Key Points

• Equity markets around the world making new record highs
• Activity in large scale mergers and acquisitions rising
• Velocity of money circulation now turning up?
• Institutional investors short and wrong
• China growth intact
• ASEAN bloc of 617m people adding to growth surge
• Commodities showing strong demand but limited supply
• Metals markets much tighter than you are being told
• A$ looking firm
• Just BUY resources stocks - see list below

New record highs in important equity indices fuelled by better earnings data and some major M&A activity provide strong evidence that the Dawes Points synchronised global economic boom is on track to flourish in 2014 and the Year of the Horse and beyond.  The sidelined cash built up in most economies around the world will now start to flow into investment and consumption and add significantly to economic growth.   Several good years are ahead of us all and the opportunities everywhere are boundless.

Would you believe the GDP growth rates of 5.9%pa for Japan in the March Qtr and forecasts of 4% pa for the US in June Qtr? Some technical reasons here of course but nine months ago you would have said I was on drugs if I had said that.  You probably did anyway!

Well it has been almost 18 months since Dawes Points made strong suggestions of a global economic recovery that would bring boom conditions back to the resources sector in 2014 and beyond.  The US equity market boom led by the small caps (the Russell 2000)  and the broader market (Wilshire 5000) has been followed by the S&P 500 and the Dow Industrials in keeping with better economic and earnings data.

The mergers have added to this but what is interesting is that the velocity of circulation of cash (GDP divided by M2 money supply) has been falling for some years and has really decelerated since the GFC in 2007/08 while everyone (individuals, corporates and banks) have built up cash levels in very defensive stances. 

Even here, RBA figures show the A$538bn in term deposits and A$572bn in savings accounts in a total ofA$1572bn.  ATO data suggest SMSFs have 31% in cash, 15% in property and only 32% in shares.  This cash buildup has contributed to weak data on retail expenditures and also on the lack of interest in general investment especially higher risk ventures such as mining stocks and junior companies in particular which have lagged here in great contrast to the performances of the major US indices.

Could it be a change is underway at last?   Most definitely YES!!

The new mergers mania may be changing this velocity of circulation. US banks have had a record 26% of net equity assets held as cash and have held back on lending.  The current M&A surge with bank lending support may get this index moving the other way at last.  Let's keep watching it.

Velocity of M2 Money Stock USA  - Federal Reserve Bank of St Louis

You have been advised of this growth outlook for quite some time at Dawes Points so why was it that Dawes Points was able to say this whilst all the massive brainpower of local and global investment banks said otherwise.  Experience, knowledge and vision I think is the catch phrase. This was the motto of MPS almost 15 years ago.

The more recent comment has been to heed the markets not the commentators.

Forty-something Western Generation Xers who have been brought up in an environment of entitlement, compliance and communication can only respond within that paradigm.    

However, the paradigm for six times their number in China, India, ASEAN, Africa and Sth America is something far different. 

A rise in domestic living standards is imperative and they know it can only come from someone being able to sell something to someone else. And by George that is occurring almost everywhere. People feeling pleased with what has been bought, sellers pleased that they have sold a quality product at an attractive price that makes a profit but importantly one that will entice a return customer and everyone wins.  It  is a pity that all socialists and bureaucrats seem to think about is a crappy product(mostly government services) and care nothing about repeat customers because they usually have a monopoly.  Just jack up prices, pay the bureaucrat more and who cares about the service, outcome or recipient.

Anyway, the US equity markets now really like what they see and the recent breakouts show the markets around the world also really like what they see.  But not everyone it would seem.

Have a look at these next two graphics.

The first shows that institutional clients of BofAML sold a cumulative net US$50bn of equities since 2007.  Assuming BofAML has a 10% market share and that its clients are no different from those of any other Wall Street broker then just maybe about US$500bn has been sold on market by institutional clients.  Hedge funds are also out/short.  Just the man in the street building up his holdings as the market surges to record highs and US corporates now on a buying spree recognising the great value there.  And a myriad of new technologies.  Who has got it right?  Who has got it very wrong?

So many professional fund managers are scared and short!  Sell shares and buy bonds for goodness sake?

And then what about this?

Record highs accompanied by rising short positions.  Not the psychology of market highs.

Think of what this means.

Market psychology should tell us that peaks in markets are accompanied by participants believing that the new plateau of prosperity will continue forever, higher Share Index targets are rolled out daily and that market shorts should be overwhelmed and ridiculed.  It's not happening that way.  Caution, caution, caution is the mantra.

I attended the annual Resources Information Unit conference in Sydney this week. Some wonderful opportunities offered and so cheap!  But almost all of the resources sector summation presentations said the same thing!  Caution, caution and caution. Commodity prices are going nowhere for at least another 18 months.  Maybe 2016.Don’t know about gold. Too hard. Sure do some stock picking by crystal ball gazing and impute resource potential from a few drill holes but don't do anything before a JORC figure is given.   Just ignore the drawdown of inventory for copper and lead/zinc and tin.  New supply is coming. Not sure about where from, but it is probably coming from Africa.  Or Sth America/China. Somewhere.  But it's not Australia just now. 

But now look at what the markets are saying.

New highs in the US equity markets.  I have been talking about this for over two years now for the US to lead the world out of misery.

And the economic boom rolls to the East.  First to Europe that obviously did not collapse.

Then further East to India, where growth and now a change of government suggest much more to come.

And the Far East. Hong Kong is a proxy for China and it is all good here.

Sth Korea is relying on Japan and China. KOSPI up 2.63% last week. Would love to buy stocks here!

UK catching up after some major changes. Almost a year of indecision but it will run well soon.

Commodities starting higher.  Agricultural commodities might be leading but watch energy.

Brent looks like it is ready to run.  I sure like oil and gas stocks in Australia! From WPL at the top to STO, OSH, BPT, SXY, DLS, BUR, AJQ, CTP and HPR. Get aboard!

Then metals to follow.

Copper looks very strong after the scam selloff.

And look at these LME copper inventories.  Down 72% in 11 months.  LME stockpile is declining at more than 15% per month now. Just 191kt. Just 3.6 days consumption. What Purchasing Manager is now going to sit tight while thinking about `oversupply'. Buy copper producers! 

What we see in copper is replicated in lead, zinc and tin to a lesser extent but all show production declines and very tight markets out a year or so.  Falling LME inventories to critical levels of under 2 weeks supply will force prices higher.  Aluminium and nickel have been in oversupply difficulty but may now be also showing demand exceeding supply so their inventories might continue to fall from current quite high levels.  It is the direction that counts and the momentum then builds.

Have at look at bauxite prices into China. Lots of alumina/aluminium capacity. Not much bauxite. There may be an analogy for bauxite and aluminium with iron ore and steel.  We saw a big jump in iron ore vs steel.  Just might get a jump in bauxite vs aluminium.   Watch this space.

As Dawes Points has said ad nauseam, the crude steel production numbers out of China say very clearly growth is continuing.  Output was a record 827mtpa in March.  I hear over 830mtpa in April. Who are the conmen here?  Take a bow US investment banks with an anti China agenda and their collapse in China steel production.  I maintain my forecast of new highs in iron ore prices within the next two years.

 

You should listen to the iron ore company executives.  They know what their clients are saying and wanting.

Funny how so much oversupply in iron ore has Chinese ships arriving at Australian ports to take every tonne they can get while prices are low. Record exports from us.  Record imports from them.

And port inventories are high but mill inventories are low.  The stocks to import ratio at about 35 days is still 40% BELOW two years ago. 

Fortescue (ANZ Research) shows these new mills being built on the coast to take imported hematite ores, not much local magnetite required here. Imports will soon make up over 80% of iron ore demand in China.

And look at Shanghai.  Trying very hard to move ahead against the bearish environment but major structural changes are afoot to help.  SOEs are now encouraged to tap massive savings in China and take equity to replace debt and to start to really free up business strategies from just providing a social service to creating earnings for shareholders.  PER of 9.8x is very attractive now.  Same price level as 2001 but about 30x PER lower. Go China!

I mentioned ASEAN which now includes Vietnam, Cambodia, Laos and Myanmar within the new ATIGA free trade agreement.

Look at this result for 617m people and 50%<35 years of age.  Better demographics than China and no One Child Policy. Almost as important as India and Sth America.  

Note, too, the energy consumption and growth rate of MENA (Middle East and North Africa)!  MENA energy consumption is one third that of the US and growing at over 4%.  US energy demand growth is negligible!

These are impressive numbers using BP data.

And look at the ASEAN economic growth rates stats from the IMF.  Not far behind China with almost 50% of its population.  Mostly English speaking peoples too so good rule of law!  I hope you are getting the full picture here.

US Bonds have peaked and yields heading higher. Dawes Points has not got this right yet but the latest rally sure suggests they are just grasping at straws. This will be a major source of funds to the equities and commodities bull markets as participants move out of an overvalued sector in a very tired 30 year bull market that has already peaked almost two years ago.

And the US$ is breaking down.  What a rear guard action over the past couple of years.  Truly grasping at straws here too.

While the US$ is fighting for relevance the A$ has finished its correction.  Next stop is US$0.95, then higher.

