Category: Dawes Points

Gold is now poised to rise #76

by Alison Sammes

Key Points

  • Australian Gold Sector leading global reflation
  • ASX XGD Gold Index pushed through 5000 and breaks 2011 downtrend
  • A$ Gold Price at ~ A$1750 also breaking 2011 downtrend
  • Australian gold production reaching new record in 2018 >310tonnes
  • Australian gold resources rising
  • Exploration and development increasing
  • Gold sector earnings rising
  • A Corporate M&A rush likely to unfold
  • Global macro outlook outstanding for gold
  • Large cap golds well ahead of minnows – time for catch up
The past few years in gold have been fascinating for those who can take a longer term perspective beyond the weekly and daily gyrations in the markets and see that the time has come for gold to reassert itself in the market place and for the value in gold mining and exploration companies to become better recognised. The key longer term undercurrents come down to supply & demand and for gold, with that unique position of having all its historic output of around 180,000 tonnes still available, it is the what and the wheres of gold inventory transfers that are most important. The price itself of gold may be an important driver in stock valuations in this sector with movements due to US$, interest rates and wars etc but to me the most important matter is the transfer from the West of most of newly mined gold and freely tradeable gold bullion inventory to the East being India and China predominantly but with Turkey, Russia and the Middle East also as key gold purchasers A time will come, and soon I expect, when the rundown of the this freely tradeable physical gold in the West will actually be felt.  The tightness in gold will become unprecedented. Looking at the overall market place it is clear that the gold bull market thesis has not yet been embraced as indicated from the generally weak performances of gold equities around the world and in particular in North America. The important Philadelphia Gold Index (XAU) bottomed in early 2016, had a rapid 6 month 200% surge and has spent the last 18 months causing emotional stress to the bulls and nothing clear for the bears.  The TSXV has been a Blockchain and Cannabis sorry story where small resources have been all but ignored. That is also obvious from the broader ASX gold sector because many quality gold stocks are still quite friendless and the ASX XGD Gold Index has also been going sideways for over a year. But that is not quite the reality. The A$ gold price and a rejuvenating Australian gold industry have generated some outstanding returns from Australia’s geotechnical entrepreneurs. This graphic shows the strength of the Australian Gold Mining Industry over the past five years with my unweighted index of ten Australian gold producers (ex Newcrest) with operations in Australia. This index made its low in June 2013 and is almost 500% higher today. In contrast the ASX All Ordinaries Gold Index didn’t make its low until November 2014 and is up ~200% from that time but it is just 150% from June 2013. This graphic presents a wholly different view of gold sector in Australia. The Terrific Ten have been wonderful with earnings and dividends flowing and are a great credit to the Australian mining industry. These figures on growing cashflows and cost reductions from Evolution are typical of the results from NST, RRL and SBM so far. Evolution Mining Ltd operating results FY2013-18 But the ASX XGD only looks like this. Importantly however, the 2011 downtrend has now been broken and the 5000 level has been breached again in this latest surge. This should lead to a rapid move in the XGD and is likely to be leading the US$ gold price higher. These Australian gold producers have been leading the whole global economic recovery since their lows in June 2013. From these contrasting graphics, the ASX XGD has failed abysmally in providing a proper picture of the true state of the Australian Gold Mining industry. A gold index undiluted by pointless inclusion of foreign companies with no Australia assets would be a start. The underperformance of Newcrest over this period, particularly since early 2015 has held back the Index but it has been the woeful makeup of this index. The index has simply not reflected the remarkable gains made by the likes of NST, EVN, SBM, RRL, GOR and SAR. The numbers look like this
Low + from 2013 + from 2014 low
MPS Terrific Ten stocks(ex NCM) Jun 2013 498% +390%
Eight dom-based with OS assets Nov -49% -13%
ASX XGD Gold Index (25 stocks) Nov 2014 +149% +205%
