Resources Sector Opportunities Remain

The long term trend for resources remains firm as the demands from the real people in the world override the views of the financial sector bureaucrats and market manipulators.  The evidence is everywhere.  Especially if you are looking.  But closed minds abound in today’s world.

But fear still abounds and a compliant populace in Australia has heeded the calls of the doomsayers despite the abundant evidence otherwise.  The rush to safety in bonds and cash has been strong but may now be no longer needed.  Sensing this, bond prices are now falling and bank shares are following – down almost 20% from their highs and down ~13% in the past two months.  The flow of funds is now trending from safety to something else.

You should be putting your money to work in more active and productive enterprises that should give you major gains for the next decade at least.

It is now worth just sitting back and think where we are as this change in bond yields takes place.

The world’s new middle classes come from 1,400m people in China, 1,300m in India, 700m in ASEAN, 1,000m in Africa and 600m in Sth America. All wanting higher living standards. That means more food, technology, energy and resources.

Against 360m in Nth America and 450m in Europe.  Most now wanting government handouts.

Asia is growing through higher consumption and high infrastructure spending. China may be slowing in absolute growth figures but personal income is rising.  People everywhere in Asia are becoming wealthier.  Would you see these sorts of growth in personal income in the US, Europe or here?

Average Annual Household Disposable Income in China from 2009 to 2018

Source: Ipsos Report – Dongfang Modern Agriculture Holding Group Prospectus

China and India populations are also buying more gold and silver.

So who now owns the gold and who will be making the rules?

The demographics of the West are strongly influenced by the Baby Boomers who grew up in a rapidly changing world that was actually a slipstream sucking them in behind a World War II-depleted generation of cold-reality shaped stalwarts and but then the BBs also graduated into a generation of the Lyndon Johnson Great Society of publicly funded under-achievers.

The initial gains were spectacular but the aging hippies and their uninspiring Generation X progeny gave us all massive government spending, Budget Deficits and the Welfare State.  And generations of reactionary bureaucrats.

For us unreconstructed Baby Boomers, the 1960s and 1970s were a time of revolution in thinking after the conservatism from the Great Depression of the 1930s and the upheaval of World War II in Europe and in the Pacific.  The Depression said money was hard to come by and your savings were hard to hold on to and then WWII said that your life and personal safety, as well as savings, were hard to hold on to.

Lord Keynes in the1930s with his Deficit Spending backed up by some US attention seekers announced to the world that `Government’ knew better and it could invest OPM (Other People’s Money – yours, as the Taxpayer) better than the people who earned it, i.e., you and corporations you might have invested in.

The Revolutionaries of the 1960s and 70s are now the Reactionaries.  And their children too. Governments and quangos and NGOs all wanting to tell you what to do and how to do it.  Using your tax paid dollars of course.  Groupthink and consensus overruling facts and natural evidence.

And calls for an inquiry on iron ore.  For heavens’ sake.  Dawes Points set out precisely in early May what was happening within the iron ore market.   The expected short cover rally is now underway.  How far will it run?  The bureaucrats are wanting to be heard now but the horse has bolted.  Yet another thought bubble.

But perhaps the people overall have their own special way of responding to the uncertainty . Building up cash deposits. It is truly fascinating how people everywhere have taken to building up savings.  Inventory of Money.  Conserved labour. Private Savings. (And in contrast, Public Profligacy).   This Inventory of Money has come up often in these Dawes Points.     As does flow of funds. These funds will need to flow!

Now with that flows of funds. Recall that we have gargantuan annual expenditures in USA (US$3tn), Europe (Euro 2tn) and here in Australia (~A$430bn(US$320bn) Federal Budget Expenditures) with deficits that add annually to the debt burden.  Funded by bond sales.  Government bonds now have higher yields than corporates!

Dawes Points has been talking about the bond markets for some time now but I hope you have noted what has happened in the major bond markets over the past couple of months?  A volatile top and then carnage!  The bank shares are following.

Just think about bond prices.  The lower the coupon the higher the volatility.  Doubling in yield.  Halving in price?  Well, not quite but horrible anyway.  And much more pain to come.

Germany 10 years are now 0.88% after falling to below 0.05%!  And the UK has blasted through 2.0% after seeing 1%.

