Key Points
- Six year correction in gold almost over
- Move through US$1300 and higher anticipated in early 2018
- Weakness in US bonds suggests further sharp falls ahead
- Technical internal market strength in gold highlighted
- ASX Gold Index close to 4900 and heading for 8500
- A$ gold price holding near $1700
- Australian gold industry really performing
Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111
The 2000-2011 first leg of the unfolding Dawes Points ~40 year bull market in gold brought a maximum US$1643 (575% and 19.7%pa) gain to gold and was followed by a four year correction of US900/oz (46%) in the 2011-2015 decline.
The longer 2011-2017 downtrend was broken in August 2017 with the move to US$1354 and subsequent retesting and backing and filling has provided the technical support for gold to now move strongly higher. This has been a furiously fought battle in the futures markets that has taken around 56 months so far to be resolved. Price surges and sharp selloffs have characterised this period.
This graphic shows the tightness within this US$200/oz trading band. Tight markets like these tend to be eventually resolved violently and the demand/supply equation is shouting tightness and higher prices to come.
The drivers in gold from Dawes Points perspective are unchanged.
It is simply Demand and Supply.
China and India providing most of the demand with the notable addition of recent strong figures from Turkey and Germany.
Rising equity markets are reflecting strong economies in the Dawes Points Global Boom and growing wealth that just needs to have more gold bars and jewellery.
The flow of gold from West to East is just One Way Traffic. Nothing is coming back the other way.
Import figures of a combined almost 4000 tonnes to India and China is being met by 2800 tonnes (3200 tonnes globally less China's own ~400 tonnes mine production) mine supply and about 1500 tonnes recycled global scrap.
Inventory of Gold in the West is declining.
A shortage is coming.
Shortages in commodities bring about short squeezes.
Big shortages with short positions thrown in bring about big prices.
The battleground has been set so let's review the evidence.
First of all we have the global bond markets turning down because current yields simply do not compensate for the risk on sovereign debt. All interest rates need to rise.
The yield on a US 10 Year T Bond is moving higher again. The 2007-2016 Downtrend has been broken and yields have retreated to test and retest with good bye kisses and are now moving higher.
The picture is better shown through the price index of 10 year T Bonds. These bonds peaked in price in 2012 and have just broken sharply lower as expected.
The picture on bonds is horrific. A vast concentration of global capital (~US$100trillion) in a safe haven sector but now at a time of global economic boom and at yields that are unattractive against equities (especially dividend paying resource stocks and in particular ASX Gold producers) and very unattractive against the quality of the issuers ( read politicians).
A very overcrowded trade that is now being unwound.
The 10 year bond peaked in 2012 but the 30 year T Bond peaked in 2016 and now has so much further to fall.
There are inflationary pressures building globally as well.
Gold in the short term
Action on gold here looks text book. Downtrend broken, first Good bye Kiss, surge, retesting, short term uptrend tested, consolidation. Then it should soon move higher.
The three year view shows the breaking of the 2011 downtrend and consolidation. 
The medium term shows the importance on the 2011 downtrend and the break in trend and also the important resistance around US$1360.
The Long Term is looking just brilliant.
Some things here are absolutely noteworthy for comment:-
Every investor has a memory of the 2008 financial crisis with the initial surge in oil, gold and other commodities and the subsequent downdraft in all such prices. The rally out of the lows brought strong moves by gold (and silver and copper, tin and iron ore) into 2011 but most other commodities including oil only managed half hearted moves before it all came down into the Dec 2015 lows.
The 2007/08 highs were the end of the first leg in the commodities boom. But Dawes Points again notes the important internal and relative strength of gold (and silver and copper and tin and ironore) to make new highs.
This interpretation clarifies many previous unresolved questions. The true peak of commodities was in 2008 but the remarkable rise of gold into 2011 showed outstanding internal strength. The correction in the Wave 2 low of 1064 in Dec 2015 held above the US$1032 high in 2008.
This internal strength gives us a powerful bull market in gold.
Gold stocks
North American Gold stocks give the global market picture with the short term XAU looking constructive after 18 months of extreme volatility.
Gold stocks globally are now in far better positions with most debt repaid, earnings normalised and dividends resumed. But are still underowned with the relative strength against stocks still poor and also against gold itself.
Nth American Gold stocks against US$ gold still shows underperfomance but this relationship is compressing and `wedging' so that resolution to the upside should be very soon.
Market sentiment is very poor and indicating strong potential buying power.
For Australia, the ASX All Ords Gold Index (28 stocks) is building constructively and 4900 has been challenged. A breach will see a rapid move to 5500 on its way to test the 2011 highs of 8499. Soon.
