This has certainly been uncharted territory for us all so we can only react to what major markets are doing and saying. The very long term price histories remain positive and suggest the past few months have seen declines to major long term support.
We now need to ponder what this all means in the longer term.
And price history suggests you can forget the doomsday scenarios.
Extremes in sentiment show many signs of very important lows and provide the basis for continuation of the DawesPoints Global Boom.
The rally in global equities has begun and it could be driven more by the assumption that the worst for Covid-19 may be over rather than just the US bailout. The markets are anticipating a peaking in new Covid-19 reportings and/or that a cure/cures has/have been found.
Let’s look at what the markets are saying and have been showing these signs for the past month as reported in my desk notes.
Dow Jones Industrial Index at important MAJOR long term uptrend support
Four year cycle low is probably in place
Sentiment indicators show high pessimism levels
Long term indicators suggest low is in place
US$ still strong – Euro made new 3year low
Bond markets well over extended
Commodities driven lower by oil price rout
Shanghai market still holding well
Iron ore steady
Long term ASX Metals and Mining index back to downtrend line
I still am of the view that this weakness will be over very quickly and the fiscal and monetary easing across the world will cause strongly inflationary pressures.
I am seeing numerous efforts to bring some vaccines and drugs to combat the virus and am particularly impressed with the results from the anti-malarial Hydroxy Chloroquine. Markets might be recognizing this.
These figures are very interesting for the understanding of this Covid-19 virus and who it hits.
A 2 April 2020 report from Reuters on Louisiana showed an astounding 97% of COVID 19 hospital admissions had pre-existing conditions:-
Chronic Kidney 23%
Cardiac Problems 21%
(these are not meant to add to 100)
I have not been able to independently confirm this data but it seems whatever data we are seeing it is more a matter of comparing apples with bananas, cheese and zucchini.
Age, gender, race, comorbidities, mortality/admission ratios and so much needs to be tabulated and analysed.
Control might prove to be far simpler than currently perceived.
This crisis is enforcing curtailment of civil liberties and changing expectations from citizens so we might see some most unexpected outcomes when this is all over. Will it bring better people into politics and will the media be reformed after so much partisan commentary from commentators who are instant experts on everything?
Good people need to, and are, standing up.
The opportunity for restructuring the global economy and supply chains is now massive. This should result in more manufacturing in the US and hopefully in Australia and may be a sea change here in attitudes and actions. New incentives for start ups, fewer regulations, revival of onshore oil and gas exploration, consideration of new onshore refining capacity and changes in labour laws.
The crisis has created problems in Europe and the pressures will surely lead to the eventual break up of the EU. That union has no leadership and its many members will be wondering why they are there at all. Euro to zero?
Also the problems in Iran could lead to a better outcome for its citizens and a regime change would curtail much of the insurgency in the Middle East.
And the impact on China may also lead to more liberalisation once the crisis there has truly passed.
The collapse in the oil price will cause restructuring in US shale production and in Russia. Saudi Arabia will be having budget issues as will all the high taxing oil producing countries.
Expect to see the permanent loss of at least 1mmbbl/day production from marginal fields in the US and Russia in 2020. Oil prices (West Texas Intermediate -WTI) in Midland Texas have been in the US$6-7/bbl range as demand drops storage is taken up. Expect a 25% decline in US oil production rate from ~13mmbbl/day to <10.
This crisis has also shown up problems in so much infrastructure so renewal capex should accelerate across the board with physical assets and also in IT and bureaucracies. Interesting times.
The economic impact of the shutdowns will be great on employment levels but many sectors will be completely unaffected in the short term.
The equity markets will discount the future and give a better idea of the outlook so it will again be a time to `Heed the Markets, not the Commentators’.
This is indeed a critical moment in the markets but could be the MAJOR low here as the bottom picked up the 1982 uptrend. Maybe some churning is required but the worst is probably over.
This graphic shows the extreme low channel and a jump back into the next channel.
The shorter term looks even better for a market bottom to be in place. Bounced off a lower channel and back into a mid-range channel.
It is worth looking at some of the sentiment graphics available.
Martin Pring with Stockcharts showed the NYSE Bullish % Index hit a level almost as low as 2008.
The US Put/Call ratio was at extremes with all Puts and no Calls.
Martin Pring’s momentum indicators provided a major BUY signal with many stocks making extreme lows then rebounding to show leadership in the S&P500 Index.
Ciovacco Capital has this interesting chart for the S&P 500 250 week moving average with probably fastest-ever test.
The short term has seen a close above the 200 week moving average but with confirmation needed with this week’s close.
Stocks are outperforming bonds and have just pulled back to the break out line. Very positive.
And this from Graddhy – Commodities TA and Cycles (@graddhybpc) suggesting the 4 year cycle low is coming in right now. This is impressive. Major sell off, massive volume right on time with this 4 year cycle.
f you have a Twitter account I suggest you follow him at @graddhybpc
Comparisons with 1929.
The 1929 fall was very dramatic and the recovery quite spectacular.
This graphic is not logarithmic so is not so useful. (Apologies that it is cut off, unlabelled and unsourced.)
However, this is Martin Pring’s view of 1926-1941 highlighting major selloffs.
The world worked on the Gold Standard then so prices had a true yardstick (even if it did change in 1934 from US$20.67 to US$34.00).
Today, with no Gold Standard, all prices are measured against a floating currency which means nothing can be measured against a fixed yardstick.
It is also worth noting that in the 1920-30s about 40% of Western World workforce was employed in primary industries:- agriculture, mining, fishing, forestry, energy etc.
