismic. At new 10 year highs and looking to go much higher. SBM has just announced a 10% holding in ABU.ASX for exploration in the Tanami SBM 1999 - 2018 EVN has made some outstanding acquisitions with Lake Cowal being wonderful and Ernest Henry providing a great revenues and reduced costs input. Lake Cowal exploration potential Acquisition debt is now well down so corporate activity should re emerge. EVN is testing all time highs in its current operating form). EVN 1999 - 2018 RRL has delivered strong financial results and dividends to shareholders and continues to add to its regional position. RRl is also looking for expansion in NSW and elsewhere. This graphic seems very powerful to me with a big upside target generated. RRL 1999 - 2018 Two other major developers are doing quite well GOR  1999 - 2018 DCN 1999 - 2018 Another important but smaller developer also about to commence gold production GCY 1999 - 2018 And a potential fledgling NST in PNR All these (other than NCM) are essentially outperforming the XGD. This means that many of the medium and smaller players have UNDERPERFORMED the XGD. It is interesting that many of the medium size stocks have similar price patterns to NCM and suggest resolution upwards too. In contrast, many of the smaller stocks in the XGD are hitting multiyear lows as the lack of investor interest results in a self perpetuating low liquidity. Interestingly here, most of these stocks are picking up longer term uptrend lines. Overall the Australian Gold sector is looking in excellent shape and should provide strong returns over the next few years.

Gold in US$

The big picture is still very positive in the long term as the long term uptrends are strong and the long term downtrends from the 2011 highs have been broken. The medium term shows the `battleground' of the past four years that will be resolved soon.  The 2011 downtrend is clearly broken and a successful retest on it has taken place.  A short term uptrend is in place and major resistance is at US$1350-70. The short term is getting quite exciting now.  How long will it take? The gold price seems quiet with the price within a relatively narrow band between US$1050 and US$1370.  Underneath it seems very active, But the net effect is a very low level of volatility.  Years of trading under the long term average. The long term average is 12%.  The past two quarters have been just 6%. 6% at US$1324 is US$79.  Another 6% or US$79 certainly breaks through US$1370. The impact on North American gold stocks is also interesting. The Big Picture from the Barron's Gold Mining Index is just exciting. Those of you following Dawes Points over time will remember this graphic giving a long term buying opportunity again in late 2015.  When everything else was so gloomy. The very long term history is so important and allows you to `heed the markets, not the commentators' The BGMI is hugging a downtrend from 1983 and may be signalling something big is about to occur. Just more evidence. Barron's Gold Mining Index 1940 - 2018 And I like this subset of that very long term.  The lows in 2000 clearly ended something and started something else. The pullback to those lows in 2015/16 ended something and again started something. If you keep your eye on the big picture you can see the patterns emerging with much greater clarity. If you wish to participate, talk to me about this. Barry Dawes BSc F Aus IMM (CP) MSAFAA  bdawes@mpsecutities.com.au +61 2 9222 9111 I own or manage in portfolios I control: NST EVN SBM NCM GOR DCN PNR CLY WGX

Perth Conferences

21-22 March 2018 Crown Perth Burswood WA I have been invited to Chair Day 2 of the Minerals and Investment Conference in Perth next week. Should be a great discussion on the potential of the Pilbara Conglomerates Concept. There will be three other strands Iron Ore and Steel Minerals Sands Lithium Battery Metals

