- Gold price now in uptrend
- Gold stocks jump after rallying from Nov 2104 lows
- Downtrend breaks for several resources equities indices
- Gold price encouraging broader short cover rally?
- Price bottoms for oil and copper?
- New paradigm applying to resources investment
- Do have enough(any?) resources stocks?
- Call me to discuss +61 2 9222 9111 bdawes@psec.com.au
As noted in the last Dawes Points further rises in gold have given strong support for gold mining shares and these are now acting to reassert reasonable valuations again after years of underperformance, especially against gold.
Consider that the market place is extremely underweight gold and gold shares so the run may be longer than expected and the eventual pull back may come much later.
Gains to date have been over 100% for some of our major gold stocks and the smaller companies have great leverage and will eventually join the party.
And as was said, this rise is gold is extremely important and when put in the perspective of the BIG PICTURE so much is now becoming clearer.
A couple of months ago I wrote a piece titled , What if …a rising gold price forces a short cover rally?
Well I think it is coming to pass.
The gold price is rising in almost every currency.
Equity markets are rising.
You can get yourself tied in knots over the actions of the Fed, the ECB, The Japanese Central Bank and the PBOC or even the Swiss National Bank. Do you really understand what is going on? From the 10,000 views from 5,000 talking heads and economists I would say most of them don’t either.
So let’s just look at markets and tonnes. Prices for gold, oil and copper. Iron ore, tin and zinc. The Shanghai market, Mumbai, Hong Kong and New York. Tonnes of production, consumption and inventory.
What I see is truly fascinating. I am bullish on gold and economic activity. I am not a doom and gloomer who seems gold as the only lifeboat. Not a bull of the US$ for the infinite margin call that might be coming on all the debt funds utilised outside of the US, especially the Emerging Markets (whoever they might be). Not a bull of vastly over valued sovereign debt. Not a Greater- Depression-Underway fan.
Just a follower of tonnes and observer of markets.
I have been saying that something is not adding up for gold stocks and whatever I said there applies multifold for all other resources stocks.
This may be a very important Dawes Points.
My view of the world has been for some time a matter of the flow of funds. The movement of capital from one asset class to another.
The vast amounts of cash and the extraordinary commitment to government bonds has to flow from these vastly over valued sectors to those vastly undervalued. All resources are grossly undervalued.
Last week the focus here was the very attractive PERs and dividend yields applying to the Australian Gold Sector.
The numbers were 4.0x for FY17 and a yield of 10.0% for the Paradigm universe of gold stocks.
Under-owned, despised, hated, forgotten but such extraordinary value! And dividends coming along.
My clients have a portfolio of the best of these stocks. What do you have?
As most of you know, I have been watching the resources sector for over 40 years and have experienced many cycles but just as importantly have researched many more as far into history as can be accessed. I consider this allows me to have a different perspective than many others and has given me the experience to have remained long term bullish during this long period of falling resources shares and commodity prices.
My 2014 non-traded 30 stock portfolio established in late 2013 was up 24% in 2014 compared to -20.7% for XMM, -19.0% for XJR, -29.2% for XSR, and +7.9% for XGD.
I will explain my 2015 portfolio a little later this month.
I still expect the next move up to be very strong and last for a very long time.
Almost every cycle I have experienced has seen strong investment and consumer demand that pushes hard against capacity and results in higher prices for commodities and manufactured goods. Labour prices follow higher as do interest rates and debt.
High interest rates reduce demand, prices fall and newly committed capacity comes on line only to see operating and corporate failure. Equity markets fall and many bond prices rise. All commodities, including gold, fall in price, inventories rise and unemployment surges. Bad news, misery and Hard Times.
Then it all starts again.
But this time it is very different.
This time the world has a growing China with 1400 million people. IMF says its Purchasing Power Parity GDP figure is now US$17,600billion pa and growing at 7+%pa compared to US$17,100bn and 4%pa for the USA. This time the world has 1300 million people in India and growing at 8%pa. Add 700m people for ASEAN, 1,000million for Africa and 700m for Sth America.
Resources materials consumption is at record levels and growing. I have previously highlighted the strong demand for iron ore into China and the just-published 2014 import data showed an increase of 13.8% to 932mt. So much for slowing or falling demand from China. High growth rates are always unsustainable but slowing growth is not declining demand. It is worth reviewing all of this data to show what is happening on the demand side.
Spend the minutes to see the demand/consumption levels. See the growth rates. All these consumption figures are at RECORDS levels.
To see commodity price fall 50-80% and the resources shares fall even more doesn’t make sense. In previous cycles, as noted above, demand fell and commodity prices collapsed. This time commodities collapsed and consumption reached record levels. Its true.