For Dawes Points that is by Sept Qtr 2018.
The Australian gold stocks have been leading the world resources sector. Leading economic recovery, leading reflation and leading inflation.
Australian listed domestic producers have really outperformed the index itself.
Coming into the Christmas Season and the end of the year selling should subside and the market will start to anticipate restructuring of portfolios and indices for early 2018.
Dawes Points considers 2018 should be very strong throughout the resources sector with the gold stocks being amongst the leaders again.
The Pilbara Gold Conglomerates provided some intriguing new perspectives on gold in Australia with considerable sums being committed to the first substantial exploration in the vast region.
Results to date have been encouraging but so far inadequate to confirm the hypothesis.
I had the honour of visiting the Novo Resources/Artemis JV at Purdy's Reward last month and was very impressed with the potential but sampling methodology for these conglomerates remains a hurdle to yet overcome.
The bigger picture is truly fascinating and will discuss this further in the New Year.
I wish all readers a wonderful Christmas Season and for a prosperous 2018.
Barry Dawes BSc F AusIMM (CP) MSAFAA
+61 2 9222 9111
bdawes@mpsecurities.com.au
Dawes Points #72
22 December 2017 
The Super Bears didn't notice this action so it looks like October will pass without a crash and the 30th anniversary of the 1987 Crash was just a celebration.
But accelerating into the next channel is worth noticing because these channel changes have a habit of alternating and displaying quite the opposite character to that of the previous channel.
Over eight years trading within a congested 4000 pt range could just give way to a very sharp and free upmove. The DJIA has already added 1550pts since early Sept and accelerating into the next channel should give us another 2500pts by year end. Will it do this? I think so.
Australia has finally woken from its torpor and should pass through 6000 this week on its way to above 7500.
The character of these markets and these clear trends shown in the indices are reflecting the underlying economies and they all indicate another extended period of prosperity for at least another ten years. Leading economies around the world are just having a great time yet appear to not be over extended and changes to taxation rates in the US just cannot hurt.
USA, Europe, China, India, Japan. All in synchronised economic expansion.
Of course these equity market moves are not occurring in isolation.
The key principle of investing is the flow of capital. This time it is flows of capital from cash and bonds into equities and commodities.
Cash has been highlighted previously and there is certainly a lot on the sidelines.
Capital into equities, and particularly into new equity (IPOs, rights issues and other capital raisings), funds capex and new jobs.
The Fear Thesis has kept hundreds of billions of capital in cash and near cash. No wonder the Australian economy has been so sluggish.
A surging stock market should now have a major impact on the local economy and keep in mind that a strong resources sector helps bring in foreign portfolio investment. Investment that buys shares from locals and increases local money circulation.
The so-called Mining Boom of 2010-14 was really restricted to the major stocks owned by the large pension funds so individuals saw very little of those benefits. It will be very different now.
The flow of capital should be from the US$100tn that was tied up in the bond markets.
That is now coming out as bonds are sold or just not rolled over by those just seeking safe refuge for capital rather than long term income.
The bonds are weakening and seem to finally be ready for the next leg down.
Note that this is happening just as equity markets are surging!
So much for `rising interest rates send stocks lower'!
And also note that higher interest rates are pushing up US banking stocks which are outperforming the S&P500 after 14 years of underperformance. Again, so much for `rising interest rates sending banking stocks lower'!
Here in Australia the banking sector is having some heartburn with this although can't be sure as to what it really means! Is it following the bonds? Don't hold any local banks here. Do you?
Commodities continue to do well for the resources sector and copper is an excellent proxy for the story with most metals. The Channel Analysis works well with copper and the bullish calls from Dawes Points over the past couple of years have come to pass as prices move nicely with the channels. The US$3.70/lb looks easy now but US$6/lb is coming.
The strength in gold, copper, iron ore, coking coal, aluminium, lithium, graphite, cobalt, zinc, lead and silver have helped the ASX 300 Resources Index (54 stocks) to regain its 2015 highs on the way down from the 2011 highs but the current 3650 level is firmly indicating that an upward move through this will give a very rapid retracement to 4000 (+10%) then to 4400(total +20%).
Market share is now back over 25% of All Ordinaries weekly turnover.
Small Resources (recall this index has 38 stocks with a combined market cap of A$42bn with 15 stocks capped at over A$1bn (including 5 >A$2bn!)) is showing much higher leverage and is coming with a probable 50% gain for the next year.
Market share of turnover is growing and is over 5% again.
Both of these indices seem to suggest that a sharp upmove is imminent.