2018 Outlook – And it is only just starting #74

by Alison Sammes

Key Points

  • Brilliant year ahead for resources
  • Bond market peaking creates critical watershed
  • Global inflationary pressures building
  • Economic Boom broadening
  • Equity markets now playing catch up
  • Gold and silver now ready for major move
  • Resources commodities iron ore, copper and aluminium strong
  • Oil and gas (+LNG) rising as energy bull market resuming
  • Big caps wonderfully cheap
  • Mid caps proving production and earnings paths
  • Small and micro caps provide numerous opportunities
  • Small cap oil and gas stocks outstanding
  • Expect lots of M&A across the resources sector
  • Key stocks BHP.ASX RIO.ASX FMG.ASX WPL.ASX NST.ASX NCM.ASX SBM.ASX PSA.ASX LNG.ASX OSH.ASX
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111 The Dawes Points Global Boom™ is now in its fourth year and has been accompanied by robust GDP growth in Asia and US and now Europe and Japan are fully fledged members of this expanding club. Also, China has just announced an uptick in growth in Dec Qtr 2017 to 6.9% annualized. Equity markets around the world have been showing enthusiasm and, quite frankly, rational exuberance as earnings growth accelerates and as new projects are being unveiled daily everywhere.Global trade is expanding again with major drivers in transportation, housing, construction and technology.  The list is ever-widening. The 3000-4000 Dow points surge called in early Sept provided 3000pts by end Dec and 4000 on 12 January and 4500 by 23 January. So much more coming over the next decade. The top of the channel has been hit by the Dow 30 so it will probably need some consolidation before moving higher. Other individual stocks have only just broken through their top channels so more upside is still coming and the US Banking sector is not overbought and still well below previous highs. The Australian market has been playing catch up but the Resources Sector is giving it underlying strength and will propel it higher in 2018. Commodities are looking strong and resources equities are starting to take off with gold now likely to move sharply higher after breaking the 2011 downtrend and providing enough retests, good bye kisses and fake-outs to deserve to go higher now. Gold has gained US$100 since early December and now has US$1350-70 as the major resistance. Pullbacks and consolidation may be expected but it just may be more powerful. Oil is in its next channel and should achieve US$80 (WTIC) and US$86 (Brent) in 2018. Demand side drivers, especially China where consumption is expected to surge again, are reducing the inventory position and supply side issues like no growth in Non-OPEC output and flagging US tight oil output. Iron ore will surely provide the U$100/tonne target set by Dawes Points early last year. Resource sector stocks large and small are having a wonderful start to 2018 and can be expected to provide a magic year. Keep the buy and hold mentality close to your nose. Fortunes are made by being patient, not by furious trading. This graphic is showing the long term trends and is notable how well BHP did from 2000 to 2008 when the S&P500 went nowhere.  BHP out performed the S&P500 over 12 years, has had a correction and is now moving on to outperform for another decade. RIO is a few months ahead of BHP but BHP should get a benefit from the rising oil price and should catch up. Again, keep in mind the time frames involved here. At least a Decade. Not a few months. Long term Dawes Points readers might recall the early 2016 discussion anticipating the `bifurcation' in markets with the bond markets, the bureaucrats, the public sector, snout in the trough politicians and the media heading for trouble while the backers of industry, raw materials, Asia and gold were heading in another direction. This bifurcation has been clearly underway. And in three dimensions.We are moving upwards in a new direction. They are stumbling down an old and treacherous path. Dawes Points continues to focus on the Flow of Funds concept for markets. 

Follow the money.

The vast amount of capital tied up in bonds and also in cash has been tied up with the left bifurcation and, in anticipation of the demise of this defensive sector, is now flowing out. And flowing to the Resources Sector and tangible assets and infrastructure. (Did you note recent ECB comments that its policy settings were for continuing downturn. Now inappropriate. The boom is happening there as well. Some clearly worried EU bureaucrats.) China has indicated an acceleration in GDP growth with 6.9% recorded for the Dec Qtr. The equity market is going to respond positively to that in 2018. As with China, the other emerging economies are also performing and receiving strong capital inflow. Some repatriation of safe haven capital and some is new investment.

Emerging Markets surging after nine years of consolidation.

The outlook is powerfully positive. These long term trends are so useful and inspiring. Take the bond markets. This is for US Ten Year T Notes. Almost 80 years of history in a single market and asset. Long term trends. Generational and hence easily ignored by each generation. Here, from 1946 to Sept Qtr 1981. 35 years of rising bond yields. Then until Sept Qtr 2016, 35 years of declining bond yields. Another 30+years of rising bond yields is now in train. Bond yields and bond prices get a bit complicated when the coupon ( ie the income component of a bond) differs from the actual prevailing interest rate environment and bond yields. The price of a bond itself is also complicated but the overall price is declining and a big fall is imminent. This is the 30 Year Tbond and you have seen the 10 Year has already fallen sharply. The 10 Year Price Index will include 30 year bonds from 1997 when rates were 7% and 20 Year bonds from 2007 when rates were 5%. These would now be trading at a premium to their issue price but are now falling back to par value as maturity comes closer. Before we go on, note how equity markets are rising as bond yields head higher. Now look at the yield on 30 Year T Bond. A major compression feature ahead of a strong surge in yields to probably 3.25% and then targets to 3.75%. Nothing much in 0.5%-1.0% in interest rates rises but it will have a major impact on bond yields and a significant decline in bond prices at a time of low coupons. Note that yield on 10 Year T Bonds have already jumped. Likewise for 3 years and all along the yield curve. Note that weaker TBonds are not necessarily a call for a weak US$. The DXY US$ Index is very narrow with just six components and is terrible given it is 57% Euro, 13.6% Yen and 11.9% Sterling, 9.1% Canadian $, 4.2% Swedish Krona and 3.6% Swiss Franc. The CNY and A$ don't figure in this index. This US$ Index may be ready to weaken. Or may strengthen. But look at this broader US$ Index. Doesn't look so bad at all. Note that the US$ is very strong against currencies of many smaller nations.  The proverbial s**tholes are still weak currency states. Also note how gold is rising with higher interest rates. And with equities. No Fear Trade here. Can you imagine the current anguish of those believing that rising interest rates will make markets in stocks, commodities and property fall.  Imagine their short positions in all these markets over the past year. Ouch. I have called this global boom for almost four years now so have given it a trademark -  The Dawes Points Global Boom™. I hope you agree that this is a fair assessment of things. The Wave Pattern graphic below was first presented on 1 December 2008 at Mines and Money London that happened to coincide with the major 2008 lows in commodities, resources stocks and most things China. The major equity markets kept falling until early March 2009 but the earlier upturns here in resources with gold leading gave strong confidence for the future of world economy despite the extreme pessimism at that time. The previous 8-10 years had been a good bull market but as long term readers would know, there was little participation by institutional investors and very little public retail interest. It was an excellent Bull Market that few believed in and hence the Disbelief leg. The Subprime/Lehman Bros debacle in 2007/08 created that sharp Pessimism leg that was the GFC. The Hope rally was encouraging with gold running to US$1923 in September 2011 however the resources rally petered out earlier in 2011 leading into the Despair leg that gave us an 80% fall in most gold sector indices into the lows of late 2014 in Australia and late 2015 elsewhere.

