Key Points
- Asian equity markets booming ahead
- Global bond markets have peaked
- Funds to flow into hard assets and inflation hedges
- Commodities surprisingly strong and breaking out in Euros and Yen
- US$160bn Asian Infrastructure Bank to fund major Asian infrastructure program
- Silk Road trade route program to increase Asia Europe trade
- Oil price has most probably bottomed – Shell bids US$70bn for BG Group
- A$ has probably bottomed
- Gold demand very robust
- Gold stocks ready to run in next upleg.
- Recent capital raisings and stock selections are up strongly
- Are you on board?
Gold and oil might be ready to move much higher at a time when Asian markets are booming. Australian resources stocks are looking very good and are underowned.
Whilst the past month wasn’t particularly kind to us after calling for the next upleg in gold and gold stocks, the overall the signs are there for a major change in long term sentiment after the general mania in chasing overpriced bonds and the upswell in global equity markets. As for the rushing to the safety of the US$ because of collapsing Emerging Markets – what garbage!
Asian markets have been very strong in recent months. Have a look at these stats
- Shanghai – up 92% since 1 July 2014
- Mumbai – up 40% since early 2014
- Tokyo – up 40% since 2014 lows
- Singapore- up 15% since early 2014
- Taiwan – up 15% since early 2014
- Manila, Thailand are surging and Sth Korea is trying hard.
At any other time everyone would be talking about global boom as I have. Instead, it is still gloomy out there. Mines and Money in Hong Kong recently was subdued with a low turnout. Sentiment is still underwhelming and turnover has been low. But signs for a turn are good.
This new US$160bn Asian Infrastructure Bank will assist in financing of major upgrades to rail and other infrastructure from Guangdong through Beijing, Mongolia, some of the Russian `stan’s and into Europe. Rail freight could rise from 1% of Chinese exports to Europe to 5-7% by 2020. That is essentially up 10x in growing tonnage.
This rise of the ASEAN nations (over 700m people) with Indonesia with 250m people and strongly rising living standards should not be ignored either.
The preoccupation with the defensive chasing of yield thesis just seems wrong to me because the markets are saying something different. Note that the US small caps (Russell 2000 and S&P 600 Small Caps) here are again reasserting the market leadership after a year’s hibernation. This says expanding US economy. Don’t ignore the recent wage rate rises in the US either. Inflation is coming. And this spells doom for deflation-priced US and European bonds. And for the defensive yield and high cash strategy.
Why be defensive in respect of our resources sector when the world is out there having fun?
The global economic boom is now well underway fuelled by central banks flooding the world with liquidity. Watch for changes to the velocity of money in circulation. Commercial banks are starting to lend gain. Everywhere. Especially for takeovers.
It seems strange that the world commentary focus should be on the US Fed and interest rates with players cheering down the Euro and thumping commodities while chasing impossibly valued sovereign bonds and an overvalued US$. The markets are saying something very different.
These markets are barometers for future economic conditions so steady growth for China and rapid and increasing growth for India and ASEAN seem very likely. Iron ore and coal commodities might soon surprise us to the upside. Maybe quite soon. These countries with low installed steel capacity but strong demand will be taking surplus Chinese steel.
Good signs of global economic expansion are there despite this current rout in iron ore prices gripping the locals.
Small resources stocks are starting to move higher and many with gold or technology materials are outperforming. Capital raisings are happening again with funding available for advancing new projects whilst survival capital is still hard to raise.
I see many brilliant opportunities and clients are making money again. This is the time when small investments spread over tiny nanocaps give the highest returns and lowest risks. Are you on board?
And on iron ore, what will happen to the 300mtpa of Chinese magnetite production which has cash operating costs of close to US$100/t? At US$48/t that is at least about a US$30/t loss. Times 300mt that is US$9,000m in losses. Atlas Iron is small beer. How long will these low prices last? Production cuts in China must be coming soon. With low steel mill inventories, lower port inventories and short positions in the futures there might just be a major short cover rally. The declining iron ore price has never seemed right to me. I have been clearly wrong but let’s see what the next year might bring. Or even the next month.
Here in Australia the All Ords is flirting with 6000 again and making 7 year highs but Resources are still being spurned. BHP is showing a 5.5% yield. Great buying.
Can the world be slowing that much while markets are moving up?
But as ever, I simply ask, `What are the markets saying?’.
It seems to me that the choir and what’s on the new song sheet are not yet in sync.
Try looking at this
The bond markets.
Major new low for yields in US 30 yr T-Bonds last month.