Today it is 3-4% so low commodity prices benefit most of the other 96%.
But today, services are far more than 40% and here it is where most job losses appear to be.
Importantly, many of these services have low barriers to entry as far as working capital so we should see a strong pick up once the turn comes through.
Barriers to employment in many services might just be a desk, phone or a vehicle.
I have shown this long term graphic of the Dow Industrial Average from 1923 to present from Schism @jatkinson33 previously.
A break of the uptrend curve from the low in 1932 would be very negative indeed but it would seem that government fiscal and monetary policies are and will be very accommodative such that a decline would be unlikely.
Also, bull markets, and this has been a major bull market, generally end with a bang. This hasn’t!
Note that the Dow 30 was not even at the midpoint curve when it had its pull back to the bottom uptrend curve.
We have a long way to go yet to the upside!
The US$ seems to be retaining its strength in this index.
The Euro looks awful to me.
Bonds are well overbought, at EXTREMES and have hit the top of the channel….
… the long term is for a change in the direction of interest rates. This must be the low in interest rates.
Commodities are bottoming out after a massive energy related sell off into a four year cycle low.
The longer term in this 60 year price history of the CRB Index shows today is certainly at an extreme level but it is at a stage of close to the end of a 12 year decline from 2008.
This index is back at 1973 levels in nominal terms but it is heavily weighted to oil and petroleum sector products.
It seems to be coming into a major low.
Clearly precious metals and copper are well above 1973 levels and certainly iron ore so do not fit into this group.
ASX Metals and Mining
This is one of the best and most positive charts I can find. Pull back to 2008 downtrend and some long term support.
This graphic tells me a lot and is very positive. Ignore the current `fundamentals’ and consider that a retest of the 2008 downtrend line has taken place at a level that is horizontally important. The bounce should be robust from here.
BHP is well placed to continue its longer term outperformance of the S&P500.
Shanghai - Long term still heading up
It is surprising that Shanghai is holding up well and in 2019 finally broke out from its 2015 downtrend.
This market may be manipulated but it is still at the level of a decade ago despite rising GDP figures.
Shanghai – Short term still solid
And what might this mean? Shanghai vs S&P 500.
Iron ore is holding OK.
Gold – looking very strong - Much higher prices coming -probably quite soon
Gold is a many splendoured thing and means different things to different people.
Concerns over debt, the Coronavirus or an overvalued stock market could be reasons for higher gold prices but I still consider gold now to be the Metal of Prosperity.
Asian demand is from rising prosperity and sales to Asia from the West represents a short position for many banks. The probe into JPMorgan gold price rigging may force cover of these short positions, especially in silver.
ETF and Central Bank purchases of gold in the Dec Half of 2019 offset declines in Asian demand but rising prosperity in the US pushed gold jewellery demand to the ten-year highs.
The US is experiencing a momentous acceleration in its Trump Blue Collar Boom. Just watch employment, housing and autos (the coming EV boom).
Economic Confidence Index is at the highest level in almost 20 years.
This long term demographic/technical graphic shows the US market is in the early days of a major bull market. Demographic changes are driving it.
Capital flows are showing bonds have peaked and are flowing into equities. And Property and commodities and gold.
Watch this video!!
Gold has continued to move higher in all currencies and achieved Friday monthly close on 31 January at US$1588.
The technical setup is for gold to now move higher in the near future.
US$1600 is an important level so a break above this should see gold rise almost US$200 to around US$1775 in a reasonably short time frame.
Moves to US$1800 are likely in 2020 and the previous high of US$1923 might be met or exceeded this year.
The longer-term picture is for a much higher gold price than this.
Gold in A$ is moving higher and the technical are suggesting a coming move into the next channel.
Gold can be traded using the ASX-listed ETF GOLD.ASX.
Silver is also setting up for continuation higher after its strong move in Sept last year.
As with gold, the long term pattern is suggesting a move that will take silver above its 1980 and 2011 high of US$50/oz.
Silver can be traded using the ASX-listed ETF ETPMAG.AXW
World Gold Council Data
The recently published 2019 data from the World Gold Council provided some interesting market trends.
Gold-backed ETF holdings reached an all-time high in Dec Qtr 2019 at 2885 tonnes, up 325 tonnes.
Europe now has almost as much in gold ETFs as the US.
Gold in Euros seems to be ready for a strong move as well.
The Euro still looks very weak to me and so the US$ will remain strong.
The US$ Index seems to be now ready to move higher.
Central banks were net buyers for 10th consecutive year with 650t to 34,500t and this gain, similar to
that in 2018, was the most in 50 years.
World Gold Mine production was 1% lower at 3463 tonnes and the first mine output decline in ten years.
Interestingly, this data shows the rate of change of gold production has a declining trend.
China has been declining from a record 453 tonnes (453,00kgs here) to 420 t but these figures may be optimistic. Peru gold output fell 9% in 2019.
Gold production in China has been from numerous small mines so the longer-term production is not assured despite official forecasts.
Other major gold producers Australia, USA and Russia were marginally higher.
Production costs as measured by AISC figures are rising again but this is more likely to be a function of declining cutoff grades rather than input factor costs.
On this graphic, ~6% of global gold production is still loss-making basis AISC data.
Recycling rose 11% to reflect the higher prices bringing out scrap.
The data showed gold in Indian Rupees drew out some selling.
Gold stocks in North America continue to consolidate and after breaking through some technical resistance should move sharply higher again.
The unhedged HUI index is constructive.
The Philadelphia Gold Index has major long term resistance at 110 so a breakthrough this soon into 2020 will provide an acceleration to 150-170.