MPS Dawes Points Wave Pattern

The key issues to focus on here are the time cover of these trends.  Ten years Disbelief. Five to seven years of Pessimism/Despair. Now we have at least 10 more years of Optimism. This pattern can be clearly seen in the resources sector indices and in commodities. The big driver is GDP growth. Underestimated and disbelieved by so many commentators. GDP growth (and Industrial Production growth) is good for commodities and growth in China is the best growth.And it is accelerating again. Commodities have been priced for recession and resources companies have cut back on exploration and new capacity development. Particularly in energy. The CRB Index has a heavy weighting in energy so this should be very strong over the next few years. The shorter term is providing evidence for a sharp move soon. Commodities were covered in more detail in Dawes Points #73 2017 Year in Review but the 2018 Outlook is still the same. Record consumption demand still flowing through, restocking of inventory required, limited major new capacity coming on stream and, well, just no inventory. Higher prices are inevitable and the outlook still suggests the supply/demand imbalance will be with us for several years. Higher prices are just inevitable. The producers of resources commodities are generating very robust cash flows on balance sheets that are now quite favorable. The big commodities iron ore, copper and oil are really helping the bigger stocks. All are moving higher. So is aluminum with its 63mtpa and rapidly growing consumption level. The big stocks still appear to be very cheap and here BHP is on its way to test the previous high A$50 (US ADRs US$75) and perhaps this year. Just repeating targets from 2016. RIO is looking strong too. Aluminium, iron ore and copper here will send RIO up to US$75 and up 150% to my target from 2016 (100% from early 2017). Here is a link to my 16 Jan 2018 CNBC Asia interview on RIO. https://www.cnbc.com/id/15840232/?video=3000686687&play=1 FMG is here too. Brilliant company with debt reduced and strong cash flow despite the discount for low Fe iron ore.

Energy Outlook

Energy is having its own resurgence thanks to robust demand and to supply side concerns. Inventories have fallen considerably. Source: HFI Research Oil consumption is likely to hit 100mmbopd in the Sept Qr of 2018. That is 36bnbbl pa. The largest oil field in the US was Prudhoe Bay at 16bnbbls recoverable. Australia's largest was Kingfish at just over 1bnbbl. Oil will remain tight for many years yet. Energy consumption is all about Non-OECD countries increasing their energy consumption while OECD has been flat due to stagnant economies and energy efficiencies. OECD is growing too now! BP does it differently with some more detail but the picture is growth in China and India and in lots of `other'. It is also useful to note the relative sizes of each source. Fossil fuels aren't going away anywhere soon! MPS Energy Consumption by Fuel Type Energy will be covered in more detail in the near future but the basic position is quite clear. Energy is the lifeblood of all economies. Demand is rising and LNG is already assuming an important role again in Asian energy imports. WPL looks quite exciting. And also Oilsearch. These larger companies need to be part of every portfolio. The Oil and Gas Sector on ASX is quite unloved and doesn't even get a sniff of an index.  This MPS index of 11 small explorers/producers shows a lag between oil prices and stock prices. These stocks are down 80% from an arbitrary 1 Jan 2007 basis and almost 90% against the oil price so should provide outstanding returns to astute investors. The market for many of these companies is the East Coast of Australia where decades of government and bureaucratic bungling and pandering to half baked ideals of special interest groups have put the entire well being of 80% of the nation at risk. Shortages can be overcome by increasing supply. So simple. Talk to me about them.

Gold Outlook

Gold continues to be looking positive and an appropriate switch is underway from T Bonds into gold as part of the great bifurcation. Which safe haven would you prefer? Gold itself is readying for another test of US$1350-1370 before launching a more powerful upmove. This may still take another three to six months to break through. Or maybe the coming week! Gold in A$ has travelled sideways for three years now but it has bounced off the long term uptrend and is still heading toward a A$2000 target within the next year or so. Gold stocks in North America have been trading constructively but have been net flat in 2017. The largest global gold stocks have had to unwind a lot of debt after some expensive new projects and mergers but improved cashflows and better balance sheets are making these stocks quite attractive again. In Australia the ASX XGD is leading the world resources industry, as it did from Dec 2014. The short term trend of gold stocks vs Gold is calling for a resolution soon. A similar wedging is apparent for these gold stocks against the S&P 500. Together these graphics suggest a VERY strong outperformance by gold stocks. And gold and gold stocks are important in the direction of the A$. Look at this long term correlation. Within all this the A$ looks very robust. The very long term is bringing about a change. To make A$ holders wealthier.