But the new lows not confirmed by the US 10 Yr Notes.
And bonds globally are just ridiculous. Germany at 0.18%.
Japan has said this was ridiculous. The capital losses from buying at 0.20% to 0.40% are unimaginable. Try 25%.
And then look at the UK. Big losses here too.
Why is this so? Why is there a rush for income at such low rates? And why the love of sovereign bonds when government and bureaucracies in so many countries around the world continue to show utter incompetence in managing taxpayers money at every level? Unelected officials with their own agendas.
And just look at prices for US 10 and 30 year bonds. 10 Year bonds hitting the uptrend return line for a Good Bye Kiss (a lovely term for when a market breaks then returns to the break out line then surges in the other direction) but 30 year bonds hitting new spike highs. Overbought signals everywhere. New highs in the 30 year Bond Index but no new lows in yield. Danger, Will Robinson.
I keep noting references as to who will buy these bonds once the decline does get underway. Could be a case of seller, no buyer.
Now look at some currencies. Starting with the commodities currencies the A$ and C$. Both are in long term support and are heavily oversold. Dawes Points has not got this right for the past year but I repeat the point above, nothing has changed in the Big Picture.
A$/US$ C$/US$
Now just for lark let’s look at the A$ on the crossrates. Well this is not bearish against the Euro.
Nor is this against the GB Pound.
Nor this against the Yen.
Well I find this interesting and not what most people are talking about.
Now here is another view on life. Commodities in other currencies. Reuters/Jefferies has decided to discontinue the favoured Continuous Commodity Index so let’s use copper and Brent oil. Start with copper in Euros. That’s interesting! A break out!
And in Yen.
And in this context just recall the consumption data from a Dawes Points earlier this year and the turn to deficits over 2010-2016 for most major resources commodities.
Annual consumption and consumption growth data
Where are the demand decline-driven bear markets?
Do not ignore the biggest traded commodity in oil. The US shale oil production is only part of the equation. Why has Brent surged to a 20% premium over WT when the proposed dropping of the 40 year old US export ban was overturned was supposed to bring them to parity?
Could it be supply concerns. Iran is now backing Shia Iraqi fighters against ISIS and Saudi Arabia is Sunni and is fighting against Iran-led incursions in Yemen, right on the Saudi border. A civil war here could affect oil shipments in the major shipping lanes such as the Straits of Hormuz. The tentacles are spreading. Export cuts at Libya. Iraq output down. What if Qatar fell? The impact on LNG would be immense.
Nor here. Oil price recovery may be coming sooner than you think.
Shell might be thinking so with its bid for BG Group. Great confidence for LNG. And LNG Ltd (LNG.ASX)!
Gold has bounced after the US Jobs Report selloff and is readying itself for another run up. The emphasis made here for some time now on the rapidly rising demand for gold from Asia can only be increased as we see the Shanghai and Mumbai stock markets roar to add wealth to citizens. Jewellery demand is robust in these countries and low gold prices can only increase demand.
Needless to say, the gold price in most currencies is in a good bull market. You knew that of course so I won’t show it again. Well I will anyhow. In Euros and A$
And the US market for gold stocks has given us some fascinating market action. Reversals patterns last month. When a market makes new low (or high) then closes above (below) the previous day’s high(low) then it generally indicates a direction change.
Our collection of US gold sector Indices makes for some very encouraging analysis of reversals.
The HUI unhedged gold index.
The XAU, the major US Gold Index.
And then the two major gold stock ETFs GDX and GDXJ.
Here in Australia, the ASX 300 Gold Index (XGD) has moved up nicely too to reflect the A$ gold price over A$1550/oz. I see it moving up strongly to 4500 quite quickly.
We are still down 70% from the 2011 high.
And the ASX 300 Gold Index is down 83% against the A$ gold price.
Gold stocks are picking up market share and the three decline in the 12 week moving average has broken its downtrend.
Newcrest and Northern Star have been the leaders in this new bull market for gold stocks. I hope you are on board.
Remember these stocks as well as my recommendations for this long term bull market. Most are over their recent capex, have reduced debt and costs and are making money. Dividends soon and for a long time :-
Metals Ex MLX
Doray DRM
Tribune TBR
St Barbara SBM
Resolute RSG
Evolution (EVN)
Beadell BDR
Blackham BLK
Crater Gold CGN
Don’t let global ignorance cloud YOUR own judgement.
Barry Dawes
BSc F AusImm MSEG MSAA
I own NST TBR SBM DRM CGN BLK MLX BHP and LNG