I mentioned attending the RIU Resources Conference last week. I saw about 40 company presentations and a few industry commentaries.  Of the 43 companies I would be happy to invest in about 20 just on the  basis of outstanding growth prospects and another 10 or so on just ridiculous valuations.

Of course there was the caution, caution, caution, commentary but I really don't think there is much time left to be cautious.  This a great bull market that is developing and there really isn't much time at all.

So I will make some suggestions.

• BUY graphite stocks - I expect them to become market leaders
• BUY gold producers.  I have a very select list.   
• BUY copper producers and explorers.
• BUY nickel producers and explorers.
• BUY lead/zinc producers and explorers
• BUY Musgrave Range copper/nickel explorers
• BUY NSW copper/gold/lead/zinc developers and explorers
• BUY Rare Earth developers/explorers

I will also make some other suggestions.

• BUY Cooper/Eromanga Basin producers/developers
• BUY unconventional oil and gas explorers in NT, Qld, Sth Aust and WA.
• BUY iron ore producers and selected hopefuls

And finally yet another plug for old favourites

• LMB  expect over A$2.00/share
• LNG expect over A$5.00/share
• BLK  expect over A$1.30/share
• FMG  expect over A$7/share
• CTP expect over A$2.00/share
• HPR expect over A$1.00/share

I have a list of about 20 Super Stocks for clients. Major outperformance expected. Contact me if you are interested.

I own BHP, FMG,CTP, BLK, HPR, LMB, LNG, DLS, AJQ, Fo.V

Sydney

18 May 2014

Key Points

• Global boom accelerating
• China crude steel output hits another new record
• Copper prices moving up again
• Gold prices becoming very interesting
• `White’ precious metals looking good
• The stealth onshore oil boom coming into daylight
• Resources stocks beginning to really fire

Exhilarating!  It is so nice to see the gains now coming through in the form of improved market turnover, increased market share by resources stocks, greater market breadth and of course rising stock prices. And client activity is up sharply and the early investors are very happy. So much more to come. It has been frustrating over the past few years to have experienced extraordinary and mostly irrational negativity over the resources sector, particularly since the most recent highs in April 2011, now three full years ago.  The unceasing and incorrect downgrading of the outlook for China and an equally incorrect strongly bearish commentary on gold have delivered stock prices that were down 80% for the ASX Gold Index (much more for smaller stocks) and 70% for ASX Small Resources.  The net commodity price changes that the harbingers of doom have delivered is just wonderful to see. .  Not much at all really.

	April 2011  US$	April 2014 US$	%	April 2011  A$	April 2014 A$	%
Gold	1556	1301	-16.4	1418	1402	-1.1
Copper	9370	6786	-27.6	8542	7316	-14.4
WTI Oil	114	101	-11.7	104	108	4.5
Iron Ore	182	112	-38.3	165	121	-27.0
US$/A$	1.10	0.93	-15.2	1.00	1.00
China crude steel	700	827	18.2	700	827	18.2

But stocks have fallen so much more.

	April 2011  US$	April 2014 US$	%	April 2011  A$	April 2014 A$	%
XMM	4623	2237	-51.6	5071	2412	-52.4
XSR	5668	2165	-61.8	6217	2165	-65.2
XGD	7295	2116	-71.0	8002	2282	-71.5
BHP	41.78	35.50	-15.0	45.83	38.28	-16.5
XMM	75.50	58.41	-22.6	82.82	62.98	-24.0
FMG	5.61	4.95	-11.7	6.15	5.34	-13.2