The reason behind it might be just the global equity markets and the cash on the sidelines but gold is likely to have an important input here.
Whilst the immediate short term for gold is not quite so clear, the long term indicators are very robust and suggest a major move could come at any time now.
There are simply hundreds of small quality resources companies out there and to find them is one thing but to play them is another.
The best advice is to have a core portfolio to ride out the cycle and to add to it as further opportunities arise. Which they will do in spades.
The best returns come from choosing well early and just sitting it through.
Have a look at these portfolios from the last boom from 2003-2011:-
October 2004 Portfolio +432% in 36 months and +430% over 44 months.
Structured model portfolio with no trading.
Structure provided liquidity and dividends as well as allowing 68x gain in SMM in the riskiest end of the sector.
The July 2005 Portfolio provided 103% in 12 months and 261% in 22 months.
Clearly not every stock provided positive returns but the portfolios did what they were supposed to do – give high aggregate returns with income and liquidity.
Let's look at some portfolios for now:-
Portfolio A
A$100,000 in a conservative diversified portfolio for income and capital growth.
Stock selection will be revealed in a month or so!
Portfolio B
A$100,000 in 24 equally weighted small cap stocks across a wide variety of sectors.
Stock selection to be revealed in a month or so as well.
The overriding comment is to `heed the markets, not the commentators' and the market character is that extreme value exists against the 3,300m people in Asia who just want better lives. And our resources!
Are you onboard?
Barry Dawes BSc F AusIMM (CP) MSAFAA
+61 2 9222 9111
Source:PSA
These two tenements are well known to Petsec and the potentially >110million barrel Al Meashar discovery was drilled by Petsec’s now-current MENA team.
With these two blocks Petsec now has potential oil production from each in the next six to nine months.
Each block has the potential to produce substantial cashflows for Petsec that would match the company’s current market capitalisation in 2018 and far exceed it in 2019.
Yemen’s geology reflects the abundant and unquestionably high quality source rock that has provided the carbonaceous source to oil formation throughout the Persian Gulf region but it also reflects massive regional tectonic activity that has literally shattered much of the brittle crystalline rocks such as granites and high grade metamorphics. Oil from the source rocks has entered the intensive fracturing joints which have in many cases become very large reservoirs for oil entrapment. The Masila oilfield region has several fractured reservoir fields totalling over 2 billion barrels and many of the post- 2000 oil discoveries in Yemen have been in such reservoirs.
The abundance of high quality source rock indicates a much higher probability of any potential trap being charged with oil.
Consequently these fractured basement reservoirs offer the potential of oil fields with hundreds of millions of barrels of oil. `
Fractured Granites at Surface in Yemen
Source: Oil Search
The Al Meashar discoveries in Block 7 had an 800m oil column down to total well depth(no oil-water contact was encountered so this is still `open’ at depth) with much of this in fractured basement.
Al Meashar Wells 1 and 2 with Reservoir Estimate Targets
Source: PSA
This field is only 14km from Austrian oil company OMV’s Habban oil field that has a 945m oil column in fractured basement and reserves of 170 million barrels in a very similar geological environment.
The An Nagya field is a `conventional’ oil field but it also has potential for fractured basement reservoirs beneath it.
An Nagyah Oilfield with vertical and horizontal wells
Source:PSA
`PSA is following Oil Search, now a major LNG producer out of PNG that in 2000 had also set up a Yemen portfolio and drilling ~50(including 12 exploration) wells. PSA, unlike Oil Search, has acquired 100% of existing or producing fields and infrastructure (as well as the experienced management and technical teams) on very modest outlays and so eliminated most capital expenditure risk.
The parameters set by Oil Search for a Yemen portfolio are otherwise the same:
The link is here:-
Improving prospects for a peaceful resolution in the hostilities allowed the Yemen Government’s national oil company Petro Masila in August 2016 to recommence oil production in the Masila oil fields in the eastern half of Yemen, well away from the disputed regions of the Shiite Houthi rebels near the northwest border with Sunni Saudi Arabia.
Oil production is now around a reported 75,000 barrels per day and is pumped via the 138km Ash Shihr pipeline and allowing resumption of oil exports. Shipping has resumed and an estimated six million barrels have now been lifted since August 2016 without incident.
Petsec’s An Nagyah field has 15 shut in oil wells and 20,000bopd processing capacity that are linked to the major Marib pipeline that runs 438km to the Red Sea but this pipeline is closed and is not considered likely to be reopened before 2019.
However, Petsec considers that it will receive official confirmation of its work plan during the Sept Qtr 2017 that will allow installation of a truck filling gantry (July) and a commencement of trucking convoys to Petro Masila oil fields and gaining access to the Ash Shihr pipeline for export.