The GDX ETF seems to be tracking the XAU but may be stronger.
This GDX is tradable on ASX under code GDX.AXW.
Also, a North American Goldstock portfolio BetaShares ETF MNRS.AXW (non ASX companies) is available on ASX.
Individual stocks like Newmont
And leading royalty company Franco Nevada, are doing well.
Overall, Nth American Gold stocks are now breaking upwards against the S&P 500.
And looking very positive against gold itself.
Here in Australia the ASX S&P Gold Index looks very constructive. New highs above 2011 were seen in 2019 but the Index (~39% NCM) has pulled back to good support where the 2 December Dawes Points BUY NOW was issued. Once XGD breaks out to new highs a strongly accelerative action is likely to take place.
NST is well on its way to A$20 and beyond.
And NCM is far too cheap. Haveiron will be a real winner for NCM by converting Telfer from a marginal operation to a long life very profitable mine. Recent rains should also remove any concern for water for Cadia.
ASX gold stocks are very cheap now.
All these constructive technicals for gold and silver ( and platinum ) are telling me the artificial down pressures on gold are being removed and a significant revaluation is coming.
But this and so much else is also telling me that US equities and hence global equities are looking very strong for at least a decade.
The massive over-commitment to bonds to ~US$110tn will provide capital flows to equities and commodities for the next decade.
The fundamental factors for supply and demand for gold are, as repeated here often, many and varied so one perspective on debt, currency, COMEX market manipulation, monetary expansions, inflation, wars, economic turmoil or central bank holdings is good as another at any one time and the issues must all settle down as just a matter of buyers and sellers.
Who are the buyers and who are the sellers?
This is unknowable from week to week but if we come back to the @DawesPoints view of Asian buying and the West having sold and now considering to restock there is a very powerful argument for a continuing sharp rise in gold prices in all currencies.
Also, a strong economy will bring strong demand for gold through jewellery and maintaining insurance proportions of growing asset portfolios.
In the end though, we are all reliant on some form of technical analysis to ascertain what the millions of gold buyers and sellers are doing. There are so many different styles of technical analysis out there and many excellent exponents of their crafts. Most try to catch each move but at the end of the day, it needs to be recognised that this is a very long term bull market and we only need to get right the major moves and turning points.
This means we don’t get to sell all holdings at an index high but it pays to hold on to the key stocks like CYL that just continue to make new highs. And hold on to key stocks like NST, KLA, EVN, RED, TGM and TBR.
The @DawesPoints Global Boom TM is still well on track and is being led by the US equity market where we are witnessing the Panic Buying discussed here so often, despite the occasional pullback.
This @DawesPoints positive outlook on the US economy, the US equity market and the global economy hasn’t wavered over the six years of this newsletter’s existence despite the gyrations in all the major commodity, equity, bond and currency markets over that time.
The fundamental factor is the flow of capital.
The flow of capital from defensive positions in bonds and cash built up since 2008 and the decline in bond yields and interest rates reflects this hysteria that gave such low yields and even negative interest rates that in hindsight will truly be seen as the Scam of the Century.
Bond yields have bottomed here.
So bond prices are falling.
Rising yields and falling prices. Risk is rising rapidly.
This flow of capital out of these defensive positions into equities commodities, property and gold is only just starting and has many years to run.
Much is made of the supposed impending doom of the US$ because of all its debt but the markets are telling us something quite different.
The US$ continues to rise.
DawesPoints has been agnostic here because the US$ has been steady on this index for almost five years and rising against most other currencies outside this index.
But the Euro, with a 57% weighting here, looks quite precarious technically and Brexit is likely to remove the second-biggest economy and leave the other 27 and six hopefuls sucking on the teat of a bankrupt ECB. And the ECB intends to bring Climate Change into its policies to further add to Eurosclerosis. The UK Election is 12 December.
There is no technical support in this graphic for the Euro in the short term.
And nothing here in the longer term.
The Euro is the King of the fiat currencies.
On another note, the US$ might be hinting that the Trump Era will do what no man has done before:- halt the ever-rising budget expenditure affliction gripping the world.
The Impeachment Investigations clearly show a complete disregard for facts and due process and have brought out the massive cost of a bureaucracy intent on having very nice lives on the public purse. The public is starting to see the largesse in Foreign Aid and who are often the beneficiaries at the expense of the average taxpayer.
Those with inquiring minds could well do to access this and read `Here’s The Plan’ set out in the latter half of this opinion.
This could work a treat and save us from all that potential hyperinflation that would otherwise occur.
Something similar should be put intrain here in Australia.
So to Gold.
Asian economic growth continues despite all the negative commentaries and we see it as new highs in the Indian stock market and also in Taiwan with China still holding on.
Growing demand for gold is still with us despite short term variations.
Keep in mind a strong US economy will boost US jewellery demand and for gold as a share of rising portfolio values.
Gold in US$ had run to US$1566 in September and has had around three months (depending on how you view it) of consolidation and has pulled back to a low of around US$1446 giving a US$120 decline.
Interestingly, an uptrend line from Dec Qtr 2015 picks up US$1450 and this also ties in with trading around US$1450 levels in 2013.
Note too, that gold dropped over US$400 in the three months to late June 2013.
This could work in reverse with gold jumping US$400 over the next few months once the correction is over.
The long term gold price chart picks up this 2016 uptrend and shows its strong roots in the 1999-2001 lows. Nice!
The Gold price in Euros is looking good to me and seems ready to shoot higher. This may relate to that 12 December UK Election
Watching the technicals of price action of gold in US$ and also in other currencies helps a lot.
