Powerful Moves Coming In The Resources Sector

July 5, 2016 | Dawes Points |

Key Points

  • US$ Gold Prices likely to surge through US$1400/oz
  • New gold exchanges in Shanghai and Dubai to influence gold prices
  • A$ Gold Prices testing A$1,800/oz
  • ASX Gold Index to soon hit 6000!
  • Silver price strengthening and breaking upwards against gold.
  • Industrial metals suggesting surge to soon come
  • I still think I will get my US$80/t for iron ore in 2016!

Gold is performing strongly as expected and the A$ gold price is testing A$1800/oz which is great news for Australian Gold producers and even better news for your gold shares.  My target for 6000 in 2016 may have seemed a stretch at the time but is now well within reach, and probably even in this month.

The gold price is rising and most investors are still underweight or simply unweighted.  So much more buying to come.

The demand for gold continues to grow in Asia and some sideshow issues have influenced some Western players to build up their holdings in Gold ETFs again.  All good news that will become even more important when the world better appreciates just how tight inventories of available physical gold are nowadays.

And gold won’t be the only market that will be showing shortages of supply, low inventories and relentless increases in consumption.

Silver has been rising nicely to have outperformed the strong gold price by about 20% in 2016 and is challenging a five year downtrend.  Always a wannabee, silver’s time just may be coming.  Keep watching here.

Copper, tin, zinc and lead have next to no LME inventories.   Nickel and aluminium have their own particular issues but their transitions from bear to bull markets are underway.

These markets seem to be setting up nicely now for a Dec Half surge and some really strong moves in 2017 and beyond.

Most resources equities are still very cheap, still underowned (and mostly unknown!) and have outstanding outlooks.

The A$ gold price is doing some wonderful things for gold producers here in Australia where cash operating costs are often under A$1000/oz.  This is a margin of A$800/oz.  For 100,000ozpa this is A$80m pretax.

For NST this is A$560m.  For EVN it’s A$660m.  NCM A$2000m. For BLK at A$140m market cap it is A$80mpa from sometime this qtr.

This graphic suggests we might see A$2,000/oz soon.

As the XGD approaches 6000 it is clear we are not now just picking up stocks that are cheap against the overall share market but they are still cheap against gold.

The relative performance of the XGD against the A$ gold price was shown last week and the peak in the XGD in April 2011 at 8499 was with A$1408/oz.  The low in Nov 2014 was 80% lower at 1642 at an A$ gold price of A$1352 that was just 4% lower.

In the big North American market the gold stocks (the XAU) essentially underperformed US$ gold for two decades from 1996 despite the runup in gold from US$250 in 2000.

Should the longer term average of around 0.225 on this graphic be reattained then the XAU would still have a 200% rise against gold coming with the first stop still 50% higher than today.

We all know the All Ords has struggled this year whilst the XGD is up 100% (the Dawes Points 2016 Portfolio is up 126%) but I still think it is early days yet so the outperformance should continue for quite some time.

In North America again gold stocks are up 150% against the SPX and this graphic suggests another 400% to come.  Given that I am a bull on the US equity market it should mean gold and gold stocks will be looking very exciting.  Again, for quite some time to come.

I think you will agree that the evidence in the gold sector is clear that something big is underway and clients have benefitted very well so far.

This same evidence is suggesting that the something big won’t be limited to gold and silver but will extend into all resource sectors.

We can see it in the performance of metals like copper where technical support is at important levels and price is oversold.  And demand is still robust and LME inventories are low.

What is there not to like?

And whilst we are all intrigued and excited about the new truly disruptive technologies coming in energy generation and power storage that may really change the world and end the Age of Hydrocarbons the markets themselves are suggesting that it isn’t quite time yet for that to occur.

The big oil stocks seem to indicate that oil prices have bottomed and will be heading higher in years to come.

I think its time to seriously consider adding selected hydrocarbon stocks to the portfolio.

All this action is occurring in the gold sector while I have been taking a short break in ASEAN country.

Singapore was quite extraordinary in so many ways as passed on last week but I also made my first visit to Vietnam.

95 million people here and it seems like China on steroids.  Ha Noi and Ha Long are showing massive construction and property development.  Like China, developments have vast population drives to underpin them and provide rapid investment payback programmes that in Australia we could not fully comprehend.

ASEAN is 800m people together with rising living standards that for some countries are still well above China.

And ASEAN consumes 85mtpa of steel yet produces only 20mt.

And that little side show that caused all the fuss last week was quickly forgotten by the markets and the underlying forces are heading higher again.

I have not called the bond markets well but that doesn’t mean the issues don’t exist or have gone away.  This still tells me that the risk reward in sovereign bonds is very unfavourable.

And when returns on low risk gold are so strong why bother taking those other risks in a market that is clearly rigged.  Besides, when the problems start really start to emerge, the sellers of bonds will be buying gold and gold stocks!

Barry Dawes
BSc FAusIMM MSAA

Edition #51
5 July 2016

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

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