Summary

It is very clear that The Dawes Points Global Boom™ is well underway and the trends are coming into place that will last for quite some years. The broader resources sector has some excellent performances in 2017 and should continue into 2018 and beyond. This graphic of the ASX 300 Resources is at a critical juncture and a solid break above 4400 (now 4174) will unleash some massive buying that will take all these indices to new highs within two years. ASX S&P 300 Resources  2004- 2018 Equity markets around the world are acting as the barometers of improving economic prosperity in the years ahead as the vast savings in cash and bonds are redirected into equities, property and commodities. The markets have been indicating all this for these past four years and the markets have often been at odds with the commentators. Dawes Points has held true through all of this and we are looking at further outstanding returns to our portfolios. The year ahead will provide even better returns for resources sector investors starting with the major companies with strong revenues, balance sheets, earnings and dividends. The mid cap sectors will also perform well and should be at the forefront of M&A activity. The hundreds of small to micro caps offer outstanding value if you know how and where to look. These will also be the targets of the M&A and once mid caps are comfortable with their own cashflows they will be looking for growth opportunities. Talk to me if you want to participate. Barry DawesBSc F AusIMM (CP) MSAFAA +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #74 25 January 2018 I own BHP, WPL, FMG, NST, OSH, PSA, LNG

2017 Year in Review #73

by Barry Dawes

Key Points

  • Global economic boom confirmed
  • Global equities surging to new highs for many markets
  • Resource sector commodities performed strongly
  • Copper, Iron Ore and Oil reached strong levels at year end
  • Consumption data indicated more record highs for metals in 2017
  • Peaking of the bond markets
  • Gold breaks 2011 downtrend and readying for strong 2018
  • The surge in EVs and their raw materials
  • Resources Sector market outperforming again
  • Capital flowing again to the resources markets
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
2017 was the year the where many in the world woke up to the sunshine of the global economic boom unfolding against a dark sky of gloom promoted by the defensive economists (see below) and their fellow travellers in news media. The markets had been indicating better times ahead for some years now as has been emphasized by Dawes Points in the past 70 odd editions and now investor interest is finally catching up. The economic data has been quite positive for some time and both OECD and IMF have upgraded their historic GDP figures and forecasts. Nevertheless their commentary is still that it won't last into 2019. (But really these are just more bureaucrats!) I expect further upgrades throughout 2018. These numbers seem to Dawes Points to be quite robust and clearly underpin the strength of equity markets. The equity markets have done well with focus on the US.  DJIA 30 was up 25% with Nasdaq Comp up 29% and S&P500 up 19%. The best of the others was Hong Kong with the Hang Seng up 36% in 2017 and the Indian Nifty Index up 28%. On a two year view the DJIA was up 42%. The strong performances by the Asian markets reinforces the long term Dawes Points view on the rise of 3300 million people seeking a better life. The Australian All Ordinaries was woeful with just 7% but the Resources Sector in contrast did very well.  The recent break upwards through 5800 and then through 6000 was resources driven. The bigger resources stocks outperformed the S&P 500 in 2017 and all stocks did vastly better over the past two years. The ASX Small Resources Index was up 36% in 2017 and 114% in two years. As pointed out previously, the so called Small Resources Index had 38 stocks in Dec Qtr 2017 with a market cap of around A$45bn with almost a third with market caps over A$1bn. Not truly representative of what was really happening with smaller stocks in 2017. The broader small resources market was somewhat of a lottery but many very strong gains were seen, especially in the Electric Vehicle raw materials stocks in lithium, cobalt and graphite. The Dawes Points of 5 September (Global Boom Well Underway #69)  picked this up nicely:- In the longer term focus, should stocks break higher from here then the move could be quite sharp and rapid.  If this view is correct then there could be 3,-4,000 Dow points added by year end. Just snuck through with 3010 points gain. (Who could have thought a 3000 point Dow Jones 30 gain in four months possible?) This channel analysis is quite useful. Everyone would be familiar with the FANG stocks and technology but this graphic on US banks is highly relevant and very useful.  This sector has just broken 14 years of underperformance against the S&P500 and is doing so at a time of rising interest rates.  