Watching gold stocks helps even more.
The Philadelphia Gold Index is the key index to watch. It has already broken out of its wedge and is showing leadership.
The XAU is actually leading the GDX Gold stock ETF out of the blocks but GDX is outperforming overall.
Key market leader Barrick is very well positioned for a sharp upmove soon.
Newmont is also ready but with a different pattern.
And the royalty companies are doing even better. And maybe ready to jump into a new trading channel.
A global exploration stock ETF GOEX provides another perspective for smaller companies.
We can go on all day with Nth American opportunities but this is where we are now with ASX gold stocks.
The Australian gold industry continues to grow its output and is on its way to 350tpa.
The quarterly data shows the strength.
Whilst WA is recovering it is NSW and Victoria that are providing the growth in output.
This shows the renaissance in gold mining in SE Australia as detailed in my recent Symposium presentation.
Interestingly we now have around 75% of Australian gold production from underground with Northern Star achieving outstanding mining productivity in its mines, Newcrest is one of the lowest cost major mines, Kirkland Lake’s Fosterville is currently the world’s highest-grade major mine (632,000ozpa @ 41.8g/t in Sept Qtr). NST has superior operating stats and Newcrest is a world leader in high volume block cave mining.
For the ASX S&P Gold Index, this looks like a massive inverted head and shoulders with a neckline at about 6000. The Index in August 2019 made a new high above the 2011 high and is simply pulling back to the neckline but an uptrend from 2012 is likely to keep the XGD above 6000.
Interestingly, those ~25% pullbacks seen throughout the 2000-2008 bull market is coming in here too.
Enough is enough!
And gold stocks have retreated against gold back to around 3.1x (but mostly through Newcrest with its 45% weighting in XGD).
So looking at the stocks let’s see what is afoot.
The leaders have made outstanding achievements in their local operations and have taken their expertise, technologies and balance sheets to opportunities in North America.
Northern Star with Pogo, Newcrest with Red Chris, St Barbara with Atlantic Gold and now Evolution with Campbell RedLake are showing the world their skills of underground mining.
This is a very long gold bull market so these companies have many years to accommodate these new assets and get the type of returns seen in their main Australian operations.
It was noteworthy that incoming Barrick CEO Mark Bristow said that his RandGold managers all had technical competencies and business qualifications as well. He also said the Barrick managers had only technical qualifications.
The global opportunities for Australian companies are very large from here.
NCM – Perfect pullback. No downside here!
NST – Still Moonshot. No downside
EVN - Tightly managed operations – Next growth phase – No downside
SAR – Tightly managed. Next growth phase
SBM – Next growth phase Already punished into excellent value
RRL - Still growing
SLR – Steady as she goes
RMS - The quiet achiever Over delivers
TBR – Still value here. Hidden assets
Smaller stocks provide excellent value
The Africans are coming together now
PRU - Growing nicely
CDV - Biggest discovery in the Birimian in over 20 years - 7moz So cheap!
TGM - Huge potential and near term production
Victoria is getting very exciting for us now with:
CYL - Hancock now 15% A$10 target still in place
KLA - Fosterville is outstanding. Buying opportunity now
KZR - Chasing up Castlemaine
CHN - Well cashed up
RED - How big might this be?
BLK - Down but not out
BGL - How big might this be?
NTM - Making good progress
PNR - Waiting on Norseman acquisition
NVA - >2moz in elephant country
NVO.V - This is an extra special stock Pilbara conglomerates.
This is an extra special stock Pilbara conglomerates. I am a believer.
The world is an interesting place at present with some important structural changes underway in a number of countries.
The US is of course the key to all these developments and from a market perspective it is coming to the biggest markets of them all: currencies and bonds.
I am unable to make out much from this measure of the US$ as it seems to want to move higher despite a recent sell off. The US$ against the Euro and Japanese Yen does not seem to want to go lower although the British Pound has jumped in anticipation of a successful Brexit.
The bond markets of the world seem to be staging a peaking in price and bottoming of yields in what is described as the Scam of the Century where sovereign borrowers have obtained almost `free money' from panicking lenders. This game is coming to a close.
The recent increase in yields appears to be signalling the end of this period as it is notable that although new lows in yield were achieved in US 30 Year and in the 10 year for UK and Germany, these new lows were not confirmed by the key 10 year bonds in the US and Japan.
Recent lows in yield are suggesting that the 38 year decline in interest rates is now over.
Why are bond yield declines ending? The economic cycle is turning up again.
The key driver is Trump's USA.
US Consumer Sentiment is high despite a recent small decline and should support the US economy where the anecdotal evidence of activity is very wide and strong.
Housing is important to watch in the US.
It is only about 4% of US GDP but data indicates that as much as 15% of the economy relates to home building.
US housing starts have been soft for almost three years but the latest numbers gave a strong increase and this needs to be set against the long term requirement of around 1.5m units per year.
This graphic shows that substantial catchup of over 6m units is needed.
Multi-unit structures are taking a larger share of the housing market.
The economy is clearly benefiting from the increase in employment and the low interest rate environment. 30 year mortgage rates are very attractive for home buyers.
The Housing Sector Index for listed companies is also very strong and almost at all time highs.
And it is not just housing.
Dow Jones Trucking Index is close to all time highs.
The rate of change on economic activity is improving despite the superficial chatter.
But this story is far from just this. Raw materials for housing are looking firm.
The lumber price is bottoming and is ready to move higher.
Copper is also showing signs of picking up again.
Copper has its greatest use in buildings construction.