The Yemen Government has historically relied on oil revenues for around 60% of its Budget income and in the current environment has encouraged foreign companies to resume oil production.
An Nagyah in Damis Block S-1 has 20,000bopd capacity today and should be able to re open wells to commence at 5,000bopd and steadily build up to 20,000bopd from existing wells and additional infill and appraisal wells. The additional undeveloped resources should ensure the capacity of processing facility is filled.
Damis Block S-1 Reserves
The two Al Meashar wells should provide at least 1,000bopd while production testing. The exploration potential in Block 7 is very high as these unrisked targets show.
Petsec should receive about 63% of the fields oil revenues under the Production Sharing Agreement to cover authorised capital and operating costs and its ~29% of the oil field profit. All sales receipts are received offshore to Petsec’s account. These cashflows should allow the drilling of infill wells and subsequently some exploration wells on structures that have >100m million barrel targets.
I have done considerable due diligence on this company’s operations and consider it an absolutely outstanding opportunity.
There is a large amount of information to absorb to fully understand the opportunity here but I can say that the numbers are very high and the risks are surprisingly low.
The key issues are that:-
1) Yemen is an early stage exploration target with underexplored basins and huge volumes of source rock
2) The MENA staff at Petsec spent over 10 years drilling wells here with Oil Search so they know the people, the local situation and the geological potential.
The stock is A$0.15 and my target of A$1.46 is only notional and only uses the Low Case of 5,000bopd in Yemen.
A perfectly rational high case could be >A$10/share.
The PER for 2018 calendar Year is <1x and operating costs are <US$15/bbl and these would fall to about US$10/bbl once output is linked to a pipeline, probably in 2019.
Looking at it dispassionately , it is clear that once production begins at An Nagyah, Petsec will be generating a lot of cash from low cost operations and should become something of a super stock. Next to no capex is required and the two Blocks have accessible reserves ready for production and have very substantial upside.
The oilfields and basins in Yemen are only in the early stages of exploration when large structures are being tested and, given the undoubted high quality of the Arabian Peninsula source rocks, it will certainly mean large oilfields are to be found. The Hunt Jannah Block (to the west) and the Masila fields (to the east) are each over 2bn bbls.
The existing fields are significant and in the experience of most operators in this basin it seems that they simply become much larger than initially thought.
The Petsec MENA team led by Maki Petkovski have actually been the operators here in Yemen for many years through Oil Search so they know the geology, drilled many of the wells and most importantly, know the bureaucrats, local businessmen and politicians who make things happen in Yemen.
The Yemen assets are almost beyond comparison with petroleum exploration prospects in Australia or in the very mature shallow Gulf of Mexico basins so the opportunities brought into Petsec are practically without peer for any ASX-listed company.
Risk is in the eye of the beholder and whilst the entire Middle East is unstable and hostilities continue in the north west of Yemen the operations of Petsec should be able to work within a supportive community and government umbrella to resume output and apply risk capital, probably through farmins, to drill some of the indisputably attractive exploration/development targets.
Petsec has acquired these magnificent assets and should production resume at An Nagyah as planned and Al Meashar deliver even modest reserves the upside is very high.
Oil prices are currently softer on oversupply concerns but underlying demand has been rising faster than most forecasts so the medium term outlook incorporating increasing imports to China and India should not be negative for oil prices.
MPS Research Report Low Case Earnings Forecasts for PSA at A$0.15.
The link to the Research Report is here:-
NASDAQ - New Highs
Russell 2000 Small Caps - New Highs
Wilshire 5000 Broad US Market Index – New Highs
UK FTSE - Very powerful now!
Japan Nikkei - Rally heading to new highs again
Shanghai SSEC – Quiet but powerful underlying strength
India Nifty 50 Index - Leading the world and heading to new highs
Australia All Ordinaries – Finally starting to catch up
Equities are showing us where the world economy is going - and it is not going down!!
I expect corporate earnings will be rising everwhere with the US adopting lower tax rates and with improving economic confidence. The equity indices should rise, despite rising interest rates. And the Bears still don't own Shares!
On the other hand the financial market cabal of bond markets, bureaucrats, central bankers, welfare lobbies, politicians and media canvassed here early in 2016 is steadily being roasted and hopefully somewhat dismantled by Mr Trump. Wouldn't it be wonderful if the US, providing 25% of UN funding, decided to drain that swamp as well.
The expenditures using 'near- free money' from low coupon bonds are now over. Bond yields have to rise much further.
You are probably tired of seeing this but it is a critical component of the outlook.