Recall that the commentary has shifted from incessant calls for demand shortfalls to tirades about oversupply. What is going to be the next mantra for Wall Street’s self absorbed IBs? The managements of resources companies have been pilloried by everyone. The operators working at the market edge have been replaced by the bureaucrats to help `steady the helm’. The entrepreneurs have packed up their tents and shut down their businesses to protect their core assets.
The financiers have been long gone and the funds themselves have been commandeered by even more colourless bureaucrats who would rather have safety at <2% on 10 year sovereign debt than back any cohort of risk takers and builders.
So come and look at this data.
Growth everywhere (except for Chinese crude steel production).
Some excellent work from Glencore is contained here. See the Investors Day Presentations from 10 Dec 2014. Over 150 pages of graphs data and strategy. Enjoy. The link is here.
http://www.glencore.com/media/speeches-and-presentations/p/2014-investor-day
The oversupply issue seems to be ready to self-correct itself and for most resources commodities the swing from surplus to deficit is either already with us or due in the next 12-18 months.
Can you see what is happening?
Consumption/transport of major metals
| 2013 | 2014 | 2015 | 2016 | 2013A | 2014E | 2015F | 2016F | Swing to deficit | |
| Metals consumpn (mt) | % chg | %chg | %chg | %chg | |||||
| Copper |
21.3 |
22.4 |
22.6 |
23.3 |
5.8 |
5.2 |
0.9 |
3.1 |
2015 |
| China |
9.8 |
11.0 |
11.2 |
11.6 |
8.9 |
12.6 |
2.0 |
3.6 |
|
| Aluminium |
50.2 |
50.9 |
51.1 |
52.0 |
5.9 |
1.4 |
0.4 |
1.8 |
2013 |
| Zinc |
13.1 |
13.6 |
14.0 |
14.6 |
3.8 |
3.8 |
2.9 |
4.3 |
2015 |
| Lead |
11.1 |
11.5 |
11.7 |
12.1 |
6.1 |
3.6 |
1.7 |
3.4 |
2014 |
| Nickel |
1.8 |
1.9 |
2.0 |
2.1 |
6.8 |
5.6 |
5.3 |
4.0 |
2015 |
| Tin |
0.3 |
0.4 |
0.4 |
0.4 |
2.7 |
1.7 |
2.8 |
3.0 |
2010 |
|
|
|
|
|
|
|
|
|
||
| Global Steel demand |
1531 |
1562 |
1594 |
1640 |
2.0 |
2.0 |
2.0 |
2.9 |
|
| China crude steel prod |
822 |
807 |
840 |
850 |
12.4 |
-1.8 |
4.1 |
1.2 |
|
| Seaborne trade | |||||||||
| Iron Ore |
1 225 |
1 360 |
1 435 |
1480 |
7.0 |
11.0 |
5.5 |
3.1 |
2016 |
| China imports |
820 |
933 |
1000 |
1050 |
10.0 |
13.8 |
7.2 |
5.0 |
|
| Thermal Coal |
931 |
946 |
966 |
1019 |
3.4 |
1.6 |
2.1 |
5.5 |
2015 |
| Coking Coal |
314 |
320 |
328 |
328 |
8.4 |
1.8 |
2.6 |
0.0 |
2014 |
And note the lack of increase in LME stocks that is usually associated with falling demand and recessions. Note too that LME inventories are only a few per cent of annualised consumption and 2% is less than one week.
|
000 tonnes |
1-Jan-13 |
1-Jul-13 |
1-Jan-14 |
1-Jul-14 |
Current | From Jan 13 | From Jan 14 | % Ann cons | Ann Cons mt |
| Copper |
320 |
665 |
315 |
155 |
248 |
-23% |
-21% |
1.1% |
22.6 |
| Zinc |
1220 |
1061 |
854 |
668 |
630 |
-48% |
-26% |
4.5% |
14.0 |
| Lead |
320 |
198 |
214 |
194 |
215 |
-33% |
0% |
1.8% |
11.7 |
| Tin |
12 |
14 |
10 |
11 |
12 |
-2% |
22% |
3.3% |
0.4 |
| Nickel |
139 |
187 |
261 |
305 |
426 |
206% |
63% |
21.3% |
2.0 |
| Aluminium |
5210 |
5435 |
5458 |
5046 |
4049 |
-22% |
-26% |
7.9% |
51.1 |
Nickel is an exception here. Iron-rich lateritic nickel ore from SE Asia has been used by stainless steel producers as a ferronickel product that has displaced pure nickel metal units. How strange that nickel metal stocks are rising at a time of strong demand for total nickel metal units. A major deficit is predicted from 2016. And tin stocks are so low that even 1000 tonnes makes a big difference.