Very encouraging. The housing market is also very significant and with this index making strong new highs and the housing shortage building up then the US should be stronger for much longer. The resources sector did very well in 2017 and is positioned to do even better in 2018. The industrial LME metals in particular performed well reflecting record consumption levels and limited inventories. Average gains in US$ were around 28% (net of tin) in 2017 after 27% in 2016 (including tin). Cobalt was a star again and at US$75,500/t that is a great money maker for the few producers and also an aspiration for the newcomers. The two year gains averaged 54% but these prices are yet to be adequately reflected in Resources Sector stocks. Precious metals had steadier time with significant volatility and palladium hit a major new 17 year high and rose 75% in 2017. The Dawes Points Composite metal price Index of monthly closes on LME broke its downtrend as noted in August 2016 and now seems on its way to new highs. Probably before 2020. The individual metals provide their own interest. Note how steady lead has been and how it will certainly rise further from here. Copper and zinc have been strong but aluminium is looking to move higher from a low base and nickel should be following soon. The inventory position whether it is LME or Shanghai is very low with massive drawdowns experienced in the past two years in aluminium, copper tin and zinc. It has been fascinating to note over the past few years the steady weekly drawdowns in LME inventories for most metals then observing large increases as some trading group delivers a significant tonnage (against the current relatively low stock levels!) of metal across the warehouse. These have nothing to do with production or consumption. Nor mining or refining. Just some speculative inventory. Once these large positions are gone then these metals will be super tight. The MPS LME Inventory Index is dangerously low at just one week. The inventory position of metals on LME (and to a lesser extent on the Shanghai Futures Exchange) is now very low leaving no buffer at all for any increase in user inventories. In any upturn it is typical for users to increase stock throughout the inventory chain such that DEMAND exceeds consumption. This should be expected to cause sharp rises in prices of metals. This is already happening in zinc and copper will be following. The rise in cobalt reflects rising consumption demand, limited supply sources and no inventory. Consumption numbers for most metals show new records each year and the 3.35% pa CAGR has been remarkably resilient since 2009. The numbers suggest that growth rates will be ACCELERATING over the next few years. Where will the metal come from? Dawes Points has considered for quite some years that the industrial metals are far too cheap relative to their intrinsic value.  This value is not just conductivity, strength, casting abilities, coating properties or coverings.  The ever expanding uses of high performance alloys or specific metals based chemicals make them truly valuable materials. From the stainless steel cladding of the NY Chrysler Building, ancient and modern bronzes (copper and tin), copper roofing in Hamburg, zinc roofing in Paris, lead sheet in London, brass (copper and zinc) door knobs to the feel, texture and shiny look the real value of metals is long lasting and true. This channel graphic on copper gave us the targets of US$3.25 when copper was around US$2/lb in 2016 and it now gives US$3.59 in March Qtr 2018 and US$6/lb further out. Producers of metals had a difficult five years from 2011 and those bringing on new high capital cost capacity treating low grade ores felt it worst. With oil prices likely to move higher again to push up bulk mining costs and power costs up on comminution processing the long term attractiveness of such new mines becomes difficult. All this should only be resolved with higher prices.  And possibly much higher. The global steel industry did well led by China but India is catching up and should be the world's second largest producer by end 2018. Iron ore achieved the Dawes Points forecast US$95/t in the March Qtr and after a pullback seems on its way to reach US$100 in 2018. Energy rebounded in 2017 and also just reached the Dawes Points US$60/bbl for WTI at year end.  The demand side has been stronger than the consensus and inventories have been drawn down. Despite the improved oil price and the debacle in Australian East Coast gas policies the ASX smaller oil stocks were surprisingly friendless.

Weakening Bond Markets

Dawes Points has highlighted the topping of the bond markets and the long length of their bull markets. Long term trends attract large volumes of complacent capital which in turn need long term bear markets to unwind. From the 1942 lows in US bond yields to the highs in 1981 (39 years) and back to new lows in 2016 (35 years) are long term trends. Where will 35 years take bond yields? New highs? The 30 year T Bond is now precariously positioned.  The fall will be quite sharp when it comes (likely to be quite soon now). The 10 Year peaked almost five years ago and is showing danger is at hand after the most recent breakdown. Accelerating breakdown says it pretty well. The direction of US T bonds will probably determine the fate of the US$ and the decline underway is possibly answering that question now. The US$ Index is useful but not perfect and the channels suggest a re-entry to the 1984 downtrend is possible but the US$ is oversold.  The next few months will show us. The A$ had a reasonable year and a break above US$0.81 will see it heading toward parity and beyond.

Gold Market

Gold kindly popped over US$1300 to welcome 2018 with some enthusiasm.  The four year fighting in the trenches in that US$200 band below US$1370 is still on but the breaking of the 2011 downtrend is encouraging the bulls like us. There had certainly been some false starts in 2017. The short term technicals showed the breaching of the 2011 downtrend line and a series of retests of this line and the pick up of a two year uptrend. Text book performance I think. This short term break is only part of that bigger picture that is indicating a very strong gold market for many years. It seems Wave 2 is just about finished and Wave 3 is getting underway.