This 30 Year Treasury Bond Index has fallen 16% from the highs in July and, whilst oversold, might just fall another 5-8% before a bounce comes. 16-20% capital losses on 'risk-free assets'.
30 Year T Bond yields are likely to rise to ~3.7% in 2017 and much higher further out.
Currencies and Sovereign Bonds have always held a fascination for me and I consider a sovereign bond is just currency with an interest coupon. Where one goes so goes the other.
The US$ and its 30 Year T Bond are the largest in the markets so need to be respected but at the end of the day they are they are just instruments that are bought and sold.
But if the supply of each (Quantative Easing and Bond-financed Budget Deficits) is rising for the US then it becomes a matter of relativity against other currencies.
The long term channels on the US$ Index have been heading down since 1985 but the rally over the past 2-3 years has been strong and has moved into a new top channel. It could be very tempting to suggest that the US$ might head to 120 on this index as interest rates and bond yields head higher.
Perhaps the strong positive sentiment for the US$ today represents an important high and may be providing a 'good-bye kiss' on this counter trend resistance line.
Note that this current strength against a weak Euro (57% of the Index basket) and the Pound (11.9%) is not confirmed against the Japanese Yen (13.6 %), nor against the Canadian $ (9.1%).
Consideration should be given to a strengthening US$18tn US economy leading to increasing imports and raising commodity prices and thereby assisting most other countries.
The performance of most of the equity indices of the important other economies have certainly been heading higher and will be atractive investment opportunities for capital leaving the US bond markets.
Also, China and Saudi Arabia have been reducing holdings of US T Bonds so those funds will be redeployed to other markets. Probably to gold, commodities and equities.
These countries, together with Russia, are using yuan, roubles and gold as trading settlement currencies and so the trading base of the US$ is steadily being reduced everywhere.
It just may be that the surprise of 2017 is not a strong US$ but possibly quite a weak currency.
Prices of Industrial Metals have been rising over 12 months and this index of LME monthly closes has had a decisive trend break into a new bull market that should last many years.
Iron ore prices have exceeded my US$80 target (did anyone else make this call in the June Half of 2016?) and could quite possibly reach US$95 by mid 2017 before we see a significant pull back.
The price history of oil carries great similarities to that of iron ore and an assessment of the supply/demand factors indicates the market is already in balance, stocks are now falling and the recent OPEC cuts will be helping as well.
These commodities are only part of the story as the CRB Index is suggesting a sharp move higher soon for most commodities and probably led by oil.
The other aspect of this is that gold is just becoming even more interesting.
Gold has broken upwards against T Bonds.China and Saudi Arabia have been sellers of T Bonds and have probably been swapping from the oversupply of bonds into the ever tightening market for gold.
Gold bought for the East from the West at artificially depressed Western prices using funds from sales of very risky sovereign debt paper.
So the Outlook in 2017 is much more of the same only better.
These are the stocks that are considered to offer the best total returns in 2017:-
US equities making new highs after 15 year bases are not saying a bear market is yet to come!
But the bond markets are the ones that are grossly overpriced while commodities are severely underpriced.
The actions of the markets over the past six months and particularly over the past couple of weeks or so are giving strong confirmation that the Great Bifurcation is now a reality and the performance of commodities has been a sight to behold.
What is the fundamental difference between Monday 7 November when the Chicken Littles dumped stocks prior to the US election and Wednesday 9 November when the XAO was up 3.4%, iron ore above US$75/t and copper at US$2.45/lb.
Nothing. Pure sentiment.
And what are those investors with gargantuan holdings in T Bonds thinking now that they are sitting on major (already down 13.6 % for 30 Year T Bonds since the highs in July 2016 and 6.3 % for 10 Year), that will become gargantuan, capital losses.
And those with massive cash positions of over US$70 trillion (I saw a number from a reliable source suggesting US$70tn might be better to use than my US$80tn cash estimate but what is US$10tn nowadays!)?
So where do we go now?
Surely now it will be straight up!
The US equity market made new highs this week.
In the S&P 500, where a major long term base coincides with mostly oversold momentum.
NASDAQ has achieved new highs above the 2000 peak!
And the Russell 2000 Small Caps making new highs.
Short Term Dow Jones 30 Industrials – Look at this action. Another 1000 points to be added very soon?
These say a massive new up leg is starting as millions of bears cover their short positions (and probably change their shorts!).
Globally.
So where to start.
The US election gave us an excellent insight into the powerful financial intertwining amongst the political and welfare sectors and the financial market participants themselves who have all benefitted from the large bond selling programmes at the expense of the economy and most of the middle and working classes. Massive expenditures, ever higher tax burdens, entangling red and green tape and little to show for it.