Global mine production is running at about 20.5mtpa with scrap at about 4mtpa and consumption is at about 24.5mtpa. The market will have a deficit of about 0.4mt in 2019.
China accounts for about 50% of all copper consumption.
Crude steel output in China has remained over 1000mtpa and September was a 20 month high in iron ore imports into China.
Keep in mind there is NO INVENTORY of LME metals out there. Copper, lead, zinc and tin are low and aluminium and nickel have has massive inventory reductions over the past few years and are now, too, at critical levels.
Port inventory of China iron ore is rising again but over 40m tonnes has been taken out of the market due to higher demand and the Brazillian shortfalls.
India is the second largest producer of crude steel at 114mtpa and is now an importer. India's target of 300mtpa of crude steel by 2030 will require another ~300mt of ironore and most will be imported. Note the growth in crude steel production in Vietnam and in MENA so that it is not just a China import market.
The price of oil still needs to reflect declining output from so many oil producers due to peak production from old conventional reservoirs.
Gold and iron ore are leading but copper and oil are ready to move higher and join the leaders.
And all the major commodities are now in uptrend.
And note things aren't all bad in China despite the Trade War.
China Caixin PMI History This has moved `unexpectedly higher'.
And that is not all.
Freight rates are improving although this is still a mixed market. Tanker rates have risen through withdrawal of some Chinese tankers and the need to anticipate the IMO 2020 restrictions on high sulphur shipping fuels. This will be another positive factor for oil prices as better quality crudes are pushed up against high sulphur crudes which have been widely used as bunker fuels.
The latest Trump China Trade Deal has emphasised a large pick up in China demand for US agricultural products especially soybeans. Trump made a big issue of this suggesting farmers would need to plant more soybeans. Futures prices for soybeans have reached 18 month highs and prices for wheat and corn have also risen.
The Commodity Research Bureau's CRB Index of futures on COMEX is showing some very constructive action and seems ready to break an 18 month downtrend.
The picture for the longer term looks even better.
This is very positive despite the pervasive pessimism and also for the Australian economy.
So coming back to the US Bond market the 10 year Treasury Note has provided `Goodbye Kiss' on the lower uptrend line.
The yield on the 10 year is oversold on the downside and now above the downtrend line.
The 30 Year Treasury Bond has also provided a good bye kiss.
The outlook remains clear.
Sentiment is very defensive and has contributed to the reduction in interest rates and the surge in bond prices.
But economic growth is continuing and pressure will soon be really placed on supply of raw materials.
Moves as we have seen in iron ore and gold over this past year are likely to soon apply to copper and oil as well as many other commodities.
The massive volume of funds tied up in bonds will pour out and fuel the uptrends in commodities and commodity stocks.
The ASX S&P ASX 300 Metals and Mines Index has broken its 2008 downtrend, is about to pick up the 2016 uptrend and should be sailing in 2020 and beyond.
BHP might already be there
And RIO not far behind.
Fortescue is looking very good indeed.
These stocks are on 5-6% yields on normal dividends and with the special dividends have rewarded shareholders with +10% dividend income yields.
So much more to come.
Call me to participate.
Barry Dawes BSc F AusIMM(CP) MSAFAA
Martin Place Securities
+61 2 9222 9111
email@example.com October 2019
Dawes Points #92
I own all the stocks mentioned in this report.
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The achievement of over 1,000mtpa in crude steel production in China in April 2019 is truly remarkable and may be even higher in Dec Half 2019. This is not a sign of a declining economy in China.
China is by far the world’s largest consumer of raw materials and steel is the most important non-energy commodity for China. It consumes almost 50% of global steel.
Steel is so important across the economy so that whatever happens for steel consumption will just as surely be repeated in aluminium and copper as well as many other commodities where China consumes even more than 50%.
Steel itself is universal and gives a clear indication of activity in every sector within an economy.
The monthly World Steel Association crude steel production figures are one of the best near-real time indicators of economic activity. These World Steel Association figures show the underlying strength of the economy in China and also show the economic strength of other parts of the world.
Obviously the current US-China Trade War will have some impact if it is not soon resolved but because China faces west and not east it is far more concerned with its own economy and those of Asia, Africa and Europe.
But with steel the figures are current and some of these numbers from other parts of the world might surprise you as will be shown a bit later.
The economy in China has continued to grow such that it is currently around US$14tn and 90tn Yuan RMB and despite all the perpetual bearish talk the economy has continued to expand.
The key point is that whilst the growth rate itself is slowing the China economy is adding around US$1tn each year.
Note this idiosyncratic table that shows GDP in US$ falling with a weaker Yuan.
The US$ has been firm so the Yuan RMB has weakened against these other currencies over the past five years.
The key drivers in China are of course a liberalisation of the Communist State that has allowed rapid expansion of commerce of all kinds and also the urbanisation such that since 2000 over 350m people have been added to city life and now cities now make up 60% of the population.
China has a population of around 1420m growing at 5mpa with a demographic problem arising from the One Child policy that is likely to see a population decline from around 2032 as China’s aged cohort peaks.
Another key factor is the remarkable growth in Personal Disposable Incomthat continues to exceed GDP growth reflecting the entry of about 20m people each year into paid workforce rather than on subsistence farming in many parts of China. These people experience a sharp boost in their own incomes and so it affects the averages. The self employed and the entrepreneurs are also adding to this growth rate.
This is particularly important factor as the Middle Classes in China as they move to housing, cars, appliances and better food. The appetite is voracious and inexorable at present.
The savings rate is still very high at >40% and vast hoards of cash are still reported to exist.