There has been no high interest rate policy and restrictive credit action for most of the 5 billion people mentioned here. These has been no collapse in demand for commodities or manufactured goods. No dramatic reduction in global employment.
Almost every factor is unlike any previous cycle.
And the internet is bringing us together into a global economy that offers extraordinary opportunities to everyone. Almost unthinkable levels of new access to buyers for your product in almost every country in the world. And so many new competitors against you and your peers.
Commodity prices have been falling and the call is for deflation, depression and misery. Is this the way it is to be?
Glencore is the absolute antithesis of tonnes-up-the-shaft mining companies. It is a marketing company. Mining companies need to be some version of Gerald Whittles’ Money Mining companies so marketing should be the critical issue to sell product and to optimise operational cashflows.
Have a look at this graphic from Glencore.
Interesting to see the strategy differences
Note the huge investment by BHP, RIO and Vale into iron ore and bulk commodities. Note Glencore’s commitment to industrial metals like copper, zinc and nickel.
Look at this Glencore graphic of the demand growth rates of metals against bulk commodities. 2014 was a very good year for demand but not prices.
Go back and look at the growth rates of copper, nickel zinc and aluminium. Note, in contrast, the turn to deficits in 2015-16 and the impact beyond.
And let’s use Glencore’s stock level analysis for copper (note LME inventories have risen by a miniscule 50kt since this was presented). Glencore also correctly points out that much of the supposed new copper capacity coming on line has been deferred due to availability of capital, corporate over-extension, environmental and political interference and just bad luck. Glencore things the Copper Deficit might just come earlier than expected.
Copper price action is indeed fascinating. Channel analysis picks up important support and the 2002 uptrend is helping out. Oversold and ready for strong bounce after falling for three years. And note that copper made a new all-time high in 2011. Strong underlying long term fundamentals applied then and still apply now.
Here you should be recognising that the old paradigms are no longer working so you need to be thinking what else might be happening.
So here is my paradigm. My way of thinking.
You will recall I have referred to my presentation of the MPS Disbelief, Pessimism, Optimism, Opportunity and Euphoria graphic in November 2008 at Mines and Money in London.
I have provided updates for this occasionally.
Why have I done this? I was amazed at the sentiment that applied to the Disbelief Leg 1 in this bull market. Believe it or not, from my perspective as a corporate financier, very few players were on board and the lack of market breadth was quite extraordinary.
Remember when oil was surging to its high of US$147 in 2008 after the Lehman Bros and the sub-prime debacle? The 20:1 leveraged global hedge funds pushed the major oil stocks to very high levels but the local institutions and public yawned and stayed out of the market and ignored the small cap oil and gas companies. Ditto gold stocks and almost all resources stocks. The big stocks were making all-time highs while so many of the small stocks struggled in the cellars. No market breadth and no participation.
So a bull market that not many people came to.
The GFC brought about a major fall in 2008 that saw +60% falls in the XMM, XJR, XSR and XGD into Dec Qtr 2008. These sectors bottomed here, along with general commodities, Shanghai and Hong Kong, more than four months ahead of the All Ords, S&P500, Dow, FTSE, DAX etc that made their lows in March 2009.
This is important.
2008 was clearly the end of some economic cycle in the US, with housing the driver. Usual end of cycle action with commodities peaking then falling, debt levels rising, some interest rate rises, a brief and short-lived spurt of price inflation, corporate failure. This followed into Europe, Japan and elsewhere.
China with its centrally planned economy was able to stand and, with fiscal expansion financed by a major trade surplus, accelerated infrastructure expenditure activity from 2009 onwards. Demand for iron ore, steel and copper surged to extraordinary record levels.
This provided Australia’s Resources Boom with over A$400bn of capital spending mostly on iron ore capacity, new coal mines and ports and the new LNG gas gathering and export facilities.
The performances of the major commodities showed US$ price peaks in 2008 or earlier. Most commodities rallied from the 2008 lows to good prices that peaked in 2011. Interestingly, four key commodities had the underlying strength to rally to new and all-time highs – Gold, Copper (as noted above) and Tin and Silver touched its 1980 high of US$50/oz.
I consider these will be the leaders of the next upleg that is now already underway. Nota Bene.
So coming back to the Wave Two Pessimism. I thought Pessimism had fully taken hold in 2013 and 2014 but the latest surge in the US$ and the US T-Bond market showed that Pessimism was still alive, well and thriving in 2015.
Have look at these. Who are the lemmings chasing yield on 10 year bonds?:
US 1.65%, ( US$14 trn net debt (81% GDP) Budget deficit of 4% GDP)
UK 1.33% (GBP1.4tn net debt (84% GDP) Budget deficit 4% GDP)
Germany 0.30% ( Euro 1.5tn net debt (54% GDP) Budget surplus 0.5% GDP
Australia 2.34% (A$254bn (16% GDP) Budget deficit 3% GDP)
Source: IMF data
These markets are clearly in the final phases of a collapse in yields (and a surge in price). The timing for the end is uncertain but it is likely to be very soon.