Margaret Thatcher expressed it well with words to the effect of `Socialism is wonderful. Until you run out of other people's money'.
And the US and Europe (and Australia) are running out of other people's money. That is, the money that wouldn't be better used elsewhere.
To me, this is best explained by considering the ending of the 35 year bull market in bonds.
In a bubble like no other.
The Trump victory was just saying `Enough'! Call it what you will.
But the markets have been indicating this all along.
Consider the strategy as pointed out by the markets over the past two years.
Prices have broken the 2011 downtrend as suggested in the last Dawes Points after eight years of bear market from 2007.
The evidence has been so clear and the perspective has allowed confident assessment of markets and opportunities.
The mix of strongly performing gold stocks coupled with the move into the large cap resources in mid year has been wonderful.
A general Resources Portfolio was set up for 1 July picking up recommendations on the major resources stocks BHP, RIO, FMG, S32, WSA, WPL and STO together with three small stocks, MGT, ASP and PNX, that MPS was raising capital for.
Look at these.
BHP
RIO
FMG
Another five years should see gold above my US$5,000/oz.
In the very short term, gold has rapidly declined from a pre US Election US$1340 spike, down US$160 (12%) to major long term support at $US1180. Note gold is oversold and MASSIVE volume passed through as some big players covered short positions. A reasonable possibility of a major low is being formed here after a five month decline. Don't get despondent about gold.
Note, too, bullish sentiment is very low indeed and ready for a surprise upside surge.
The industrial metals bottomed in 1998 then rallied for 9 years and the last downtrend of eight years has bottomed at a much higher level. Expect at least ten years of uptrend to much higher prices. Relentlessly rising Asian consumption, high capacity utilisation, no inventory and exploration expenditure cutbacks make this an easy projection.
This graphic on copper looks magnificent. The 4 year downtrend from 2011 has also been broken.
What will be the effect of renewed infrastructure spending in the US?
The US economy that everyone dismisses has a mind of its own. How's this for housing starts as at 1 October 2016! Highest level since mid-2007. There must be ten more years yet in this upcycle. Wonderful for copper.
Iron ore has had an interesting journey as seaborne trade expanded to meet Chinese demand that just keeps growing. Steel output is still strong and high cost domestic Chinese magnetite output has been declining. India, ASEAN and the US are depend on Chinese steel exports and increased US infrastructure spending can only increase demand. US steel production at 80mtpa (and about 60% steel scrap-fed Electric Arc Furnaces(EAF)) and consumption at 120mtpa means more imports. From China. Not a lot of serviceable unused steel making capacity in the US so I think high tariffs on Chinese imports will be just another thought bubble.
The now-achieved US$80/t end 2016 target for iron ore wasn't just starry eyed optimism. This is developing into a long term tight market and, if it does, the technical pattern referred to in an earlier just might give the eventual and currently inconceivable new highs in iron ore several years out. Note the long lead times for most new mines (not too many FMGs around) and the declines in Pilbara reserve and ore grades as well as the closure of 170mt pa of Pilbara Yandi ore capacity over the next few years. Could we get US$95/t next year?
Note too, the rise of magnetite ores and concentrates and MGT.ASX is the preferred play here.
Coal is the dominant fuel. Gas is the fastest growing and nuclear has the greatest potential. Renewables are just another thought bubble.
The most interesting is oil.
Opec, Non-Opec and NGLs give us 94mbblpa and growing at 1.5%pa. Non OPEC oil is fascinating. Keep in mind Peak Oil for conventional reservoirs. Tight oil should now be considered petroleum mining. Conventional oil and gas fields have large capital upfront and low operating costs. Tight oil has short life rapid decline fields so capital costs now current operating costs.
The crosswinds within the oil market are enormous and often unfathomable. OPEC is almost a spent force with each player driving its own agenda. The national budgets of most OPEC members are irretrievably linked to oil revenues so the post 2013 oil price has reduced budgets severely Bonds are now being issued and state assets being sold.
It is of interest that most of the monthly OPEC bulletins report higher demand levels and lower output levels than immediately previously given. This market is now in balance so expect higher prices.
So we know now this will all last a long time.
How will it end?
Don't quite know just now. But whenever it is and in whatever way it happens you can be sure it isn't soon.
Of course something else happened a week or so ago.
Donald Trump won the US Presidential Election.
It is interesting how Donald Trump with his 'draining the swamp' to describe the cabal was so similar to the Great Bifurcation although his other fork in the road, whilst expressed and emphasized differently, will give impetus to commodities and world growth through promised major infrastructure.