So much carnage for so little cause.  Even earnings are so much better. We have all suffered because of this "Group think" which has pushed capital into unproductive government bonds and bank deposits and resulted in the severe mispricing of assets. But that is all history and the reverse will now be happening.  The immensity of the cash build up of A$1569bn (RBA February 2014) - greater than the A$1400bn in GDP and ASX All Ordinaries market cap of A$1550bn (just!)- relative to my Flow of Funds model says this Bull Market is going to have to run for years before the cash levels will be down to `normal'.  What level for the All Ords?  Try 10,000+. (I often wonder why Joe Hockey doesn’t just cut A$100bn off the A$410bn in Federal Budget Expenditures and somehow encourages Australians to take A$100bn out from local bank deposits and invest/spend it as offset. He could give a 5% tax deduction on the first A$100bn shifted out of a bank saving account or term deposit on a first come first served basis in the first year. Wouldn’t that be a good return on your cash and provide some fun at the same time.  The Keynesians should be delighted that the flow of funds is nicely matched and if Joe also cut A$50bn off taxes we would be running surpluses and the economy would boom. Unprecedented times of such a cash build up and unprecedented times of low velocity of circulation in the economy.) And that is just bank deposits in Australia. But the cash build up is global.  What about the misallocation of funds into overpriced government bonds worldwide that just have to have higher yields to adjust for risk? And when the world wakes up to that massive post-2007 surge in money supply that is now moving into property again and into most liquid markets like equities and commodities and probably into global PPI and CPI stats, is anathema for bond holders just where will they park their capital? Just think commodities and equities and bigger! So my global boom theme is alive and well and seeming to grow with each passing month. Also China kindly gave us all some cheer by producing another record crude steel output figure of 827mtpa, up 6% on March 2013.  So much for the slowing of China and collapse of steel production and falling iron ore prices. The inventory and output adjustments over the Chinese Spring Festival are yet to be fully understood by commentators but you will recall this very issue was raised here a month ago.  Also, it would be reasonable to conclude that the 2013 Christmas-2014 Spring Festival seasonal slowdown allowed a mill inventory rundown, a port stockpile buildup and a surge in ships to get as much iron ore at the low prices as possible.  Then of course strong steel output and rebuild of mill inventories and a fall in port inventories. There is nothing quite like going to China to see things at firsthand. Sorry, bears.  I think my idea of new highs in iron ore prices a year or two out will also come to pass. One major component in this global boom theme is this inventory issue.   It is a concept that I have mulled over for more than the past couple of decades and the more I think about it the more convinced I am that it will be a critical component in understanding the outlook of the next few years at least.  Some might recall the impact `just in time' inventory management had a over an extended period in the 1980s as pipeline inventory was run down.  Commodity prices were weaker because demand was about 1-2% lower than apparent consumption over a period.  However, when demand increased and as things became a bit tighter this inventory management was termed `just too late' ! So if we begin with the basic rational premise that markets are people and people make markets then sentiment of the market place is far more important that the PE ratio, the dividend yield or the NPV discount rate.   The volatility over the past few years have shown that these three factors have had such variation that sentiment has indeed been the key factor! So the unceasing negativity of the outlook for commodities and intermediate goods has probably encouraged most purchasing managers (ie people) to allow inventories to fall.  Without a doubt the internet has had a big influence by providing far greater transparency and allowing for a change in the mix of participants holding and delivering product. However holding costs for small operators have probably been far higher than the current global wholesale interest rate structure would suggest so it may be that the overall inventory position is even more tightly positioned. It is my view that the inventory pipeline system and the rise of the BRICs in whatever form you like has become longer and more complex.  So when consumption demand for copper rises because say China is growing at 7.5%pa (and not Wall Street's preferred 5% and falling) then each inventory manager is going to have to make a call on acquiring just a little more copper to ensure the business has enough to meet customer demand. Consider what might happen if all the participants decide to increase carrying inventory by say 5%. You probably get something like what happened in the oil market from 1998 to 2008, i.e., from US$10/bbl to US$147/bbl.  Yes a bull market.  For whatever reason. I consider that there is a real chance that this might happen in copper and this might also explain why copper prices have eluded the bearish targets of Wall Street. I hope you have been following LME copper inventories (see graph below) and the 420kt (64%) decline since July 2013. And now look at the copper price! And, as we say above, it might just happen in iron ore as Chinese steel mills decide that they have to rebuild their inventories again because demand for steel is clearly still firm. (see  Dawes Points Points 26 March 2014).  And in oil again.  And nickel.  Zinc. Lead. Gold and silver. I can also tell you that here in Australia that other inventory pipeline of stocks called shares in resources companies is also very low.   The intermediaries in this pipeline being the massive A$1500bn in superannuation funds that have shunned the resources sector and put as much as 30% of their funds offshore (on a flow of funds basis these Super fund taxes are contractionary to the local economy to the tune of about A$50bn per year or about 3.5% of GDP), the asset allocators that influence inexperienced trustees, the Financial Advisor industry that acts as another gatekeeper pushing funds into cash and of course the banks themselves whose lending policies have been risk averse and against small business.     (The mining industry could quite rightfully question how many of these bureaucratic positions are just `lifestyle' jobs?) So as this all starts to unwind in the face of continually improving local economic fundamentals, changes in Federal Government policies and un-falling commodities prices and non-collapsing China then it will be slow at first then it will be a flow then a flood. Each player in the pipeline will get a little more confident and so it will go.  For years to come. So these graphics for resources sectors of turnover and market share really do mean something.  First of all they are historically very low and that means the market is underweight.  Very underweight = SHORT! BHP is increasing market share from a low base but the Small Resources seems to have jumped about 40% from 2.5% to 3.5% so market breadth is increasing. (That must be our LMB, LNG and VXL!) The major XMM is up from 16% to 19% but Gold is better but not much yet.  It will come. And the 250 projects needing A$400bn to develop will get access to capital.    So come back to LME inventories since 30 June 2103.  Are these declines due to demand from current  consumption or for anticipated increased consumption or just more comfortable inventories.  Missing out on those last 4.2 days (240kt) of copper supply just might get embarrassing for some.   And just may be the same also for lead, zinc, iron ore, nickel aluminium, fertilisers, palladium, silver, gold, oil, .... So copper prices look good again after that little sell off skirmish and the rest of the LME metals are OK.  Even nickel when the fundamentals were getting so bad (major expansion of nickel pig iron output from Indonesia and the Philippines) and with aluminium oversupply has been remedied by closure of high cost capacity (esp here in Australia).  The best thing for low prices is low prices. Gold is always critical in the outlook and I express my continuing bullishness for  a big number on gold as this next upleg accelerates to reflect the very strong underlying physical demand from China, India and others that will have run down a lot of the loose gold inventory.  Some evidence is suggesting that there is not much inventory left because increased Chinese and the Indian demand have been well in excess of the draw downs from the ETFs.  Now that these are exhausted of easy sellers, where will the next 500t of gold come from? The technicals look constructive here and higher prices soon would be good confirmation. So gold is OK but I am also now getting very intrigued by the performances of the `white’ precious metals. Palladium is looking very strong at present and just might be leading them all higher. Platinum is following and silver is bringing up the rear. Energy prices are warming up again too with oil looking to make that long awaited breakout.  Nearly there. Over in North American the tight oil and gas (better terminology than unconventional or shale oil and gas) boom has sent stocks there into the stratosphere. Heavyweights Exxon and Conoco-Philips are well on their way.   And here in Australia the stealth onshore oil and gas boom I have been talking is now becoming very visible. It is worth noting first the character of the Nth American and in particular the US with extensive infrastructure of pipelines and services companies makes for great efficiencies and lower costs. But just for single and hopefully contiguous one square mile sections that usually have 10+% royalties and more attached. The large inland tenements in Australia allow for a totally different approach.  Having 10km of continuous and contiguous tenements gives explorers many more options. Having 50km even better.  Certainly all our costs are several times those in the US but there are likely to be significant trade offs in scale. Let’s just watch for a while.  Over to you, oil and gas industry. The tight oil and gas here in Australia is applicable to so many basins and I consider it will only increase in importance over the next two decades. The Cooper Basin is important because some infrastructure is already there and geological knowledge is broad and deep. Activity has been in conventional oil and gas and 3D seismic has provide some outstanding new oil and gas fields at a very high success rate.  The Western Flank has been very exciting and the Cooper Basin is now the largest oil producer in Australia today. But much more is happening in the Cooper. The tight gas and shale gas targets have encouraged Big Oil groups like Chevron and BG Group to farm-ins and Beach Petroleum, Drillsearch and Senex are surging along with big programmes that plan to find the gas to deliver to the ever hungry new LNG projects at Gladstone on the East Coast. Whilst concerns have been raised about CSM gas deliverability in Qld and shortages it is interesting to note Santos producing above expectations from its CSM fields and Senex highlighting its high delivery wells.  Nevertheless it will become clear that every LNG plant on the East Coast will be producing flat out and seeking to expand capacity to meet an accelerating global demand for LNG so much more gas will be needed for current capacity and wanted for expansions.  Note that a surprising number of new LNG receival stations are being built in ports all around the world as this market broadens.  LNG long term growth projections may be too low at 6%pa. So exploration for gas in other parts of onshore Australia is well underway and I continue to like what I see with the Amadeus, Georgina, Beetaloo and MacArthur Basins in their searches for tight oil and gas in Basin Centred Gas/Oil accumulations. Envision these as being similar to the coal seams in the Bowen Basin or the Sydney Basin.  Tens of kilometres of coal seam are known to be  there so it only depends on the depth and the style and quality of the coal at each site.  No exploration risk just appraisal and development risk.  And so it is with continuous tight hydrocarbon basins. It is no longer exploration but engineering.  The hydrocarbons are there but the question is how do we get them out. The Amadeus is a special target due to its large size and its three levels of regional seals that restrain all hydrocarbons as well as some very valuable helium. The recent Mt Kitty discovery by Santos with Central Petroleum could just be something very special because its continuous basin accumulation may be hundreds of km long and goodness knows how wide, up to 600m thick and covered by a massive salt blanket across the Basin. The 0.5MMCFD flow doesn't mean much just at present because it will need to be fracced to encourage fracture permeability in its 109m thick section.  Note that the Heavitree has delivered the same gas composition(including almost 6% helium) as was encountered in Magee 100km away. If it is a continuous gas accumulation rock formation and just the 2km Mt Kitty faulted structure section highlighted above is 2TCF then the number across the basin is very large.  Take note of CTPs statement that this discovery` could be the catalyst to interconnect the Northern Territory with the Eastern Seaboard gas market’.  This won’t be small. Extent of Heavitree Quartzite and strata isopachs (lines of equal thickness indicating thickening to >600m) And the Heavitree here extends over 400km to the west. Mt Kitty-1 is 100km SW of Magee-1 near the two wells Murphy and Endunde.  Watch this space. Phoenix O&G royalty shareholders should be very happy (soon to list as High Peak Royalties HPR.ASX) I own all three participants here (STO,CTP and HPR.) Other players like Santos, Beach, Drillsearch, Senex Armour Energy, Falcon Oil and Gas, Norwest Energy  and Advent have some pretty fancy targets in these tight basins and in another parts of Australia and 20014-15 should bring in some very intriguing results.  So keep watching them too. All the above is showing that resources stocks are very cheap and many stocks have already started to move.  The broad indices aren’t really showing it yet but I expect they soon will. Very soon.   The June Qtr should be quite strong. So there you have it.  Gold, oil, iron ore, copper, nickel, zinc, palladium, platinum, uranium, rare earths, technology metals, graphite and LNG.  Just about everything.  Just coal dragging the chain but it won’t be long before a change comes, particularly for coking coal. No comment here on the Fed, Ukraine, the World Bank, IMF or other distractions just watching the markets for our sector. So now talk to me at Paradigm and let us help you really benefit over the next few years. +61 2 9222 9111 Sydney 28 April 2014 Disclosure: I own BHP, DLS LMB VXL LNG HPR AJQ CTP  

Key Points

• China still growing steadily
• US$ and bonds still weakening
• Global equity markets, well, booming
• Commodity markets strong
• Oil prices ready to surge
• A$ still strong