Electric Vehicles (EVs)

I declare my hand as an unbeliever in AGW because the empirical data does not show it, the relative percentages are infinitesimal and so much of the presented data is fraudulent. (Dawes Points has done much due diligence on this so stands on its research findings) So the surge in EV excitement is based on a false foundation.  Nevertheless, the world likes the idea of clean electric vehicles so lets all enjoy it. EVs will capture a large share of motor vehicle sales by 2030 but with around 1000m current vehicles and 1500m by 2025 EVs will still be less than 10%. The impact on oil consumption is likely to negligible against 110mmbopd consumption by 2025. Taxes on fuel are very high in most countries so the revenues losses on gasoline and diesel will probably need to be made up by taxes on electricity somewhere. And someone will need to pay for roads and infrastructure. Battery efficiency and cost will need to make substantial improvements and we all know they will. And at the end of the day the increased demand for grid power to recharge these batteries will put enormous strain on distribution infrastructure and will need more coal and gas fired ( plus nuclear) power stations to charge the batteries. But for now cobalt and lithium are in bull markets that have strong fundamentals as new gigafactories and EVs are built. Performance of these stocks in 2017 has been very strong and volatile. Expect more in 2018. And in 2018 numerous new Battery Metals stocks will have the market caps to be hitting the various indices and adding spice.

Resources Sector Performances

As noted above, the performances of the resources indices have been excellent. The chart performances look outstanding and suggest a major further rerating is immediately ahead. 10 Years XMM Metals and Mining   breaking through a neckline and soon to break a downtrend 10 Years ASX S&P 200 Resources XJR   On its way higher 10 Years ASX S&P 300 XKR Resources  Recent new breakout 10 Year S&P Small Resources  XSR  Break out with sharp acceleration coming 10 Year S&P All Ords Gold Index XGD  - Massive breakout about to start after 18 mths consolidation.

Capital Flows

Capital is flowing back into the resources sector with vast volumes raised by small companies after years of drought. The larges caps are reporting strong earnings and dividends are flowing and many more companies are reporting earnings and dividends from new projects started in recent years. Many opportunities and most with management that has seen tough times for over a decade. Capital is flowing from cash deposits which are large and sufficient to stoke the markets for years. Market liquidity in these smaller companies is rising and is probably the best in a decade.

Summary

Yes it was a true watershed year with the long term bearishness that continued into early Sept Qtr seeming to be dissipating by New Year's Day. The data was strong, the markets were improving and many stocks had great years. The peaking of the bond markets at a time of surging equities is good and the commodities and gold are lifting off nicely. It is really only just starting and there is so much more to come. Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #73 3 January 2018

Gold now ready for stronger 2018 #72

by Alison Sammes

Key Points

  • Six year correction in gold almost over
  • Move through US$1300 and higher anticipated in early 2018
  • Weakness in US bonds suggests further sharp falls ahead
  • Technical internal market strength in gold highlighted
  • ASX Gold Index close to 4900 and heading for 8500
  • A$ gold price holding near $1700
  • Australian gold industry really performing
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
The 2000-2011 first leg of the unfolding Dawes Points ~40 year bull market in gold brought a maximum US$1643 (575% and 19.7%pa) gain to gold and was followed by a four year correction of US900/oz (46%) in the 2011-2015 decline. The longer 2011-2017 downtrend was broken in August 2017 with the move to US$1354 and subsequent retesting and backing and filling has provided the technical support for gold to now move strongly higher.  This has been a furiously fought battle in the futures markets that has taken around 56 months so far to be resolved. Price surges and sharp selloffs have characterised this period. This graphic shows the tightness within this US$200/oz trading band.   Tight markets like these tend to be eventually resolved violently and the demand/supply equation is shouting tightness and higher prices to come. The drivers in gold from Dawes Points perspective are unchanged. It is simply Demand and Supply. China and India providing most of the demand with the notable addition of recent strong figures from Turkey and Germany. Rising equity markets are reflecting strong economies in the Dawes Points Global Boom and growing wealth that just needs to have more gold bars and jewellery. The flow of gold from West to East is just One Way Traffic.  Nothing is coming back the other way. Import figures of a combined almost 4000 tonnes to India and China is being met by 2800 tonnes (3200 tonnes globally less China's own ~400 tonnes mine production) mine supply and about 1500 tonnes recycled global scrap. Inventory of Gold in the West is declining. A shortage is coming. Shortages in commodities bring about short squeezes. Big shortages with short positions thrown in bring about big prices. The battleground has been set so let's review the evidence. First of all we have the global bond markets turning down because current yields simply do not compensate for the risk on sovereign debt.  All interest rates need to rise. The yield on a US 10 Year T Bond is moving higher again.  The 2007-2016 Downtrend has been broken and yields have retreated to test and retest with good bye kisses and are now moving higher. The picture is better shown through the price index of 10 year T Bonds.  These bonds peaked in price in 2012 and have just broken sharply lower as expected. The picture on bonds is horrific.  A vast concentration of global capital (~US$100trillion) in a safe haven sector but now at a time of global economic boom and at yields that are unattractive against equities (especially dividend paying resource stocks and in particular ASX Gold producers) and very unattractive against the quality of the issuers ( read politicians). A very overcrowded trade that is now being unwound. The 10 year bond peaked in 2012 but the 30 year T Bond peaked in 2016 and now has so much further to fall. There are inflationary pressures building globally as well.