The Trump victory was strongly hinted at in the statistics and analytics within social media Face Book, Twitter and Instagram where Trump was followed and `liked' by far more than Clinton and the overflowing halls were in great contrast to the tame Clinton gatherings. Take non compulsory voting and you have a very interesting range of dynamics which the `cabal' had ignored. You also saw the difference between Trump rallies and the Clinton gatherings.
The biggest question is whether then the US$ will rise because capital will be attracted to the booming stock market and active economy or will capital see that US imports will rise giving greater leverage to the economies of Asia, Europe, Sth America ... and Africa?
The stock markets of most of these we follow have done well.
Barry Dawes
BSc F AusIMM MSAA
27 November 2016
London
I own or control in portfolios BHP, RIO, FMG, MGT, STO, PNX, S32 and ASP mentioned here.
Contact me now -
Source: Randgold
Even EFT holdings of gold remain firm and even rising while the US$ gold price has had its consolidation pullback. The current position is around 2060t or about 65moz, well above this green line.
Take a look at oil again. Its correction is over. Demand is continuing strongly and market balance is already here. Natural gas is having its own little run and has recently been as high as US$3.40 /mmbtu.
(By the way, I am buying oil stocks again. Ask me what I am doing.)
Look at the performance of gold in the various currencies. It is not just a US$ : Gold relationship:-
Gold in US$ has broken its downtrend, has come back for a `goodbye kiss' and should now move higher.
The Euro is also providing a suggestion by pressuring a resistance line that a sharp rise is now due.
Gold in Sterling is, well, just on a tear on its way to test previous highs.
Gold in Japanese Yen just looks to be a base that will support a strong move sometime. Maybe soon.
And gold in A$ has pulled back to the uptrend line and should also head higher.
The outlook is just strong and we haven't had to pull back on the big picture at all, even though Dawes Points did just fall short on the 6000 for XGD.ASX in July. It will come soon enough.
This pullback in the XGD might just be enough.
US gold stocks hit precisely the 116 resistance level and now after a 25% pullback may just be ready to go again.
The shorter term for the XAU matches the XGD.ASX so we should be seeing action again very soon.
Gold itself in the longer term, just looks robust with momentum indicators turning up again and the 50 week MA is crossing the 200 week MA.
Hold on to your gold, buy more great value dividend paying gold stocks, search out some gold mine developers and watch for some more excellent discoveries.
Barry Dawes
BSc FAusIMM MSAA
24 October 2016
I own and control portfolios with ASX Gold Stocks and ASX Oil and Gas stocks 
The growth in resources is also very substantial and the technical evidence from NST in particular is that the strong growth will continue.
The 30 Year T Bond is about to say more and even a 1% fall from here would be doing important technical damage.
Although it would be the conventional wisdom that weaker bonds mean higher yields, and thus the discount rate on stocks’ income streams must rise and bring equity prices down, the market reality might just well be something very different.
It is something of an understatement to say that US$100tn tied up in bonds is at a record level. A record level against global GDP, global equities and global assets. I can’t imagine world history ever having so much tied up in one market and as they say - if you owe the bank $10,000 you have a problem but if it is $10m then the bank has a problem. Governments of the world have a US$80tn and mostly short-dated bond problem. Other borrowers have their own US$20tn problem but they may have very long maturities so may be that is not such a problem.
Now bonds have another quirky feature in that almost all have a finite life (British Consuls were perpetual bonds that were first issued in 1751 and the last of them were finally redeemed in 2015) meaning that they need to be repaid at maturity and probably rolled over to the next issue. As interest rates fall the new interest rate coupon is most likely to be lower and as interest rates rise the annual coupon needs to be higher. The issue price of the bond can of course be set higher (or lower) than the par price of say $100 to keep the coupon the same as the last issue and give a lower (or higher) yield to maturity. A $99.50 priced bond gives a higher yield at a 2% coupon than a $100 priced new issue bond at the same coupon.
As noted last week, the US Government Treasury Bond Portfolio has 70% of its issuance with less than five years’ maturity and the US Treasury is issuing 90 and 180 day bills at very small interest yields so the overall portfolio interest cost is relatively low at about US$400bn pa on its US$13.5tn outstanding debt. There are another US$6tn of debt somewhere.
But keep in mind that US$400bn in annual interest could very quickly get to US$1,000bn if rates rose 2% points from here.
US pension funds generally have a far higher proportion of bonds than equities in their portfolios as they try to match the portfolio maturities with their pensioner obligations, and while the US economy continues to grow it would be expected that these pension funds will maintain or increase their demand for bonds. Central Banks are also likely to be continuing buyers of US T Bonds.