Despite the sombre mood and all the end-of the worlders, the world economy seems to just get better.  Not that is any surprise to you who still read Dawes Points and, as unfashionable are the views expressed here,  the reality is on our side.   The great Contrarians of the markets of yesteryear seemed to give a little too much of the same.  Year after year.  End of Western Civilisation is nigh in a great debt spiral that would have gold at US$10,000 the DOW at 1000 and everyone on the breadline.   The Also-rans Group have decided that Cash is King and yield is better and let's just stick our head in the sand until it all goes away while we sit on A$1568bn in bank deposits, bank stocks and Telstra.  Yes, you win. Pity about your grandkids unable to  get a job.  Who is going to employ them?   Well, it isn't going to be the government. But hey, that is away from topic. And I was going to write about gold this week.  Well, maybe next week but the urgency for gold is still there.  Ignore it at your peril. The China Syndrome threat hasn't worked.  The collapsing of the Chinese economy that was going to drag us into a vortex of falling commodity prices, sinking of the A$, blowing up Australian Government finances, unemployment,  horrible this and horrible that and well, yes,  the Greater Depression just hasn’t happened.  Doug Casey and Harry Dent where are you now when we need you so much.  Or not. So, something else is happening.  7.4%pa for China in March Qtr.  Where are the Bears?  Oh, The Government said it was going to be  7.5% so you might say the economy is slowing.  Only US$630bnpa  added to GDP, not US$640bnpa.  But they still tell you its is slowing.  Maybe next quarter they will get it right.  But the shadow banking system is collapsing.  Unoccupied phantom cities. Too much debt in the SOEs.  Power consumption slowing.  China is a basket case now!   Crude steel production collapsed to a new annualised high of 809.5mtpa in February.   Iron ore stocks at ridiculously high levels that show 40% less availability than two years ago.  But Australian iron ore producers can’t put enough on the ships to sell to China at these current low prices.  Record shipments for BHP and FMG.  And so it goes on. Fine. Fine. But what are the markets saying? Well, let's start with the biggest markets first.  The currencies.  And the  US$ is the biggest . What are the markets saying about it.  I fear not much.  Same level as two years ago. And looking heavy.  I know you have seen it all before but we all need that boost to keep the faith. Now you can say  that the ending of the Petrodollar Era will mean the US can no longer print money.  Maybe.  Or that the debt is coming home to roost.  Fair point.  Or you can say that the US has lost its true entrepreneurial spirit  and that it has lost its way.  Maybe.  Or just maybe that the US is OK but other places are better.   Well, this is my view. Have a look at these.  The SWIFT Nowcasts are showing reasonable growth. First for OECD. Then for Europe Golly gosh.  Economic expansion. Here.  And actually everywhere. So no need for US$ safe haven. I will put in a plug here for the strong A$ but I will come back to it later. And  after the currencies come the bond markets.  About US$80tn worldwide.  Much bigger than the equity markets. The US 10 year T-Bond seems to be a little less happy about being at such low levels than the 30 year  but neither gives the appearance of wanting to stay at these low yields.   Supporting on a downtrend after a breakout is a great technical indicator of change.  It has been a slow process but I think it is doing the right thing and yields will be heading higher. So much for bonds.  I hope you are not too exposed here.  After all, it has been a 30 year bull market that has already peaked(July 2012). Well then let's look at the equity markets. The US is the biggest.  And again let's look at the small caps which have led the global markets.  And also the Wilshire 5000 that gives the market breadth.  Overbought on most measures but may be not over extended.  What are they telling us?  Surely not a global economic boom? Impossible!   Well, now look at the big players.  S&P 500 and the DOW 30.  Everything overbought but not over extended.  Hmm.  Couldn't be a synchronised global economic upturn. Nah.   Germany is already on its way to boom times and the UK in its own reticent way is catching up too.  Was that a surprise fall in unemployment I heard in the UK  today? And so much for the collapse in the Emerging Markets.  India surges to new highs and Korea is nearly there.  All the majors are looking OK.   Finally Shanghai.  Full of underperforming SOEs but the PER is<10x. So equity markets are not calling the end of the world.  Are commodities? Well, not here. Brent is strong.  As is WTI.  Where is the recession?   And finally BHP.  In US$ but looking good. And finally, finally, the little Aussie battler.  After being in Hong Kong and China in the past month I sure am happy the A$ is over US$0.90 and not at US$.80.  Those who wish a lower A$ simply don't understand wealth.   A higher A$ means EVERYONE  has to work better and more productively.  More technology.  More personal responsibility. Isn't this a ripper!  Supporting on the downtrend and kicking off!  Even if it has had a false start.  Supporting off a 100 year downtrend.  Now that is class. I was going to talk a little about gold too but I will leave that for another time. So I am sure now you will want me to tell how to make some money in the stock market. First of all, the broad resources market bottomed in the last week of June 2013, so we have been in an uptrend for almost 10 months. And, if you had been watching the market closely recently you would have seen that dozens of small resources stocks have  jumped in 2014. Dozens.  But there is so much more to come.  We have shared in quite a few. The majors are also building good bases and are looking good for the June Qtr upmove I have been expecting. A lot to like with BHP, WPL, STO, FMG, OSH, PNA. I will continue to recommend the usual great plays where we have played a role in recent times

• Lamboo LMB
• Valence VXL
• LNG LNG
• Blackham BLK

But also WSA, DLS,  BPT and WHC. And a very special plug for Central Petroleum which has made a MAJOR gas discovery at the Mt Kitty +1TCF target that will have a significant impact on the Australian energy scene. And our very own Phoenix Oil and Gas (now soon to be listed as High Peak Royalties HPR.ASX)  holds a 1% royalty over all of this.  Watch out for a report next week showing why you should definitely not sell and should certainly buy on the 29 April listing! So don't be caught down the hole this Easter while St Nicholas is actually flying across the sky early this year delivering  some wonderful Christmas presents. 17 April 2014

Key points

• Massive commodity bull market now underway
• CRB Index up 9% in 2014 price breakout
• Inventories of raw materials at critically low levels
• Strong earnings reported by major resources companies
• Resumption of Australian Resources Boom
• ASX resources stocks are extraordinarily cheap.

And so it has all come to pass. The views expressed in Dawes Points over the past 18 months are now firmly on course. The efforts of Wall St and local investment banks to talk everything commodities and Australia down has failed and they will fail spectacularly further as 2014 unfolds. The world economy is growing and commodity demand continues to rise. A financial world focussing on `the Fed' and `tapering' and believing that pulling the monetary levers in just one country will determine economic outcomes elsewhere in the world is failing to watch the fundamental human aspirations and the laws of supply and demand.  And the most recent wailing about `failing emerging markets’ is yet more wailing from those just looking for troubles. Dawes Points has continually focussed on the markets and data that can be monitored, measured and assessed.  The markets have consistently indicated a global economy very different from the views of most of the economic commentators.  Market reality is coming to the fore. Certainly a broken clock is right twice a day but the evidence has been as clear as day that no depression in the US was happening, no collapse in the European banking system has occurred, no collapse of China has taken place and the concerns about Turkey do not make for a system crisis in emerging markets. The key points above are very clear.  Commodity prices are moving up again after about three years of consolidation.  The move up is from a much higher base than many previous declines and the structures of supply and demand are unlike any other in modern economic history. The ASX Gold Index had fallen 80% from its April 2011 high into a December 2013 low while the A$ gold price fell just 5% from A$1408 to A$1339/oz.  Today it is A$1490.   To say that again just note that at the time of the high in the ASX Gold Index at 8499 it was A$1408 and now XGD is 70% lower.   Go figure.  But then again just remember the BS from the DS at GS with their sub US$1000/oz forecasts last September. How can consensus thinking be so wrong.  Why did the ASX Small Resources fall 70% from April 2011 to last June’s low?  Where is the collapse in commodity demand/prices? It is just sentiment and the prolific opinions of financial media and its bed fellows in financial institutions.  How can it be otherwise?   Now just look what the markets are saying. The Dawes Points three ``Fasten Seat Belts'' calls of 15 Oct (ASX Metals and Minerals 3184 +3.6%),  11 December (3181 +3.6%)  and 17 Jan ( 3346 +6.7%) seem to be on track with that index rising to recent highs of 26.7% from the 2653 27 June 13 low.  And the ASX Gold Index at 2618 is up 54% since that Dec low. China now consumes more than 45% of most resource sector commodities. The US is now less than 10% in most commodities except for energy. Other countries are showing marginal rises in consumption so the pressure continues to be on supply. The pontifications of almost all things Wall Street is for lower commodity prices, lower gold and weaker currencies against the US$.  Pontifications and propaganda to protect the US bond market where these banks have large long positions and to defend the US$. As has been said before:- Defending the indefensible and protecting the unprotectable. These terrible twins of the US$ and the Treasury Bonds are suggesting a serious change in the flow of investment funds from safe refuges and paper assets to the real economy and inflation hedges.  Yes, inflation.  Is anybody here old enough to remember the bad old days?  The Moses Principle is applying here. After 40 years wandering in the Wilderness by the Israelites with nothing, the Promised Land of `flowing with milk and honey' in  er..er ..Palestine was found.  Forty years was enough to squeeze out memories of a better life in Egypt or anywhere else for that matter and to bring the Israelites to expect very little to be given from life.  Small gains seemed miraculous because the then collective wisdom knew no different. So many of the current investment communities have known only three decades of falling interest rates and bond yields to reflect their experience.  Too many erstwhile mini Warren Buffets looking for `sustainable cashflows from well run businesses' to notice that the landscape may be changing. The `Moses Principle’ applies here.  Outside of common wisdom.  Outside of common expectations. The 30 year bond uptrend is broken. The world is `long’ bonds as True Believers to the tune of US$80 trillion. But the fundamentals are rancid. Who, apart from `the Fed' will be buying this paper junk in the next few years. The US$ Index has just had a Friday close under 80.  It failed to make it into the upper channel and now has closed below both 50 and 200 month moving averages. Expect a move down in 2014 to about 3-5%. Maybe more. The weaker US$ will stimulate capital outflows to everywhere else.  Expect higher equity markets and commodities and gold.  And also a stronger A$. Mitchell Johnson was the Panzer and the Maginot Line is being outflanked. The bond market is de facto currency with a coupon. Strains appearing in bonds and with the US$ breaking bad below 80 last week all isn't looking good for the `strong dollar' thesis. And whilst all this is happening note this extraordinary pessimism at the exact bottom of the market! Just review some recent commentary from these Wall Street gurus and their sycophants here in Australia:- In a recent AFR article :-UBS spokesman... `But he warns it’s going to be another tough year for resources. “Our expectation is commodity prices will probably track sideways, pretty much, but they’re still healthy commodity prices, But companies that will be able to generate strong free cash, reduce their debt and know where the market perceives they will be able to return cash to shareholders will be the ones that do better this year.” he says. A recent review on Bloomberg 11 Feb 2014:- `Commodity prices rose almost fourfold in the decade through 2011 on Chinese demand. The Standard & Poor’s GSCI Index of 24 raw materials posted the first drop since 2008 last year as bear markets extended from corn to gold to copper. Citigroup Inc. says the so-called super-cycle of rising demand has ended and Goldman Sachs Group Inc. said last month a reversing cycle will eventually drive raw materials into a structural bear market.’ Morgan Stanley’s chief metals economist recently left the bank after almost five years in the role to start his own research and advisory group. He understands, but possibly not the bank. He said `The collective memory of the financial industry, particularly in relation to commodity cycles, appears to me to be shrinking if not disappearing altogether..' Pontifications because the banks think they know better.  They of course have big trading arms and balance sheets that allow active participation (we wouldn’t say manipulation would we!) in some small and illiquid markets but pontifications are no substitute for knowledge at the coal face. So despite the talking down of gold, oil, LNG, copper and natural gas the markets themselves are talking a different language. And the language is almost from a different planet and is about shortages.  Have a look at these LME inventories that were mentioned last month.  Sure, Shanghai inventories are rising but the real evidence is that there is little spare metal now. Rapid declines in inventories but prices are still being held back with copper and tin being in backwardation where future prices are lower than current spot prices.  The markets are still pessimistic. LME Metals Inventories