It is also noteworthy that wealthy Chinese (and most SE Asian) businesses have just two asset classes for investment – the business (including property) and cash.
Consequently the economic expansion drive remains strong.
Anecdotally, the driving forces of property (location, location, location) together with the dramatic urbanisation has produced very large rises in true property value and rental incomes that can readily support the high property debt load.
And I see no sign of any significant slowdown that could turn to a downturn although the momentum has clearly slowed. Nevertheless, overall investment in construction is still rising.
With this level of construction it is to be expected that demand for steel will be firm.
It is notable that demand for steel reinforcing bar is at robust new highs.
The MPS steel rate of change indicator is providing another turning point. The 12 month moving average is ~5% higher than a year ago and the six month rate of change is turning up again.
Crude steel output should be even higher in the Dec Half.
It has been clear that domestic iron ore production in China has seen a dramatic decline of around 50% from highs in 2014 as the iron ore price fell. Almost all iron ore production in China is magnetite ore and requires crushing and grinding beneficiation to produce the saleable 65-70% magnetite concentrate so it is a high cost source of iron units and mines closed accordingly. Ore grades had been declining over the past 5-8 years down to around 15% but with closure of some very low grade mines the average has begun to rise again.
With rise in crude steel production and the decline in local iron ore production the level of imports rose strongly and Australia is the most important supplier.
Port stockpiles in China had risen in 2017/18but began to turn down so with the loss of around 40mtpa of Brazillian output the market saw over 20mt cut from stockpiles in just two months. Clearly this was more strong demand than declining Brazillian supply when viewed against the massive 1034mtpa monthly crude steel production in April.
No wonder the iron ore price has been rising.
But as indicated above, it is not just China.
India has become the second largest producer of crude steel with output now around 110mtpa with and has passed Japan.
Importantly, India has produced this steel from its own mines. Also India uses magnetite concentrates for use in the production of Direct Reduced Iron (DRI) and Hot Briquetted Iron (HBI) for about 30% of its crude steel production in processes that are using gas as the reductant rather than the blast furnace route with coking coal.
The demand however is outstripping existing mines and bureaucracy issues over mining titles is likely to limit near term expansion. India is now an importer.
India would like to be producing 300mtpa of crude steel by 2030 so the jump from 110mt will be 190m crude steel requiring about 300mtpa of iron ore. Probably 60% of this will need to be imported.
Where will it come from?
So with India needing more iron ore and Sth Korea still growing and Vietnam accelerating rapidly from a small start to a current 18mtpa the market for iron ore must remain tight.
And in addition to Vietnam we have other strong growth in MENA where again most production is as magnetite concentrate fed DRI products that use very low cost local gas and these are fed into electric arc furnaces (EAFs) that use low cost electricity from low cost gas for steel making.
So it becomes no small wonder that the iron ore price is strong.
It is clearly a demand issue not supply driven.
The iron ore price completed a text book A-B-C correction with that 5 wave C completing a Wave 2 into the 2016 low and this enabled Dawes Points to then call for new highs to come in iron ore prices. That outlook is still on track.
Iron ore prices are heading up and so are those for coking coal.
So let’s now look at the Shanghai stock indices to see how the market views China.
Looks robust to me holding that 27 year uptrend and the recent 30% jump into 2019.
And I do like this relative performance chart vs the S&P500.
And while we are at it lets look at India’s Nifty 50 Index.
And also the Nifty against S&P 500:-
Capital is flowing to these `emerging markets’.
So the ASX Metals and Mining Index looks robust.
As do BHP
The chart formations for these companies suggest VERY MUCH higher prices are coming for these stocks.
The Dawes Points Global Boom is firmly on track.
Call me to participate.
Barry Dawes BSc F AusIMM MSAFAA
Executive Chairman Martin Place Securities
I own many of the stocks mentioned in this report.
After almost six years the US$ Gold price is still meandering in a roughly US$200 band between US$1180 and US$1350. Each move toward US$1350 gets the market excited but we have seen about half a dozen false dawns in just the past three years.
The true 'fundamentals' on gold have always been unfathomable. The bullish position on so many levels has been there for years and is so clear, but price response has been muted. The Dawes Points simplified position of viewing of demand from Asia running down inventory in the West and likely to cause a short squeeze is wonderfully logical especially against the background of massive open positions on COMEX that are impossible to cover from registered COMEX stockpiles. Currency volatility continues and sovereign bonds still seem absurdly overpriced. Inflation is rising in so many sectors and all the key indicators are positive, yet the meandering continues.
But something else seems to have just happened last Friday 26 April 2019.
The ASX XGD Gold Index jumped 2.15% with some of the leaders rising 3-4%.
On COMEX after a soft start US$ gold jumped ~US$9/oz in a constructive technical pattern that could give gold the power to push through US$1300 again and back up to retest US$1350.
The breaking of the downtrends from the 2011 highs for gold and many other related assets has been highlighted here repeatedly because it is to me clearly signalling that the global change in trend is underway.
Reviewing the North American markets for gold and goldstocks is critical to an understanding of overall investor sentiment and the direction of capital flows in precious metals markets. If it not happening there it won't be happening here.
Having said that of course, the ASX senior goldstocks have been the global market leaders but the smaller stocks are currently shunned and reflect the moods for many of their North American counterparts.
Moreover, the Australian market is far too small to be representative of global trends. It is also clear that it is international funds not local funds involved in most activity in the ASX Gold Sector.
So, in the US it is the Philadelphia Gold Index ($XAU) that is the key gold index for the market place as it has the gold sector heavyweights like Barrick (GOLD) and Newmont (NEM).