But again as noted
MASSIVE BREAK THROUGH 7000 for the FTSE!!!! 7100!! YOU WERE TOLD ABOUT THIS!!!
Looks like Brexit is going to be very successful for the UK.
The DAX in Germany has been leading and is now ready to resume its upside thrust.
The broad 6500 US domestic listings Wilshire Index is making new all time highs again. Small caps are also doing well again.
Is Sth Korea is about to have a strong run very soon?
India looks good and its domestic interest rates are heading lower.
These markets appear robust and about to move substantially higher.
Even commodities are looking up and as we saw last week, metals and coking coal have been heading higher.
Crude oil is looking good here.
As is Natural Gas
So all commodities seem to be moving higher.
So get this right. Bonds weakening and equities and commodities rising!
So commodities are rising against T Bonds.
So all the above is simply a cyclical response to an extended period of low interest rates and it sounds like Economic Boom to me!
Could all the above be the manifestation of inflationary pressures building up within the economy after so much quantitative easing?
Or could it be the 3300 m people in Asia that are driving all this as these graphics from last week pointed out?
We don’t know yet but the overall picture is still compelling.
But there is so much more to the Bifurcation Revolution.
Source:HKTDC
And also consider the oil and gas pipelines along with the railways and highways.
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The entire network is growing substantially and we watching the integration of all of Asia. From Siberia to Singapore. Shanghai to Kazakhstan. Burma to Turkey. Connections everywhere.
The benefits to international commerce are major and unprecedented. Internet and rail travel. Freedom and mobility to even the smallest player.
Even Saudi Arabia with its 2030 Vision wants to further encourage Chinese investment in Saudi Arabia and to join in the One Belt One Road revolution.
The Asian activity is high but so is that in Europe. Major new high speed trains, lines and linkages.
And maybe also in the US.
Seems everyone is building even faster trains.
The technology advances associated with VFT networks are extraordinary. From rails themselves and ballast electric motors, high speed bogies, fuel efficiencies, super strength lightweight carriages, power gantries, pantographs, power receptors, braking systems, communications and all manner of new safety devices.
All use raw materials of steel, copper and cement and many utilise high performance materials from alloys and composites to ceramics.
And this transportation revolution is just not with trains. Aircraft demand and technologies are equally breathtaking.
Boeing’s view of the world says 100% growth in the world aircraft fleet by 2035 and current aircraft will make up less than 15% of that fleet.
QANTAS plans a nonstop London Perth 14,000km and 19 hour direct flight in new Boeing 787-9 for 2017.
Richard Bransons’ Boom Supersonic Airliner will fly faster than Concorde and is planned to be flying by end 2017.
And we haven’t even got to motor vehicles with electric cars and all sorts of hybrids.
Or power generation, energy storage and water.
All these transportation gains are likely to significantly boost person to person contact which is true commerce. It may not be GNP related but it will certainly boost commerce and trade.
Would you pay a large sum to sit in the front seats in a 3D VR performance by your favourite artists from the comfort of your own home? You probably would.
Real Estate and tourism will have major marketing revolutions with this system.
No waiting for opening hours for that new apartment or actually staying clear of real lions on your VR safari. No breathlessness on top of Mt Everest.
And Social Media and business conferencing will also be revolutionized.
Watch this video!!
Example VR World: avatars meeting in the VR environment
VR has become the fastest growing new media platform for the world of tomorrow and starting today.
China’s Central Government has also introduced aggressive policies to support high technologies with a strong emphasis on Virtual Reality technology and content developments. By 2020 China is expected to capture 1/3 of a global VR market generating US$30 billion in revenue. The current pace of development in China VR businesses would suggest that China alone will exceed most of the Western industry forecasts and may end up dominating the world VR industry.
You might not yet be part of it but it is coming now very quickly.
The turnover share has also kicked up nicely to say that Resources Shares are back!
BHP, RIO, FMG, S32 and OZL and for the oil stocks WPL and STO are good for a start.
There are a plethora of smaller players in copper, zinc, lead and tin as well as rare earths, technology metals and mineral sands. And oil and gas.
And we have already been strong against Sterling and the Euro.
The markets appear to be bringing together the strong themes of this fork in the road away from bonds and the Fear Trade and towards growth and better times.
So it now becomes a matter of flow of capital.
As a post script I also have two technology related opportunities:-
Aspermont (ASP.ASX) - digital publisher with global resource sector dominance
GoConnect (GCN.ASX) – early mover in VR commercialisation.
Barry Dawes
BSc FAusIMM MSAA
I own all the ASX listed stocks mentioned here.