LME Metals 000t	Jan 2013	June 2013	Feb 2014	% change On Jan 13	% change On June 13	% of Jan inventory drawn down in Feb 2014
Copper	320	665	276	-14	-58	-12.2
Zinc	1220	1061	761	-38	-28	-10.9
Lead	320	198	202	-37	+2	-3.0
Tin	12	14	8.06	-33	-42	-9.3
Nickel	139	187	271	+95	+45	+1.5
Aluminium	5210	5435	5311	-2	-2	-2.1

Copper, zinc, lead and tin show very low inventories and reflect lack of new capacity.  Can you name two ASX stocks outside of BHP and RIO that produce each of these `old fashioned’ metals.  Not as racy as gold or iron ore so mostly forgotten.   Aluminium and nickel have high stocks but as always the best thing for low prices is low prices that cut output. So maybe a change could come through for these two as well. Now have a look at gold. The COMEX has access to about 7moz of eligible gold sitting in vaults around the world. This gold is known to COMEX but only gold that is `registered’, is in 100 oz bar form of high standard purity and ready for prompt delivery can be used for meeting delivery notices for the 100oz contract.  Much of the gold is on kilo, 10 kilo or other bar form and is not suitable for delivery without remelting. Recent open interest in the futures showed over 100 contract oz for each oz of gold registered for delivery on COMEX.  With Asian demand now greater than global mine production the potential is there for a short squeeze. The change in trend for gold looks very constructive.  Downtrends of gold prices in a number of currencies are now broken and price are turning up. With iron ore, the big build up in iron ore stocks in China might just be a furphy.  86mt at 20 coastal ports in China against 850mtpa of imports is still only 33 days and is 35% fewer days than two years ago.  The new large coastal steel mills get almost 90% of their iron ore feed from imports.  The old small scale inland steel mills get less than half from imports.  The current low iron ore price is closing down environmentally unfriendly old inland steel capacity along with their high cost low grade magnetite mines.  Potentially over 400 million tonnes of domestic iron ore production is in danger of progressively closing down should prices fall further.   The mining, crushing and grinding of magnetite is energy intensive and in a competitive market for energy, power bills must be paid or the power goes elsewhere.  At US$120/t probably 30% (120mt) is currently cashflow negative. The most commonly used number is for 20 ports and is 86mt.  The larger number for 40 ports adds about 14mt but this is only 750kt per additional port and probably just a tiny 200kt for many.  The 20 ports figure is more significant. So this graphic of port stocks doesn't suggest oversupply, but rather tight inventory here in the commodity the market loves to hate. Let’s see what iron ore does over the next month or so to see a clearer direction.  I still am sticking to my forecast of new highs in iron ore in the next few years.  Today, about 130m tonnes of Chinese iron ore concentrate production is underwater. The oil market is saying the same story.  Peak oil has been with us since about 2006.  Where is the new oil coming from?  The idea that the US will provide vast new production is considered to be delusional.  That has been stated here previously. What does the market say?  Brent is a global price and seems ready to jump higher. Higher oil prices in the US are likely now after the breakout last week. West Texas is enduring an increased supply from shale oil (tight oil) but it’s market is still building up and anticipating a sharp upside move. What does the US oil and gas industry say?  Gearing up for new highs in E&P stocks. And drilling activity is saying US$5/mmbtu is not enough to boost gas production.  A tight market is expected for another few years.  Gas rig activity continues to drop. Gas rigs are getting better productivity and more efficient with horizontal drilling so fewer rigs are needed but gas prices are saying something more.  Recent prices above US$6/mmBtu suggests this figure is not enough to make money in dry gas in the US. Don't worry about Asian LNG prices. Oil-indexed prices will probably be here for a while yet and US exports might not be so great after the first few new export LNG projects. This doesn't look to me like a market about to collapse. And US natural gas prices look suspiciously as if they might run much higher yet.  The sharp run up has invited profit taking but this shows strength to me. The big ASX resources stocks have reported strong results from iron ore and oil and gas in particular. Strong results, undergeared or better balance sheets and lots of free cash for dividends.  After the recent five year Resources Sector investment binge of A$400bn, capex is tapering off and balance sheets are being rebuilt and cashflows are being redirected towards shareholders.  In the 1970s and 1980s it was usual to expect 50-65% of earnings paid out as dividends.   We should see it again.  (How long will it be before the commentators start pushing companies to go on the acquisition trail or expand output again?  Two years max?). So the next stage of the boom is underway, ASX resources stocks are rising and capital raisings are picking up nicely. The Dawes Points Portfolio is up 7% (pre dividends) against the XMM which is 2% higher (before recent dividends). Whilst the heavy weighting in the large caps slowed the portfolio (pre dividends) some of the smaller stocks have done very well. Stock picks AQA, IGO, ERA, DLS, WSA, NST, ORE, MAU and BLK have done well whilst LMB has been and continues to be spectacular! The next stage of the Resources Boom will be focussing on the 230 undeveloped projects that are in the hands of mostly junior companies. The story is the same.  The stock prices are far more advantageous and the opportunities are almost boundless.  Has there ever been a time in Australian stock market history that Resource Sector stock prices were so divorced from reality? Disclosure: I own LMB, BHP, DLS, BLK, MAU, NST. Barry Dawes 3 March 2014 BSc FAusIMM MSAA MSEG Follow me on Twitter @DawesPoints