Gold in the short term

Action on gold here looks text book.  Downtrend broken, first Good bye Kiss, surge, retesting, short term uptrend tested, consolidation.  Then it should soon move higher. The three year view shows the breaking of the 2011 downtrend and consolidation. The medium term shows the importance on the 2011 downtrend and the break in trend and also the important resistance around US$1360. The Long Term is looking just brilliant. Some things here are absolutely noteworthy for comment:- Every investor has a memory of the 2008 financial crisis with the initial surge in oil, gold and other commodities and the subsequent downdraft in all such prices.  The rally out of the lows brought strong moves by gold (and silver and copper, tin and iron ore) into 2011 but most other commodities including oil only managed half hearted moves before it all came down into the Dec 2015 lows. The 2007/08 highs were the end of the first leg in the commodities boom.  But Dawes Points again notes the important internal and relative strength of gold (and silver and copper and tin and ironore) to make new highs. This interpretation clarifies many previous unresolved questions.  The true peak of commodities was in 2008 but the remarkable rise of gold into 2011 showed outstanding internal strength.  The correction in the Wave 2 low of 1064 in Dec 2015 held above the US$1032 high in 2008. This internal strength gives us a powerful bull market in gold.

Gold stocks

North American Gold stocks give the global market picture with the short term XAU looking constructive after 18 months of extreme volatility. Gold stocks globally are now in far better positions with most debt repaid, earnings normalised and dividends resumed.  But are still underowned with the relative strength against stocks still poor and also against gold itself. Nth American Gold stocks against US$ gold still shows underperfomance but this relationship is compressing and `wedging' so that resolution to the upside should be very soon. Market sentiment is very poor and indicating strong potential buying power. For Australia, the ASX All Ords Gold Index (28 stocks) is building constructively and 4900 has been challenged.   A breach will see a rapid move to 5500 on its way to test the 2011 highs of 8499.  Soon. For Dawes Points that is by Sept Qtr 2018. The Australian gold stocks have been leading the world resources sector.  Leading economic recovery, leading reflation and leading inflation. Australian listed domestic producers have really outperformed the index itself. Coming into the Christmas Season and the end of the year selling should subside and the market will start to anticipate restructuring of portfolios and indices for early 2018. Dawes Points considers 2018 should be very strong throughout the resources sector with the gold stocks being amongst the leaders again. The Pilbara Gold Conglomerates provided some intriguing new perspectives on gold in Australia with considerable sums being committed to the first substantial exploration in the vast region. Results to date have been encouraging but so far inadequate to confirm the hypothesis. I had the honour of visiting the Novo Resources/Artemis JV at Purdy's Reward last month and was very impressed with the potential but sampling methodology for these conglomerates remains a hurdle to yet overcome. The bigger picture is truly fascinating and will discuss this further in the New Year. I wish all readers a wonderful Christmas Season and for a prosperous 2018. Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #72 22 December 2017

