The Boom Just Sped Up! #84

by Barry Dawes

Key Points

  • Equity markets heading higher again
  • Heed the markets, not the commentators
  • Resources Leaders leading again
  • 2008 downtrends broken after ten year bear market
  • Expect 15 years of bull markets
  • Commodities beginning to reflect market tightness
  • No inventory
  • US$ Gold heading towards important US$1370 resistance
  • Australian resources sector exports back on track for further robust growth
  • Australia has A$1650bn in bank deposits held by risk averse bears
  • This will fuel the markets for at least a decade
  • Contact me to participate

What a wonderful week that was!

The US equity markets defied all the doomsters and provided a 454 point Dow 30 (1.74%) rise and set it up for probable new highs.

This channel analysis provides a simple and transparent assessment of markets.  Not always easy to correctly predict but market action tells its own story and the channels often help.

Back above the upper trend line and setting a new course higher.

The Dow 30 looked good for the large caps as did the Russell 2000 for ‘small caps’

The major resources companies headed higher with BHP making a new 7 year high and RIO a 10 year high as the XMM (ASX S&P Metals and Mining Index) and XKR (ASX S&P 300 Resources) broke the 2008 downtrend.

BHP Makes 7 year high

RIO  Makes 10 year high

XMM  ASX S&P Metals and Mining  – Breaks 2008 downtrend

XKR  ASX S&P 300 Resources – Breaks 2008 downtrend

Commodities have been firmer.

Iron ore seems set to be heading for new highs as Dawes Points has been suggesting for some time.  Amazing how the iron ore price was rising well ahead of the sad Brazilian disaster for Vale and anticipated it!   Of course it didn’t, but iron ore has been far tighter than the market place has been anticipating.

Global crude steel production was 4.6% higher in 2018 led by China with +5.4% to 928mt.

And India nudged past Japan to become #2 producer with 106mt.

There is unlikely to be a slowdown in demand for iron ore into China or Asia.

Australia’s role is firmly established as the dominant player in seaborne iron ore trade.

LME metals are looking strong again with almost all having excellent supply/demand positions and just no inventory.



Just no inventory.

The impact on LME metals prices could be very strong.

Even oil is looking good for new highs in the next few years.

Gold gained a bit more life on its way to US$1370 and beyond.

This latest move combining with the currently strong US$ is sending a message that there just might not be much resistance at US$1370 after all.

Look at gold in Euros-

The recent break of the 2011 downtrend is suggesting an acceleration ahead.

My estimation is at least 15% upmove.

Gold in Yen, probably the last currency to do this, is now about to break its 2011 downtrend.

Breaks from these wedges usually are sharp.

Keep in mind the bigger picture.

Once US$1370 is exceeded then a powerful upmove will take gold to new highs above that of September 2011 US$1923.

The Gold Sector here is doing well with earnings reports showing strong results so far for most majors, increasing dividend payouts and more cash builds.

NST had a good Dec Half with modest growth in earnings and a 33% rise in interim dividend.

It seems that NST has made another outstanding acquisition in Pogo where it seems a major extension of the mineralisation is likely to provide a substantial increase in resources and reserves.

I see no reason why A$20 will not be achieved within the next couple of years.

And a number of lucky MPS clients with entries in NST below A$1 are finding each A$1 increase is another 100% on the initial investment.

The latest Dec Half results have been with an average A$ gold price around $1700 and now gold is A$1850 and A$150/oz higher.

On Australian industry-wide figures of 325 tonnes pa (>10mozpa) of domestic production that would add about A$1.5bnpa pretax to earnings.  Some of this is produced by non-Australian companies and  of course companies like NCM, NST, OGX, PRU and RSG have offshore gold production revenues.  

Newcrest finally breaking its 2011 downtrend.

NCM makes up ~40% of the ASX XGD Gold Index so its current racy performance will pull up the Index quickly rather than being the drag of the past three years.

NCM is one of the cheapest of the ASX gold companies.

You are all aware of this graphic showing the outperformance of these Terrific Ten Australian Gold Producers against the NCM-heavy XGD itself and the miserable performance of those half a dozen Australian companies with overseas operations.

My criticism of ASX Indices for the Resources Sector remains firm so I have set up some indices of my own to cover the myriad of small companies that will become key participants in this great bull market.

An unweighted index of 25 emerging gold producers with market caps under A$250m has been created and it shows the miserable performances of the past several years.

Hard to have imagined these 25 would have fallen during a period of a high A$ gold price.



Especially when the Terrific Ten did so well.

Against that Terrific Ten there has been a major decline.  The bright side is of course that relative value has never been better.

And now it is time for catch up!

This is for new money only!  No selling of NST to go down market!

And talking of new money it is worth while reviewing some graphics that I have not shown for a while.

First, Australian bank deposits have just topped A$2,000bn.   Savings deposits have continued to surge to over A$900bn and term deposits and building societies are still at strong levels to a total of over A$1500bn.

And when this A$1500bn is taken against the value of the ASX S&P 300 at about A$1,800bn it shows loads of fear out there right when the resources markets are taking off.

This cash should fuel a market rise for at least a decade at A$50bn per year from excess deposits.

If anyone is feeling negative on the A$ this should add some solid backing to the Dawes Points view of a strong A$.

Note the revenue growth in iron ore, coal and especially LNG.

I sometimes consider all this might be repetitive but money is only made through eternal vigilance. 

The story hasn’t changed at all these past six years and the narrative has only grown firmer and more powerful.

The runs are on the board in the big caps, it is now time for the smaller resources companies to play catch up.

Call me to participate.

Barry Dawes BSc FAusIMM MSAFAA

Executive Chairman
Martin Place Securities

I own BHP, RIO, NST and NCM mentioned in this report.

+61 2 9222 9111
bdawes@mpsecurities.com.au

18 February 2019

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