Key Points A prosperous 2014 and Year of the Horse to all US Bond market breaking down Leading Equity markets still making new highs into  2014 Laggard markets catching up Resource Sector low made in late June 2013 Major Nth American Resources stocks powering on ASX Metals and Mines Index has broken 30 month downtrend Iron ore export volumes robust and growing Gold sector and small resources showing increases in turnover Resource Sector capex to resume with A$400bn in new projects 2014 is now with us and it is appropriate to do some crystal ball gazing for the year ahead and beyond.  The markets are providing us all with some now very clear indications of the near term and what is in store for medium and longer terms.  The Resources Market low came in late June 2013, over 6 months ago.  It does look very encouraging now and the Year of the Horse will start early this year and is rearing to go! The short term reality is however, strongly coloured by the historic poor performances of most stocks in our resources sector over the past 30 months despite the low occurring in June 2013.  Poor market action of volume and breadth say loud and clear that participation rates have been and are still low.  That means the general market place does not believe and few players from local and foreign institutional investors to even fewer punters have been playing.  But the signs are already there for a major change. Turnover volumes are rising as investors realise that all is not gloom and doom.  Production data is strong and product prices are good and firming. But before we go forward it is worth reviewing the past year, that most horrible of years, 2013. Dawes Points of 28 January 2013 started with: The foundation for the year ahead was pointed out in a positive Paradigm Outlook from October 2012 which suggested that investors should "Heed the markets, not the commentators''.  So many market indices (Germany, India and several in the US) were then pushing all-time highs and others (Shanghai, Hong Kong, FTSE, Nikkei and the All Ords) had broken downtrends from the 2007-08 highs and were clearly looking over the horizon to some sort of better times.  Commodities were holding up OK whilst PE ratios for many stocks and markets were at the lower end of the ranges of recent times and dividend yields were looking very attractive. Yes that was what the view was then.  And it all came to pass.  That view of the all time highs in many of the major US equity market indices leading the world, with Europe following and Asia and other emerging economies bringing up the rear, has been completely vindicated.  Also the US T Bond market continued its poor performance and the US$ Index gave back most of its 5% rally.  Oil was higher and copper has rallied back after a soggy mid year period. Unfortunately the Resources Sector was savaged.  You may well ask why. The performance of the markets in 2013 was definitely a tale of two halves with the low occurring for most indices in the last week of June.  This was the very notable 27 June that should stand as the cycle low in gold and most major indices outside of the gold share themselves (see Dawes Points 5 July 2013   - End of EOFY Sale). The North American Indices clearly led with the Small Caps (S&P 600 +Russell 2000) as the stars but NASDAQ also did well with 38.3%.  Dow Transports did 39.5% whilst the Dow Industrials was a real laggard – only 26.5%. Where is the Recession!!!    (Note that the far right column gives the % of the gain that was achieved in the Dec Half.) Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half S&P 600 Smallcaps 343 396 485 41.4% 26.1% 63% Russell 2000 849 977 1164 37.0% 21.9% 59% Wilshire 14995 16992 19706 31.4% 18.1% 58% S&P 500 1426 1606 1848 29.6% 17.0% 57% Nasdaq 3019 2935 4177 38.3% 41.1% 107% Dow Industrials 13104 12880 16576 26.5% 28.2% 106% Dow Transports 5307 6174 7401 39.5% 23.1% 59% Russell 2000 849 977 1164 37.0% 21.9% 58% Interesting that about 60% of the performance came in the Dec Half, but NASDAQ and the DOW had all their performance and more in the Dec Half after a negative June Half. These stock market performances were very robust against a weak bond market and a US$ that gave back almost all its June Half rally.  Note rising bond yields and rising stock markets.  Never believe that junk about stock markets falling with rising interest rates!   See more below. Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half US 10 Yr Bond 132 126 122 -7.8% -3.1% 39% US 30 Yr Bond 147 135 127 -13.2% -5.1% 39% US $ Index 79.8 83.4 80.2 0.5% -4.0% -735% European Markets had a very week June Half but roared in the Dec Half to give results good but weaker than the Dow Industrials.  But Europe is following on well.  Where is the banking sector collapse! Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half Germany DAX 7612 6416 9552 25.5% 41.2% 162% UK FTSE 5898 6215 6749 14.4% 9.0% 63% France CAC 3641 3739 4296 18.0% 15.3% 85% Spain IBE 8167 7763 9916 21.4% 26.4% 123% Italy Milan 16273 15239 18968 16.6% 22.9% 138% Asia is following Europe with Japan on steroids via Abenomics up 56.7% and everyone but China just managing to stay positive.  Everyone outside of Japan had a very strong Dec Half. Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half Japan 10395 13677 16291 56.7% 25.1% 44% India 19427 19396 21170 9.0% 9.1% 102% Hong Kong 22657 20803 23306 2.9% 11.0% 385% Shanghai 2261 1979 2116 -6.4% 6.0% -94% SFT 25 39 32 38 -2.1% 15.3% -714% Taiwan 183 192 205 11.9% 7.1% 60%  Kopsi 1985 1863 2011 1.3% 7.5% 559% Here in Australia we were with the true laggards with the All Ords managing 14.8%, whilst really bringing up the rear were most things resources or gold.  The June Half was really ugly but all except gold shares were up in the Dec Half. Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half All Ordinaries 4664 4775 5353 14.8% 12.4% 84% Mines +Metals 3643 2747 3339 -8.3% 16.3% -195% ASX Small Resource 3781 1931 2172 -42.6% 6.4% -15% ASX Gold Index 4898 2064 1898 -61.2% -3.4% 6% XAU 165.6 90.15 84.147 -49.2% -3.6% 7% The well publicised concerns over Europe, China and the US have simply failed to materialise and global economic activity has continued to expand and the SWIFT Code Index NOWCAST is indicating accelerating growth into 2014.  Production of crude steel globally held up very well and is up 4.2% to 1.447mt for the 11 months to Nov 2013.  China maintained a rate of almost 800mtpa throughout the year although November was about 6% lower that the year to date average. So let’s look at the key driver again that was mentioned in the last Dawes Points in December.  The US Treasury Bond market.  It is breaking down.  The Maginot Line has been left behind.  Mitchell Johnson was the Panzer and he destroyed the defenders by outflanking them.  Twenty years of Conventional Wisdom is about to come unstuck as this long term uptrend in bond prices is broken and the short term is showing rising bond yields. The table earlier in this note shows a 13.2% fall in the 30 year Bond Price and 7.8% in 10 year Bonds.  These are capital losses in `risk free’ assets.  A lot more to come but keep in mind that this is a BIG market with natural long term buyers so a sharp drop is probably not going to happen. But then again it might. The US$ itself is the next part of the puzzle and we are in for a sharp move soon because it has held a fairly steady level for over 2 years .  It could be up and would correspond with a bond rally and possibly lower gold but it might be just the opposite.  I think it will weaken and fail to lift into the Top Channel. Through most of the last decade equity markets rose as the US$ weakened and it was fascinating to watch how highs and lows in the S&P 500 seemed to exactly match lows and highs in the US$. The strength in so many equity indices around the world particularly in the US is confirming firm economic growth in the US and that is giving confidence to other countries, starting in Europe and Sth America and spreading to Africa MENA and finally Asia.  Faster growing economies should attract funds from the US and certainly out from the safe haven of US T Bonds. So lower US$ and higher equities. The positioning of these big markets (currencies, bonds and equities) will be determining the FLOW of FUNDS for future market performances.  So if these equity market surges to new highs, uptrend breaks in bonds and downtrend breaks in major cyclicals are genuine then the FLOW of FUNDS from bonds and also cash will be to equities and commodities. I consider that the current build ups in bank deposits world-wide are something quite unprecedented and should then result in something quite unprecedented in equity markets.  Here in Australia we have this extraordinary A$1,544bn in bank deposits including A$808bn in Household deposits.  What do you think will happen when the herd starts to really flow in to equities again?  Yes, big bull market! And it is global. Coming to the resources side we can revisit the performances of our major indices and also some commodities.  The resources indices were down sharply for the year before recovering but the metals themselves fared much better, apart from the structural problems for nickel and aluminium, and finished the year well, especially zinc. Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half Mines +Metals 3643 2747 3339 -8.3% 16.3% -195% ASX Small Resources 3781 1931 2172 -42.6% 6.4% -15% ASX Gold Index 4898 2064 1898 -61.2% -3.4% 6% Metals (US$/t) Copper 7915 6750 7394 -6.6% 8.1% -124% Zinc 2034 1823 2085 2.5% 12.9% 514% Lead 2340 2058 2206 -5.7% 6.3% -110% Tin 23500 19800 22550 -4.0% 11.7% -289% Nickel 17085 13680 13970 -18.2% 1.7% -9% Aluminium 2040 1731 1764 -13.5% 1.6% -12% LME inventories are also in very good shape to support higher prices, except for nickel and aluminium. Note copper inventories have almost halved since end June and at the current 336kt are less than a week’s consumption at 20mtpa. And lead and zinc are each under two weeks. Inventory (000t) Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec Copper 320 666 366 14.4% -45.0% Zinc 1220 1061 933 -23.5% -12.1% Lead 320 198 214 -33.1% 8.1% Tin 12 14 10 -24.5% -32.4% Nickel 139 187 261 87.0% 39.5% Aluminium 5210 5435 5458 4.8% 0.4% The important industrial metals copper, lead and zinc should have a strong decade due to a lack of available new capacity.  And tin now should be regarded as a technology metal given that its key use is in solder for electronics. Other commodities are doing OK with the trends suggesting a major move quite soon within the March Qtr 2014. Iron ore, as has been stated so often, still looks strong and I expect new highs in the next couple of years.  Coal is bottoming and beginning its upturn.  Oil is behaving well and should resume uptrend. So let’s get back to the Metals and Mining Index.  Down 25% in the June Half and up 22% in the Dec Half, and now having broken its downtrend from April 2011 is looking to move sharply higher.  The most recent surges following the strong iron ore production and export figures are probably indicating that the next stage of `fasten your seat belts’  (Stage I Dawes Points 16 Oct +8.6% , Stage II Dawes Points 11 December +9.2%)  is about to get underway in earnest. The downtrend was broken, the break out returned to the downtrend and break line and then bounced off nicely.  If all goes well this should really accelerate before the end of the March Quarter. ASX XMM Metals and Mining Index 2009-2014 The data in last month’s Dawes Points on projections on iron ore, coal and LNG exports should be sufficient to get the major stocks BHP. RIO, FMG, WPL and STO moving but it will be the price moves on the metals such as copper, zinc, lead and tin that will really drive the OZL and PNA type stocks and of course the hundreds of juniors. I also want to stress the importance of uranium and all the technology metals like antimony, lithium, graphite, palladium, platinum, tungsten and tantalum that should be strong performers over this new and exciting stage of the cycle. Evidence is everywhere for the disdain the market has for resources and I even saw yesterday that an economist from a major foreign `Investment Bank’ was still talking about the end of the Resources Boom.  Well it certainly is still the Conventional Wisdom but the markets are telling me something very different. Even the new Australian Federal Government has given the go ahead for another A$400bn in resources projects yet commentators are still skeptical. The latest market share graphics shows that XMM share of All Ords ASX turnover value had dropped almost in half from the 28-33% of 2010-12 to well under 20% for most of 2013 but the early 2014 figures show that market share is now just over 20%.  Encouraging news!  Even more important is the data for Small Resources (XSR) after collapsing from ~5% to ~2.5% is now over 3.5% in 2014.  A very healthy sign!  The data for these charts is limited and is only available from 2006 for the XMM and 2000 for the XSR. The much abused gold sector is improving its share of turnover and a strong end of year/start of year week gave a 3.5% surge to show gold stocks are coming back into favour. Gold shares around the world have been beaten up and are now well down but are also well down against gold and also against stocks.  When the market decides that the incredibly strong demand for physical gold out of Asia, the buying of gold by central banks and general still firm demand for coins is enough to absorb the last of the ETF sales and the shenanigans of the hedge funds, then the net effect on gold should be very strong. It is also notable that the gold bars registered on COMEX are now just 370,000oz.  Just enough for 3,700  100oz contracts to take delivery. Not much.  The figure was 638koz two months ago and 3.0moz in March 2013. This is not the only metric to watch here but it is a useful indicator. The extremes in the values for the XAU in the two charts above are suggesting very firmly to me that gold did in fact bottom on 27 June 2013 and that we will get a sharp shortcover rally and then a lot more.  My view and I am sticking to it. The ASX Gold Index is back over 2100 which is almost 25% up from the December low at 1703 but is still down 75% from the April 2011 high. Importantly while the Gold Index made a new demoralizing low in December most other indices did not and so the Small Resources (XSR) is now looking very attractive. Within the Small Resources there are dozens of stocks that offer extraordinary value and some I mentioned a few issues ago. The opportunities are just extraordinary.  So many and hard to choose which are best for short, medium and long term! I do like the graphite sector as a new growth area and particularly recommend LMB and VXL but I think we might be hearing a lot more about these stocks and similar stocks in the technology metals this year. Finally the A$ is getting beaten around too but you should all be familiar with this correlation graphic of monthly closes where the co-efficient is 0.73.  It was well over 80 until early 2013 but I think it will catch up again.  What it says is that where the gold stocks go, so will the A$.  And rather than it suggesting that the US$/A$ has to fall back to US$0.70 I consider it to be saying when the gold stocks turn up, the A$ will be following them up. And finally this weekly graphic suggest the US$/A$ is only correcting and consolidating against a very high level of negative sentiment.  The next few weeks should just do it. The markets are turning our way, the misery of the past few years should be lifted from our eyes and we should all be looking to making some money again.  LMB and VXL have been very kind to us in this regards but I can see many more coming. Barry Dawes BSc F Aus IMM MSAA MSEG 17 January 2014