Samuel Clements (Mark Twain) was quite correct when he asked about return of money not return on money.
| US | UK | Germany |
 |
 |
 |
Would you prefer this paper garbage managed by some of today’s impressive world leaders or the `barbarous relic’ of gold? You tell me.
And Australian bank deposits. A$1,679bn as of 31 Dec 2014. Term deposits have flattened at about A$530bn but Savings Banks have increased by over A$70bn in the past year. Lots of Pessimism here.
Source: RBA
What can we make of this and what do we do next.
So let’s come back to the Australia Resources Sector.
These are the four key indices.
XMM Metals and Mining
XJR ASX 300 Resources
XSR ASX Small Resources
And XGD ASX Gold Index
As noted, XGD, the Gold Index, made a new high in 2011 but none of the others did.
All these have done the Disbelief Rally that peaked in early 2008, the decline into late 2008 then the bounce rally into April 2011 and the unrelenting decline into the lows which I consider were in November 2014.
They all bottomed on 16 Dec 2014 except for the Gold Index which bottomed more than a month earlier on 6 November.
Now if all the above fundamental supply/demand data are correct (Glencore definitely thinks so) then there should at least be a good bounce in 2015 for all things resources.
Now let’s take a further step.
What are the global equity markets telling us now?
Starting at the heart in the US. S&P 500 – maybe overbought and concerns are developing over the strength of US$ on earnings but the long term trend seems OK. Renewed calls for a crash `tomorrow’ are still coming through. Mkt cap US$17tn PER 17.6x
The Russell 2000 for `small caps’ had a Gap Year in 2014 for a bit of rest but it too does not look over extended. Mkt cap US$2.0tn. PER is 50.9x.
And the broad Wilshire 5000 looks very stable.
And look at the rest. Germany is OK. Recent new highs. Mkt Cap US$1.1tn. PER 17.6x
But now look at where the real action is. Asia. China, India, Japan (sort of), Rep of Korea and ASEAN. And this flows into Middle East and Africa.
China and Japan have started major new uptrends after long periods of decline.
Singapore and Taiwan are ready to move up. Not quite all-time highs yet but certainly trying.
And now we have India under the new Modi administration.
1,280m people and GDP of US$900bn and growing at 6-8%.
India is the fourth largest producer of crude steel and whilst historically India has been an exporter of iron ore, its domestic policies have created a real uncertainty. Exports were banned and India became an importer. Now, exports are OK but net imports are likely to continue and to meet the proposed +8% growth in in domestic crude steel that will take India to over 200mtpa by 2015. A lot of iron ore and a lot more coking coal will be required. Have we heard all this before? Yes, but this time it does appear to be happening and the pattern of Indian crude steel has traditionally been skewed to EAF (Electric Arc Furnaces) treating scrap and operating DRI (Direct Reduction Iron) plants. It will be interesting to see if a new collection of conventional blast furnaces will be built to take imported hematite and I am sure India will take a fair proportion of any Chinese export steel in the short term.
India is growing, its stock market surging and Indians are becoming wealthier. And India loves gold and will import a lot more, absorbing anything global gold mines can produce.
It has to be expected that demand for zinc, copper aluminium and nickel will also benefit.
Coal imports, both thermal and coking, into India will only increase despite the proposed drive into solar and renewables. Domestic policies on coal tenements are as complex as those for iron ore so don’t expect much of a surge in domestic production.
China, India and all the other emerging economies will be taking more cheap oil and bring the market back in to balance as the US oil patch shrinks a little for the time being. Shale oil recovery in North America is very like mining now with the capital costs actually being operating costs. And the financing of this drilling activity has taken such a major hit that will take the oil drilling industry a few years to recover from.
But the oil price does look to me to have very limited downside now and each severe sell off seems to correct within a few months. This time should be no different.
Conclusion
There can be only one conclusion.
Equity markets are telling us that sufficient liquidity exists for the world economy to survive. The dive to unsustainable bond yields is coming to an end and will bring about the final stages to a 33 year bull market in paper financial assets.
The supply/demand picture for commodities is still tight and as the flow of funds runs from cash and paper into equities and commodities the resources stocks will be the greatest beneficiaries.
Are you set for the Wave Three (Optimism) Upleg?
Gold and gold stocks are leading.
BHP at 4.5% yield is coming next.
Then all the second and third liners. Copper, oil, uranium, zinc, tin, mineral sands and of course iron ore.
Do you hold enough resources stocks?
2 February 2015.
Barry Dawes
If not contact me to see how you can benefit.