This next one has to be one of the great technical graphics in my investing life!  US 10 Year Treasury Notes by price.  The peak in 2012.  The break of the break of the uptrend in 2013.  The rally in 2015 back to the trend break line for the `goodbye kiss’ then a sell off!   A break through about 122 (but probably 125!) might just put the fear of God into the `safe haven’ believers.  The falls this past month have been truly horrendous.  No wonder banks stocks are weak.  Keep watching this key indicator because it is not yet “oversold”!

US$85-90tn in useless overpriced global sovereign debt.  And more coming every year.  These graphics on US, German and UK bonds should be telling YOU something LOUD and CLEAR.  Disinflation is over.  The central banks want some inflation and I just think they are going to get it. Maybe bigger than they expect.

And what does Dawes Points think of rising bond yields?

Good news!! All time highs in equity markets!  Almost everywhere but here in sleepy Oz.  A nation of bureaucrats chasing bank shares.

Funds will be flowing out of these bonds (and bank shares) now.  Where will they go?   General equities of course, then resources shares.  Then gold and commodities.  Let’s just watch this play out.

The oil price as expected has decided that low is no use to anyone and China’s 5.4% pa June Half 2015 gain means another 0.5mmbbl per day consumption.  The glut might just be over in the Dec Half and oil prices could be higher.

 

And while we were talking of the build up in bank deposit holdings we can also already see the build up in gold holdings.  Certainly underway in China and India.

Do you go along with that rising interest rates will sink the global economy? Possibly that might happen, but the markets are telling you differently.  The US$ may have a last gasp rally and the fraudsters on COMEX may try to hit gold and commodities again but it will be futile.

Recall the LME metals graphics in the last Dawes Points.  Consumption growth rates that even surprised me with their strength.  And no LME inventories.  Thank goodness we are going into Northern Hemisphere Summer otherwise the commodities would be surging already.

Just come back to LME inventories.  Other stocks do exist but LME stocks are a helpful indicator. The composite is at just one week and some of the individual metals are below.  Copper, lead and tin are down to just one week and zinc is less than two and falling rapidly. Stocks of Nickel metal are at an all time high but this is disguising a major shortage developing in nickel-rich iron ores in China.

 

And China crude steel production is still confounding the doomsters. 838mtpa in April 2015.  Up just marginally on 2014 and the second highest rate ever!  Iron ore inventory movements will be so important to watch and will strongly influence iron ore prices.  Expect a rally to US$80 by year end.

There is just so much more to come here.  I hope you all have an understanding of the significance of the Chinese Silk Road Infrastructure programme and the Asian Infrastructure Investment Bank.  No slowdown in China and acceleration in ASEAN and India.

You have seen how the probable iron ore short squeeze as suggested in the last Dawes Points is materialising. It might be one of the largest volume global markets but it is still a very thin market for traders.

The inventory shift highlighted there has seen China port inventories down over 25mt (~20%) to <85mt.

So the basic fundamental supply/demand data is overwhelmingly positive and a commentariat environment has been created that is overwhelmingly negative.

I am seeing dozens of small resources stocks attracting good volume and recovering stock prices.  The opportunities are many.  Companies with decent projects trading at a few % of their NPVs and are just awaiting funding.  Producing companies trading a low single digit PERs.  Explorers with some outstanding results.  Technical geological and geophysical evidence is building up for the most extraordinary decade of new major discoveries in Australia in oil and gas, copper, lead-zinc-silver and gold.

The indefatigable Kerry Stevenson and her recent Symposium at Broken Hill has just delivered a focussed insight into the massive potential for new discoveries in central Australia.  Knowledge and technology that begets new knowledge and then great wealth.   The mining and exploration sectors provide some of Australia’s most dynamic Intellectual Property.

Hats off to the staff from the universities and Geological Surveys of NSW, Sth Australia and the Northern Territory.  The base that is being laid out before us is truly exhilarating.  Australian exploration will be having a vintage decade.

I hope I have the time to cover this in more detail in the next few months because the implications are vast.

So here is your chance to do very well on most resources companies.

I know dozens of these companies with outstanding operations and projects and there are scores more that I don’t.  Many are already up 100s of % in 2015.

Most are too small to even fit within the ASX 300 sub indices but I am seeing improving volumes, increasing market breadth and the rising prices that go with them.

Participation by a broader section of the market place is still not with us, reflecting the fear and pessimism but this has been a very long period of bear market so it will take time to bring this back to normal.  That means this bull market will last a very long time too!

Call me if you want to make some real money in the year ahead!

But now however, the evidence can be best seen in the actual performance of ASX the Small Resources and Gold Sector Indices.