• Global equities explosion now underway
• Commodities readying for upsurge
• Major resources stocks about to fly
• Major sharp rally ahead for small resources?
• Is the early 1990s period of the Shanghai Stock Index an analogue?

A couple of weeks ago the Dawes Points comments of The Resources Boom Accelerating and the Equities Explosion Coming seemed a little courageous to many but the passage of the past two weeks has provided more concrete evidence of the continuation of the global economic expansion. The Wall Street gloomthink and the charade being played out in Washington seems to be ignored by the markets except by the usual New York Bozos who just love bashing the gold price to protect the unprotectable and defend the indefensible, i.e., the US T Bond market and probably the US$. And a strongly growing world economy is far more attractive than sitting in in a ten year T-Note for 2.7% or in a 30 year T-Bond for 3.7%    And if it is safety you want, well, bonds at this price seem very unsafe – all that risk and so little reward. Global equity markets are exploding upwards.  The Leaders are leading.  The Russell 2000 scored a new all-time high this week and Wilshire 5000 and the S&P 500 are not far behind.   The Dow 30 has been remarkably volatile and so has diverted attention from the better performing indices. The DAX is making all-time highs, the FTSE is getting ready to move and the Nikkei has bounced off its downtrend and is heading up again.  Hong Kong and Shanghai are looking very encouraging. And the local ASX 200 and 300 look just fine. And resources commodities look good too. Oil is leading the charge driven by tight supplies with Libyan output down again.  US tight oil is only about 1million barrels oil per day and it might grow to 2.5-3mbopd within a few years but China now is a bigger net importer than the US and it alone will absorb another 1mbopd per year.  So no oil surplus in the years ahead. But higher prices of course. Two charts here of US Oil Index and the E&P Index show new all-time highs.  Catch up Australia! Now the iron ore price at US$134/t still hasn’t collapsed and RIO this week announced record shipments of iron ore (and other things as well).  And copper is starting to really look good now. Have a look at the copper price and look at Freeport Copper, the world’s largest listed producer of copper with over 1.5mtp copper output rising over 35% by 2015 at cash costs of under US$1.60/lb.  Capitalised at about US$33bn with an EBITDA multiple of <3x, over 2mozpa gold and 35million barrels of oil equivalent.  And a 6.5% dividend yield.  Better than bonds!  Downtrend broken and leading the copper market. LME copper stocks are down 25% from the highs in July 2013 to just 500kt and just 1.3 week supply at current consumption levels of 21mtpa.  Copper will be much higher soon.     I continue to be very impressed with the prospects for several other metals in the years ahead.  Supply limitations together with growing demand make for great opportunities. With Zinc, the supply side(11% closure of existing mine capacity) is inversely matched by a projected growth in demand as China increases its proportion of steel protected by zinc galvanizing. LME inventories are down 19% from the beginning of the year to <1mt.  Expect a big jump in zinc prices as the mine shortfall becomes really obvious and few listed investment opportunities exist. With Lead, the US, Europe and Japan are supported by recycled metal but China and other emerging economies have little scrap so newly mined metal is needed.  Few mines are available now and LME inventories have been essentially declining for two years and are almost 40% lower at just 238kt or just two weeks supply at current consumption rates.  Shortfalls expected here too. With Tin, the supply is now quite limited with very little new capacity to come onstream in the next few years to meet growing demand.  LME inventories have been in a three year downtrend and are just 13,000t- about 2 weeks supply on 340ktpa consumption. With Uranium, reactor demand is already well above mine supply and the  warheads to power rods transfer has now finished.  68 new reactors coming on stream and not much in the way of new mine production. Just watch this space. The demand for raw materials from the Non-OECD is now well over 50% of all demand and the growth should be accelerating against a background of supply constraints for most resources commodities. And this leads us to our favourite area – the small resources stocks that can give those exceptional returns.  And because these are all tied up with gold they tend to perform together. The poor performance of listed gold stocks and small resources stocks over the past couple of years have been perplexing and great wealth hazards.   It has certainly been puzzling as to why the market action has been so extreme particularly against such strong fundamentals.  Well certainly the fundamentals that I see and not those of the Wall Street cabal. I have spent some time searching for analogues where markets have had so much volatility and have fallen so much against what appear to be good fundamentals. Stocks falling >90% are usually associated with severe recessions and for an index to fall almost 80% you would expect the worst to have happened.  The searches showed that such markets are very rare and apart from the Dow Jones in 1929-1932 Crash in a very different environment there have been few even vaguely similar. So why has all this happened and what does such volatility really mean?  Let’s go back to the ASX All Ordinaries Gold Index.  This is real volatility in a bull market. Certainly there was a bull market that began in about 2000 (when the Index was started) that ran well into 2008, had a sharp pullback then rallied hard to new highs in 2011.  The subsequent decline into the June 2013 lows has been vicious. So we had a good +594% run into 2008 then the 61% pullback, up 218% then down our famous 77%. Just note the performance of the US Philadelphia Gold Index with similar volatility with essentially co incident timing on highs and lows. It is hard imagining the combination of a major bull market with such volatility against still strong fundamentals. But I have found something that does seem similar.  Lots of volatility and has major moves over a short period.  And it is an Index! Look at the volatility in a bull market!  Up 1300% in 18 months!  Down 73% in 6 months then up 300% in 3 months!  Wow! And there is more. Down 79% in 15 months (see XGD down 77% in 26 months!) and then the stupendous jump of 223% in 1994 over just TWO MONTHS!!! This was a new market with lots of speculation and volatility but look where it is now. I actually think the Chinese might decide that they like stock market speculating again very soon.  It just needs only about a 1% rise to break a four year downtrend. So coming back to the resources sector what might we soon see? With the very strong fundamentals for so many commodities the value for these small companies is outstanding.  Given how underweight the world is in these stocks we just might get the big run as we saw for Shanghai.  200% in just two months? Now have a look at this for the Philadelphia Gold Index (XAU). A rubbery 12 month downtrend in the bear market since April 2011.  The downtrend has been broken and the XAU has come back to support on the downtrend in a declining wedge. Usually such price patterns are resolved in the opposite direction to the declining wedge so itshould break sharply upwards. And something very interesting took place in the US markets on 15 October that might be indicating a major turning point. Our favourite Bozos in New York markets thumped the gold price down US$22/oz to almost US$1250 then the market jumped up over US$30 to the current US$1285.  It was almost as if the gold market said that “If that is that your best shot then you shorts are now finished!”. The XAU countered by closing up 2.4% as well!  This just might be a confirmatory price reversal. So if it is a price reversal then the bottom of the declining wedge should be the completion of the Right Hand Shoulder of the overall reversal pattern. The upside breakout could be very powerful indeed. So go back to the Shanghai analogy.  +200% in two months. Let’s just watch and see if markets are strangely stronger tomorrow. If so it will be a great ride. 16 October 2013

Key Points

• Synchronised global economic upturn in train
• Resource commodities about to surge
• Global equities now ready to BLAST higher
• A$ to rise as US$ safe haven diminishes
• Australian resources stocks cheapest assets on planet
• Small caps are 10-20 bagger gifts
• Well it seems that the human spirit is finally overcoming the adversity of Wall Street negative groupthink and markets all around the world are ready to blast off substantially higher.