The Australian gold industry has been severely handicapped by this Index. But looking at this performance it is the Australian mining industry at its best.  Entrepreneurial geotechnicians who have found new deposits, reopened old mines, revitalised existing operations and earned cashflows that have built excellent balance sheets and rewarded shareholders. And done it quickly and efficiently. WA has been the leader with the services and infrastructure well in place. The reinvigoration of Kalgoorlie, Leonora and now the Yandal-Wiluna Belt is providing excitement. Western Yilgarn from Boddington and Katanning and out East to Gold Road’s Yamarna Belt are also providing new resources and new output. Kalgoorlie has had the Big Pit, Kanowna Belle and the Zuleika Shear and NST and EVN are key players in this reinvigoration. NST has two milling hubs to treat ores from all around the Kalgoorlie region. Leonora has the most impressive Gwalia Mine. And now with the rejuvenation of Jundee, reopening of Wiluna, action at Bronzewing and new management for Darlot, this Northern Yilgarn Wiluna-Yandal region can only get more exciting. The net effect of this has been a remarkable recovery in WA gold production, producing around 70% of Australian output, such that a new quarterly record is likely to be set in 2018 and 2018 exceeding the previous high of 312t in 1997. It is ironic that WA did not really participate in that US$250 to US1032/oz rally in 2008 as its output plummeted 48% over that decade but the recovery is well underway.  The sharp increase in Australia’s gold output in Mar Qtr 2018 to 317tpa is a promise of more to come in 2018 and 2019. This Dept of Industry graphic provides a useful summary of the distribution of the Australian gold industry and outside of WA. The rising A$ gold price has also stimulated exploration and discoveries, brownfields and also some greenfields and we can expect more discoveries over the next few years.  We are seeing the opportunities and the results now on a daily basis. Despite these strongly upbeat numbers we have a true dichotomy of the likes of the Teriffic Ten and a few hundred smaller companies that are still doing it tough. This graphic contrasts the Terrific Ten with 15 smaller stocks closely followed by Dawes Points. Clients have strict orders (wisely) not to sell any NST EVN SBM RRL etc but the pressure of the difficulties some of the smaller stocks are facing purely because there is insufficient capital committed to the sector and trading liquidity is still low. The market has clearly not yet embraced the big gold bull market thesis here in Australia. The excitement over 2015-16 was strong for all types of gold stocks but since the highs in July 2016 the dichotomy has been strongly pronounced. The reluctance of fund managers, financial planners and investors in Australia to embrace the now very obvious Dawes Points Global Boom TM and invest in Australian Resources Stocks has meant that this has been a much delayed bull market but much delayed markets have a habit of catching up quickly and running for much longer. The picture for Dawes Points has been very clear for some years and it is all unfolding as suggested although the time table for the general resources market has been longer than anticipated.  This has been unfortunate for traders in the markets but those with an investment approach these past few years in the better quality gold stocks have been outstanding. Coming back to ASX XGD Gold Index while we can be critical that its 25 stocks is unrepresentative of the Australian gold industry it still is a published index and can be interpreted accordingly. The ratio of the Gold Index to A$gold is probably meaningless overall but it does seem to have some meaning to the marketplace because it has provided support and resistance over the past 16 years or so. < The market happily played 4, 5 and 6 times the A$ gold price previously. The numbers for the ASX XGD Gold Index become:
A$ Gold Price 3X 4X 5X 6X
A$1750 5,250 (now); 7,000 8,750 10,500
A$2000 6,000 8,000 10,000 12,000
Interesting thoughts. Keep in mind that over 2000-2008 the earnings of the Australian gold stocks would have been almost non existent.  Most of the action was in Africa and Sth America and with loads of overseas stocks listed on ASX for……(?) what reason? Gold itself in A$ is creeping up and has also breached the 2011 downtrend line and A$2000 is quite realistic target. Gold in a number of currencies is also above their respective 2011 downtrend lines so the the move in all currencies can’t be far away now. Gold Sector turnover as a share of total ASX All Ords turnover is still a respectable >3% and likely to move higher along with the better A$gold price. To better appreciate the overall mood of the current market place it can be seen that only a handful of gold stocks are up in 2018 with the Terrific Ten figuring prominently. The average is only 7.5% whilst the XGD did 4.3%. The past four quarters have been very tough for most of these stocks. Amongst 53 other stocks monitored by Dawes Points, less than 40% were higher in 2018 and the average was -14%. There was a lot of volatility in these stocks over the past four quarters but few were through true operational disappointments and most were trading liquidity issues. A lot of gold resources have been discovered or delineated by dozens of these companies. How many will become like the Terrific Ten?  With the Australian mining sector entrepreneurial spirit there will be many winners here and given the strong difference in market ratings of the big stocks and these it is certain that M&A activity can only increase.