Market share of ASX turnover is picking up and the four year-long downtrend declines have been broken.  The momentum is now with the Resources Sector.

Have a close look at these graphics and I haven’t done them because they look colourful.

Each one suggests major changes are coming in the markets.

There is a downtrend trend break for the Metals and Mining.

Small Resources had its bottom in June 2013 which is my `low’ for this cycle and many stocks outside the XSR have done very well indeed.

The XGD is showing leadership after bottoming in November 2014.

Gold sector turnover is rising as breadth and participation increases. Appreciate that the ASX Gold index is still down 70 % from its high and is now turning up.

Certainly the weakness of the A$ in late 2014 helped kick the market and some people might have thought it was just an A$ gold adjustment that would soon peter out.  Nice jump.  Take profits.  Now what?

Well it has held its ground and then moved marginally higher.

In my view, the XGD is readying itself for another major move up.  Perhaps mirroring the bond markets that seem to be expecting an even bigger thump to come there.  Timing suggests mid to late June so you may not have much more time to dilly dally.

This looks very interesting and a break above 2800 could see a sharp rush to 4400 (up 64% from here). Will we get it?

Looking at this index more closely there is much to like.

It is showing intra sector rotation as some stocks have weakened, some have moved sideways and some others have surged.

Dawes Points has its favourites.  NST, MLX, TBR, BLK, SBM, OGC, NCM, EVN, BDR, MML, GOR, DRM and CGN.  

The Paradigm 1 December 2014 Portfolio to 3 June 2015

      A cents    
  Stock ASX Code

1-Dec

3-Jun

Change

1

Beadell BDR

19.0

19.8

3.9%

2

Doray DRM

27.0

44.0

63.0%

3

Evolution EVN

43.0

114.0

165.1%

4

Kingsgate KCN

62.0

75.0

21.0%

5

Medusa MML

57.0

92.5

62.3%

6

Newcrest NCM

918.0

1381.0

50.4%

7

Northern Star NST

96.0

237.0

146.9%

8

Oceana OGC

96.0

313.0

226.0%

9

Regis RRL

207.0

119.0

-42.5%

10

Resolute RSG

129.0

31.5

-75.6%

11

Saracen SAR

21.0

48.5

131.0%

12

Tribune TBR

265.0

390.0

47.2%

13

Gold Road GOR

20.5

45.5

122.0%

14

ABM Mining ABU

22.0

26.0

18.2%

15

MetalsEx MLX

70.0

145.5

107.9%

16

Blackham BLK

6.7

18.0

168.7%

17

Crater Gold CGN

12.5

11.0

-12.0%

  ASX 300 Gold XGD

1701

2625.0

54.3%

This unweighted portfolio is up 69% from 1 December with 0.5% yield.  The weighted (big caps double, mid caps single and small caps half weighting) portfolio was 80% higher and had dividends from NST, OGC, MLX and EVN to take it to just over 81%.

What did yours do?

The XGD was up 54% before dividends.

Look at the leaders.  NST had a very strong run but is now digesting that.  NCM had recently made new rally highs.  MLX has exploded higher.  SBM is catching up.  Market breadth is expanding.  New rally highs for many.  Do you understand the TBR story?  BLK, GOR, CGN.  Like them all!

Were you aware that the term Hedge Fund came from the big bond funds that `hedged’ their bond portfolios against rising inflation in the 1960s by having a portion of their funds in investment vehicles that bought gold and commodity stocks?

With the S$80-90tn now in bonds those fund managers have a lot of hedging to do!

What would a 1% hedging premium (US$800bn) buy in the gold and resources sector?      What would 2% buy?

Do you have enough gold and resources stocks?

Look at this:

XGD Gold stocks against A$ gold had fallen 80% from April 2011 to the Nov 2014 low!  A$ gold at the low was the same as at peak in April 2011!!

Other sectors are moving up and the takeover of Sirius by Independence Group along with the consolidation in the gold sector should be giving everyone confidence.

And I do like the oil and gas sector.  Oil is holding up well with strong demand from Asia and the US output is stabilising or falling.

The thesis in Dawes Points hasn’t changed these past two years even though some things have gone terribly wrong in the A$, the iron ore price, the oil price  and…… oh yes, resources stocks themselves.

But the rest of the scenario of:-

is still spot on.

I am winning now. Are you there with me to win as well?

I own NST, MLX, CGN, BLK, SBM, GOR, TBR, DRM and more.

6 June 2015

Edition #37

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