Yet more news on Small Resources Companies #71

by Alison Sammes

Key Points

  • Most global equity markets making new highs
  • Bond market about to have a sharp fall this quarter
  • Commodity prices looking very robust
  • Resources stocks returning to rightful prominence on ASX
  • MPS Portfolios well positioned for this coming uplift
The acceleration of the US equity market has brought renewed enthusiasm to almost all equity markets and the local All Ords finally broke through 5800 after a long consolidation. This has all been flagged for the past few months but the important initial upthrust has now taken place. The next few weeks should see some serious short covering and a strong move in all these equity markets that will take the resources sector to new highs in a surprisingly short time. The resources sector has seen the battery raw materials sector (lithium, graphite, cobalt and nickel) provide good gains amongst the leaders but the mood is spreading to companies with assets in industrial metals, mineral sands, rare earths, iron ore and petroleum. Note that uranium is stirring again. Much more to come here. Gold is moving upwards with some zigging and zagging but all seems well with much better times coming again in 2018. I still expect to see new highs in the XGD (ie doubling) by third qtr 2018. The limited funds in the market at this stage are seeing some switching out of gold into some of these other sectors but this should be only temporary. The Pilbara gold conglomerates story can only get better as results come through later this quarter. The concept is exploding across the Pilbara and the `me too' players are out in force so we need to be careful but also watchful because the area in the Fortsecue Basin is very large.  If the concept proves correct this is potentially the world's second largest concentration of gold after the 160,000t Witwatersrand in Sth Africa. No closed minds allowed here. Of course this will boost activity in the gold sector but there might not be many players in the actual ASX XGD Gold Index in the near term.  However, should Novo Resources be listed here and Kirkland Lake most certainly will then it will impact the XGD in 2018. It is certainly pleasing to see the Dow Jones Industrial Average perform so well as this shorter term graphic was suggesting. I cannot recall seeing this feature of a market pushing against an upper channel line like this but it certainly was telling something. The move should accelerate. The Super Bears didn't notice this action so it looks like October will pass without a crash and the 30th anniversary of the 1987 Crash was just a celebration. But accelerating into the next channel is worth noticing because these channel changes have a habit of alternating and displaying quite the opposite character to that of the previous channel. Over eight years trading within a congested 4000 pt range could just give way to a very sharp and free upmove. The DJIA has already added 1550pts since early Sept and accelerating into the next channel should give us another 2500pts by year end. Will it do this? I think so. Australia has finally woken from its torpor and should pass through 6000 this week on its way to above 7500. The character of these markets and these clear trends shown in the indices are reflecting the underlying economies and they all indicate another extended period of prosperity for at least another ten years. Leading economies around the world are just having a great time yet appear to not be over extended and changes to taxation rates in the US just cannot hurt. USA, Europe, China, India, Japan. All in synchronised economic expansion. Of course these equity market moves are not occurring in isolation. The key principle of investing is the flow of capital. This time it is flows of capital from cash and bonds into equities and commodities. Cash has been highlighted previously and there is certainly a lot on the sidelines. Capital into equities, and particularly into new equity (IPOs, rights issues and other capital raisings), funds capex and new jobs. The Fear Thesis has kept hundreds of billions of capital in cash and near cash. No wonder the Australian economy has been so sluggish. A surging stock market should now have a major impact on the local economy and keep in mind that a strong resources sector helps bring in foreign portfolio investment. Investment that buys shares from locals and increases local money circulation. The so-called Mining Boom of 2010-14 was really restricted to the major stocks owned by the large pension funds so individuals saw very little of those benefits. It will be very different now. The flow of capital should be from the US$100tn that was tied up in the bond markets. That is now coming out as bonds are sold or just not rolled over by those just seeking safe refuge for capital rather than long term income. The bonds are weakening and seem to finally be ready for the next leg down. Note that this is happening just as equity markets are surging! So much for `rising interest rates send stocks lower'! And also note that higher interest rates are pushing up US banking stocks which are outperforming the S&P500 after 14 years of underperformance.  Again, so much for `rising interest rates sending banking stocks lower'! Here in Australia the banking sector is having some heartburn with this although can't be sure as to what it really means!  Is it following the bonds?  Don't hold any local banks here.  Do you? Commodities continue to do well for the resources sector and copper is an excellent proxy for the story with most metals.  The Channel Analysis works well with copper and the bullish calls from Dawes Points over the past couple of years have come to pass as prices move nicely with the channels.  The US$3.70/lb looks easy now but US$6/lb is coming. The strength in gold, copper, iron ore, coking coal, aluminium, lithium, graphite, cobalt, zinc, lead and silver have helped the ASX 300 Resources Index (54 stocks) to regain its 2015 highs on the way down from the 2011 highs but the current 3650 level is firmly indicating that an upward move through this will give a very rapid retracement to 4000 (+10%) then to 4400(total +20%). Market share is now back over 25% of All Ordinaries weekly turnover. Small Resources (recall this index has 38 stocks with a combined market cap of A$42bn with 15 stocks capped at over A$1bn (including 5 >A$2bn!)) is showing much higher leverage and is coming with a probable 50% gain for the next year. Market share of turnover is growing and is over 5% again. Both of these indices seem to suggest that a sharp upmove is imminent. The reason behind it might be just the global equity markets and the cash on the sidelines but gold is likely to have an important input here. Whilst the immediate short term for gold is not quite so clear, the long term indicators are very robust and suggest a major move could come at any time now. There are simply hundreds of small quality resources companies out there and to find them is one thing but to play them is another. The best advice is to have a core portfolio to ride out the cycle and to add to it as further opportunities arise.  Which they will do in spades. The best returns come from choosing well early and just sitting it through. Have a look at these portfolios from the last boom from 2003-2011:- October 2004 Portfolio  +432% in 36 months and +430% over 44 months. Structured model portfolio with no trading. Structure provided liquidity and dividends as well as allowing 68x gain in SMM in the riskiest end of the sector. The July 2005 Portfolio provided 103% in 12 months and 261% in 22 months. Clearly not every stock provided positive returns but the portfolios did what they were supposed to do – give high aggregate returns with income and liquidity. Let's look at some portfolios for now:- Portfolio A A$100,000 in a conservative diversified portfolio for income and capital growth. Stock selection will be revealed in a month or so! Portfolio B A$100,000 in 24 equally weighted small cap stocks across a wide variety of sectors. Stock selection to be revealed in a month or so as well. The overriding comment is to `heed the markets, not the commentators' and the market character is that extreme value exists against the 3,300m people in Asia who just want better lives. And our resources! Are you onboard? Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 bdawes@mpsecurities.com.au Dawes Points #71 24 October 2017