As noted, we have been spoilt by the outstanding performances of the likes of NST, EVN, SBM, RRL and SAR in recent years but the XAU has still yet to break this important 2011 downtrend.
In recent times, however, the market focus has passed from the XAU Index to the Van Eck GDX goldstock ETF as the market weathervane.
This HAS actually broken its downtrend and is very constructively supporting on its breakout line and now looks ready to move higher.
As with the ASX gold stocks on Friday 26 April some North American gold stocks put on a 3-10% spurt.
Something is happening.
Rumours are suggesting a large central bank order is soaking up significant amounts of physical metal from the London market and from COMEX.
Might this be signs of the Dawes Points short cover rally we were talking about?
The US$ is gaining strength, particularly against the Euro (note the Euro might be heading for parity against the US$) but the US$ gold price is rising and the gold price in Euros is rising faster.
Gold in A$ has already broken out and is above A$1,820 again.
Positive price action of gold in many currencies shows the making of a true bull market in gold.
A bull market in ALL currencies.
From the Dawes Points perspective this constructive technical action across many markets should lead to the US$1350-70 resistance being tested and significantly exceeded in 2019.
The state of the Australian Gold Industry is excellent.
Recent Dept of Science and Industry data on Australian gold production showed a new quarterly annualised record of gold production at 331tpa.
At 331tpa Australia is the clear second largest producer of gold behind China.
Australia should see a new annual record of at least 325tonnes in 2019 and the is indeed a possibility of 350tpa within a couple of years.
Importantly, NSW (13% - mostly from Cadia and Cowal) and Victoria (5% - mostly from Fosterville) are beginning to show significant and growing shares of Australian output behind the leader WA (63%).
Expenditures on Gold Exploration are rising and the latest data giving Dec Qtr 2018 figures show an annualised rate of almost A$1000m and a very rapid and large recovery from the lows of 2014.
Some Australian companies are highlighting new gold resource discovery costs of A$10/oz but even if the figures are A$50/oz this billion-dollar expenditure should add 20 million oz (~700t) of new gold resources per annum.
This could convert to an additional 1mozpa (30tonnes) of annual gold output each year within a couple of years through mine expansions or new mines.
350tpa doesn't seem so far away.
At the same time China just might find that many of its multitude of small mines might not maintain output so China might quickly fall from its now sub 400tpa gold production to less than 350tpa.
The MPS Gold Matrix of 19 important Australian producers gives total FY2019 gold production from these 19 of about 5.3moz, up about 10.5% on FY2018. This is almost 90% Australia-only production.
This forecast to grow further so that the 2014-2021 CGR is 12%pa.
Newcrest and Kirkland Lake are not included, nor are the Australian operations of companies such as Barrick, Newmont and Goldfields. (The 21 key companies here includes two about-to-be-completed mergers to become 19 in the Matrix)
Additional stocks will be added to this Matrix so it will be clear to see that Australian gold production is still on the rise.
The performance of the XGD has historically been very robust in its bull phases.
From 2000 to 2008 it was 585% over 8 years
From 2000 to 2011 it was 750%
From the Nov 2014 low the XGD is up 243%
The technicals of the break in the 2011 downtrend, the backtest on that downtrend line and then the surge, are classic text books examples.
It should not be too long before the XGD makes new highs above the 2011 peaks.
Note that NCM currently makes up around 43% of the XGD so NCM will be a massive influence on the price level3 of the XGD.
Also, the big seven (NCM, EVN, NST, SBM, RRL, OGC and SAR) make up 90% of the XGD.
The ratio of the XGD against the A$ gold price has been an average of around 5x but this ratio is only just over 3x.
I think 5x might well be more appropriate.
That is a 66% rise in ASX Gold Index against the A$ gold price.
This graphic below had shown mostly one-way traffic lower since the 2011 highs but the XGD did exceed 6,000 in March 2019 to make new six year highs.
This graphic should become very useful again once the old high of 8499 is exceeded. We will be able to look for and recognise the 25% style pullbacks that we saw in the 2000-2008 stages of this bull market.
ASX Gold Sector
The ASX XGD is not a very useful index given that is has 21 stocks and 90% of its market cap is covered by just 7 stocks.
There are hundreds of other gold companies outside the ASX XGD and that index is simply not representative.
MPS has therefore set up its own index for 25 emerging gold producers where stocks have current production, are in mining development or have a reasonable expectation of being able to mine ore and produce gold within 5 years.
Smaller stocks have significantly underperformed the XGD over the past 18-24 months.
It should be time for these smaller stocks to catch up with their bigger cap brothers.
In early December 2014 Dawes Points called the low in the ASX XGD Gold Index in that November of 2014.
In that 4 December issue of Dawes Points a portfolio of gold stocks was recommended.
The 17 stock portfolio has been published a number of times.
The key to the portfolio was to overemphasise size and liquidity but to also include smaller stocks that could provide deliver very high returns.
The portfolio has been published a few times but this is the first time the weekly performance can be seen over the past 4.5 years.
In these 4.5 years there has been no trading in the model portfolio. Just the original stocks. No adding or subtracting from holdings, no rights issue take ups or option exercise. Dividends are banked and no interest is derived from cash at bank.
Over the 53 months the portfolio returned 253% at current market prices.
The XGD was up 220% whilst the XGDAI Accumulation Index was up 208%.
The Dawes Points diverse portfolio provided the best result even though some of the smaller stocks had appalling performances.
The current moment of confluence of technical price indications is suggesting that the current market mood maybe leading to a significant low in prices for the Gold Sector assets.