It is not just me saying this.  It is the markets that are telling us as you will see. In following global economic activity I have always used the World Steel Association monthly data to gauge activity in the real economy.  My observation of this data over the past few years showed there was no discernible slowdown in China despite all the hysteria and I stayed bullish.  Near real time data here is far superior to pontificating US Fed watchers. The data is almost `live’ and is untainted by interpretation so gives me a good indication of real activity across the world and has encouraged me to stay bullish despite the Wall St negative groupthink. Now I have just discovered another near-real time indicator and I think it is brilliant!  No longer do we need forecasts.  We can now have `nowcasts’! The people behind the SWIFT international funds transfer have come up with an index of economic activity based on the character of the 2m or so funds transfers that it undertakes each day. In their own words:- This says that the Europe and the US are turning up and when combined with China on track, Sth America doing OK , MENA strong and Africa growing we have a synchronised global economic upturn. And equity markets around the world are telling us that. This week I reviewed my 26 October 2012 Market Update entitled Heed the Markets Not the Commentators  - Bull Markets Anyone?  Unfashionable at the time but that note predicted strong breakouts in the DOW, the S&P 500, the Wilshire and the Russell 2000, the DAX and the FTSE.  The All Ords looked OK. Well, these markets have generally zoomed up indicating recovery was underway yet the overwhelming tone of the commentary of the past year was negative with continuing concerns over European banking system and Europe’s `depression’,  China stalling or falling and of course the US in dire straits.    And remember that mantra that investors `were only chasing yield’ so that only big mature companies were worthy of investment funds?  Remember that? And what have been the results? The case was made then, and even more now, that the small cap Russell 2000 Index and the very broad Wilshire 5000 Index were indicating that the recovery was indeed broad and that the performance of the smaller caps reinforced the growth aspects and not that the defensive stocks were the place to be. So let’s look at the results in their own currencies.

Index	26 Oct 2012	26/7 September 2013	% change
Russell 2000	816	1078	32
Wilshire 5000	14774	18142	23
S & P 500	1412	1698	20
Dow Jones 30	13103	15328	17
DAX	7200	8664	20
FTSE	5805	6565	13
All Ords	4533	5302	17
Shanghai	2101	2155	3

It would seem that the US small caps have done best.  So much for the `chasing yield’ thesis. Wilshire showed good breadth.  So much for the big cap only theme. And the S&P outperformed the Dow.  Although NASDAQ was not included in my list, it was up 27%. So equity markets generally went well and Tokyo was up almost 66%. So what about commodities?

Commodity	26 Oct 2012	26/7 September 2013	% change
Aluminium	1909	1775	-7
Copper	7850	7226	-8
Lead	2039	2069	1
Zinc	1821	1861	2
Nickel	16405	13755	-16
Tin	20550	23179	13
Cobalt	25000	26500	6
Molybdenum	24150	20000	-17
West Texas Crude	86.2	103.03	20
Gold	1719	1324	-23
Thermal coal*	88	78	-11
Iron Ore*	119	134	13

*Not used in table on 26 Oct 2012   Apart from weakness in gold and nickel and soggy coal there is not much here to comment on. So what about the rest of the Market Update of 26 October 2012 that was bullish on resources stocks?  Probably the less said about it, the better.  Unfortunately for us all. Gold was looking good then and was lining up for a strong 2013.  Yeah, right.  Copper was heading higher.  China steel production was steady with a growth bias.  Iron ore had recovered from the <US$90/t blues.   It was setting up for a good 2013. So what happened to resources stocks?  Just trashed.  Globally.

Stock/Index	26 Oct 2012	26/7 September 2013	% change
BHP	34.25	36.36	6%
ASX Metals and Mining	3505	3271	-7%
ASX Small resources	4073	2399	-41%
ASX Gold Index	5710	2586	-55%
US XAU	183	94	-49%

With these results of major highs in the major equity markets and nothing particularly significant in commodities and with the A$ about 10% lower then resources stocks should be about line ball with a year ago.  Worst case. But they are not and that is the key.  Why did it happen this way? Other than blind stupidity on the part of the Wall St negative groupthink I don’t know. (I think I do, actually! But that is for another time.) But what extraordinary value has now been created for astute investors. Note that the market is now stirring and the rises over the next few weeks will be very sharp for many stocks.  Don’t miss out. Since the beginning of 2013, over 120 companies have come through our doors to showcase their projects.   Oil and gas, gold, iron ore, copper, fertilizers, coal, rare earths and much more. Almost all wanted capital but in the falling market to June 2013 that was just about impossible to obtain.  Despite being priced at a fraction of their NPVs and with A$1515bn in Australian bank deposits.  So value in this sector has been outstanding all year and even more now. I think that those companies with tenacious and persevering managers (many of whom have forgone salaries and fees and have actually made loans back to their companies)  and with reasonable projects will survive and will prosper. You would be amazed at the number of major new resource discoveries that have been made by these companies and the extraordinary value that has been created yet totally ignored by a market place that is currently looking for safety when the world has already said `cash is trash’. Resources stocks are at their lowest risk when at their lows.  If they survive.  But most have, and the window is opening for capital raisings again so most will survive. And prosper. Make sure you don’t miss out.   It is here when the percentage gains are greatest and the risks lowest. The `Optimism Upleg’ is now with us and I think it is about to really accelerate. Make sure you contact us.  bdawes@psec.com.au Use this link to access an account opening form

Now, for a little bit of fun.

Let’s go on a trip around the world of bull markets. And just before we do you can put this little issue right at the front of your mind.  I put this in again after including it in the last issue of Dawes Points but it is the key to everything.  Capital flows. THE WORLD NO LONGER NEEDS THE US$ AS A SAFE HAVEN BECAUSE THE GLOBAL ECONOMY IS OK. Funds will flow from here and from the world’s overpriced and un-`risk adjusted’ bond markets. Got that OK? Now let’s start with the leading indices in the US which are leading everything else.  The Russell 2000 and the Wilshire. Russell 2000 (bottom 2000 of Russell 3000 Index so `smaller’ companies) Uptrend clearly powering on and breakout made last December. Ditto for Wilshire 5000 (6400 US-based stocks).   S&P 500 has a massive base that a technical analyst might say could support a substantial rise. Dow Jones Industrial Ave (30 stocks) May be a touch stronger than S&P in the longer term So much for the Greater Depression in the US!

Now looking at Europe

DAX Germany is not far behind the US but is already out of the starting blocks in a recovering Europe. UK FTSE   Getting ready to fly! French CAC   Nothing wonderful but an important short term upmove is coming. Spanish IBEX    Again nothing great but the downtrend is broken Italy Dow Jones Italy Index   Not the right one to be in but after a major decline a downtrend is broken It would seem that the stockmarkets are agreeing with the SWIFT `Nowcast’ of a recovery in Europe! So much for the Euro Depression too and collapse of the banking system! And for the Euro to Zero crowd this one is for you.  A break above about $1.40 would be very telling. The Euro Zone trade surplus is currently running at well over Euro200bnpa. Now let’s do a quick trip to Asia with Japan first. Nikkei Index has broken a 22 year downtrend thanks to Abe-nomics. Korea’s Kospi has a very strong uptrend and is about to break higher. Taiwan seems to want to go higher as well. India is testing its uptrend but there is a lot of energy here.  Should break higher. Hong Kong’s Hang Seng has been basing for over four years and has weathered the China-bashing. China  Shanghai is about to break a 5 year downtrend. A strong performer in the year ahead So that brings it to us here in Australia.  Much like the rest of Asia. Let’s just first think about it.  Major markets led by the US and Germany with other Europe just a little behind.  Asia in all regions just ready to fly.  Economic growth in Europe and US looking sound (SWIFT `Nowcast’) and Asia is always there.  Commodity prices are OK.  Oil, LNG, iron ore and copper are firm.  Coal is still soft but recovering and gold is good and looking better.  The A$ should rise against the US$. Yes, the All Ords is on its way! Grab your internet banking log in, send some cash and get ready for some fun! And for the resources sector proxy we can use BHP.  Almost ready to go.  Strongly . So after that around the world  tour to the major economic growth engines we have the following conclusions.

• As the world recovers and as the needs for safe havens are reduced, the US$ and the US T Bond markets will be the source of funds that will drive equity markets everywhere much, much higher.
• World equity markets will follow US and Germany and will improve confidence substantially.
• Our resources commodity sector has been unnecessarily beaten down and should benefit with the global recovery.

And a special factor comes into play here.  The `commodities falling’  mantra would have encouraged inventory shedding at the user level and with the weak share prices and bankers’ reluctance to fund new projects we will be coming up to a very special period of supply and demand.  Demand will exceed consumption so the already-low producer and terminal market inventories will be stretched.   And new supply has already been deferred. Welcome to the resources `Optimism Upleg’!   Small cap resources stocks are gifts. This is a very special asset class where the underlying resource asset can increase geometrically in value over a cycle. 10 and 20 baggers abound. Here the ASX Small Resources is back to the levels of 2004 and is still 65% below its 2011 highs. Bargains everywhere. Barry Dawes 30 September 2013