Accordingly Dawes Points has suggested another 20 stock portfolio to participate in the market for the next three to five years.
Let's see how this portfolio runs.
I will tell you the stock codes in a couple of months.
You will probably be able to work out the bigger stocks but some of the smaller ones might keep you guessing.
And as a parting comment, just look at the results of the 2012-14 Resources Boom.
Total Resources Sector Commodity exports in Dec Qtr 2019 hit A$280bnpa Almost 70% of this came from just iron ore, coal and LNG.
The gains are coming from price and volumes.
The gain in total Resources export revenues since Dec Qtr 2017 was 23% up on that pcp. Prices are even higher in Mar and June Qtrs 2019.
It is hard to see a weaker A$ with a rising US$ gold price and such strong revenue growth.
The iron ore market is continuing to show the strength recognised here almost three years ago and there will be new highs in iron ore prices.
Oil is still tight and LNG prices will continue to reflect oil prices and not US domestic gas prices.
It will not be just gold that is to rise.
Call me to participate.
Barry Dawes BSc F AusIMM (CP) MSAFAA
Executive Chairman Martin Place Securities
I own many of the stocks mentioned in this report.
2019 certainly has been interesting. The sharp sell off in US equity markets in Dec Qtr 2018 seems all but forgotten as markets continue to rally. Remember the `1929 revisited' calls? Remember who said it all? Well you will recall it wasn't Dawes Points!
Economic growth is continuing in most important regions and no sign of a real slowdown. The US markets are recovering. The channel analysis here of the major indices has helped again.
Asian markets have been quite unperturbed about that Dec Qtr 2018 sell off. What me worry?
They have been robust and you can see they are indeed heralding the Asian Century.
But the commentary focus at present is on the US and the President on domestic issues.
This seems to be a key time to indeed `Heed the markets and not the commentators'. The economic commentators are about on par with the so called MSM experts on the Mueller Report.
The US economy does seem to be running smoothly and all those announced new capital projects together with the low unemployment can only be positive. It might even mean a declining budget deficit at some stage.
But how can commentators be calling for a recession in late 2019? Is it just the Fake News?
Consumer confidence has also recovered and is encouraging.
With the strong economy and the apparently contradictory near-concensus of pessimism for the near term I just keep coming back to focus on US housing.
This graphic of housing starts still suggests a housing shortage exists and with the recent influx of illegal immigration of another 1m pa the pressure must be increasing, particularly in the South West of the US.
Regionally, the South is doing well and better than the national aggregates.
Source: Federal Reserve Board of St Louis
The housing sector stocks had a savage sell off in 2018 but it seems to be bouncing back.
It is also useful looking at what those parts of the stock market that deal with the real economy.
Consumer Discretionary stocks and the Retail Sector seems to be looking reasonable.
Retail Sector ETF
So when looking at the major indices the picture looks quite reasonable.
The DOW 30 seems to be leading and wanting to make new highs.
Will we have a panic rally now?
And the NASDAQ Technology stocks are not far behind and with new highs beckoning.
NASDAQ is leading the broad S&P 500.
And the very broad Wilshire 5000 is holding very well indeed.
The Russell 2000 Small Caps is lagging though.
As would be expected, the outlook is not so rosy for bonds. The 35 year rally is over and the last gasp rally back to the break line for the `goodbye kiss' may also be over.
The 'Good bye Kiss' rally peaking.
The US$ is looking firm and is likely to go higher.
It seems the Euro is likely to weaken and may go as low as parity against the US$. With the UK the second biggest economy in Europe, its leaving could leave a big hole.
The Dawes Points thesis over the past five or six years has been that the global equity markets are looking good.
Germany has been a great leader of this entire bull market post 2009.
Even France looks very powerful.
Interesting to note this comment from Bank of America on major fund manager activities in early 2019.
Short European equities is the most crowded trade
A slowdown in China, at 30 per cent of those surveyed, leads the list of biggest tail risks cited by investors, followed by a trade war, at 19 per cent,, which had topped the list for the previous nine months; third on this month's list is a corporate credit crunch, at 10 per cent.
Short European equities, at 19 per cent, is cited as the most crowded trade for the first time in survey history, replacing Long Emerging Markets, at 16 per cent, which drops to fourth.
I guess there will be significant short covering in the months ahead.
But this is the Asian Century.
So look at these Asian markets.
India has about 1365m people and is growing at about 14m each year.
Japan is a bit messy but still looks OK.
South Korea has pulled back and is bouncing off the break line. So much for the hysteria about Nth Korea destroying Sth Korea. Were these the same people that said……
Taiwan looks OK.
As does Singapore.
And China proxy Hong Kong is behaving constructively.
And Shanghai is doing well. Up 27% from the Jan 2019 low. And it seems like a consolidation to me before another upmove coming.
And this Emerging Market ETF just looks excellent with a massive ascending triangle.
Australia, with it's A$1520bn in savings deposits, is being led higher by resources.
Equities are looking good in this Asian Century Dawes Points Global Boom.
And finally the best to come is the resources sector led by the Leaders.
Text book long term breakouts.
The A$ should be a beneficiary of all this.
The US$/A$ rate might seem to be only holding tenuously but just note how low that 106 year downtrend is now.
Just around US$0.77. Think of iron ore prices, coal prices, copper prices and LNG (oil) prices. Big boosts to export revenues.
And just keep watching this too.
Palisade Radio kindly invited me to join a list of global resources contributors that includes Eric Sprott, Rick Rule, Frank Holmes, Ross Beaty, Ronald-Peter Stoeferle, Jim Rogers, John Hathaway and Bob Moriaty.