The Macro Scene for Gold

The Dawes Points official view is that demand from China and India et al is tightening up the gold market to an extent that physical gold will be relatively difficult to come by in the West. This drive for gold comes from rising living standards amongst 1400m people in China, 1300 m in India and another 600-800m in ASEAN and the like. The rising living standards are also driving economic activity and the attractive economies and equity markets are reducing the need for capital safe refuge in US TBonds. The conclusion is that long term gold prices will be much higher and probably driven by a tight squeeze on available gold. Gold in US$ is hopefully completing the very last stages of its basing and reversal from the decline from the US$1923 in September 2011 and the next move up that passes through US$1370-80 should produce a powerful surge. The long term shows the rapid and powerful from the 2000 lows around US$250 to US$1923 in September 2011.   Completion of the 6-7 year pullback and resumption of the bull market gives very high technical targets. Bond prices and yields need to normalise to properly reflect a true market and so higher bond yields are necessary to match risk and it is likely that bond prices will continue to fall for years yet with occasional bear market rallies. Total Global Public Sector debt is US$61trillion in this World Data graphic and growing. The issue is complicated and exacerbated by the whole debt matter of bond issuance by governments to fund current social spending. Current refuge capital parked in these bonds is likely to leave for better opportunities as the bonds mature. Who will buy the new issues?  Pension funds will still have a growing need for income to match obligations and central banks will buy the rest.  But even US$2-3tn leaving and going to property, equities, commodities and gold will send up prices here. This graphic is disturbing for Europe.  France has 30% of GDP as spending as public social spending. Its total budget is now 52% of GDP. As interest rates rise, so will government budget interest payments. Note this yield for the US 1 year Note:- The last maturity schedule for the US Treasury bond portfolio that I have seen was 2016 and the overwhelming majority of the portfolio was less than 7 years.  Very little had locked in the low 20 and 30 years rates when they were well under 3%. Most of the portfolio was taking advantage of the low short term funding rates. This is likely to have been a dangerous gamble as these yields rise and new bonds need to be issued at higher yields and coupon costs. Let’s say US$1tn of theUS$21tn was for 1 year bonds. In mid 2015 this 1 year rate was 0.4% so the interest bill was US$4bn. Today, that 1 Year money will cost US$22bn. At 5% it is US$50bn. Across US$21tn of mostly short maturities a 2% interest rate rise is US$400bn.  Good bye Budget. In Europe and Japan where yields have been lower than in the US and bond maturities generally shorter then the impact will be greater on budget interest expense outlays. So this issuance of bonds will need to accelerate and so bond prices will continue to fall – for many years yet – as supply increases. Some swamp draining will be required but it is probably already too late. The rise in rates at the longer end of the bond maturities will just continue and at a faster rate than at the short end. While this is all happening we are finally seeing an expansion in the velocity of circulation of money as the banks increase their lending of all their previously hoarded QE funds into a booming economy. The impact on the economy will be positive and the Trump tax cuts, capital repatriation and technological revolutions will be inflationary. The banking sector is now outperforming the S&P500 so there is not yet concern about failing banks here. And so when we see strong housing in the US as the MIllennials finally make that housing commitment and that 6 million dwelling shortage becomes really visible, the result is clearly inflationary demand for housing and housing raw materials and furnishings and appliances etc. At this stage individuals and funds everywhere will be looking to buy gold. Will they find it? May be in China or India.  Or perhaps not. This combination is likely to lead to much higher gold (and silver) prices than you had imagined. Do you have enough of the Terrific Ten or those ridiculously cheap minnows? Call me to discuss +61 2 9222 9111 Barry Dawes BSc FAusIMM (CP) MSAAF I own many stocks mentioned in this report. 7 May 2018 +61 2 9222 9111 I own or manage in portfolios I control: NST EVN SBM NCM GOR DCN PNR CLY WGX

Gold Outlook #75

by Barry Dawes

Key Points

  • Australian Gold Sector is leading global resources recovery
  • Earnings, gold production and dividends rising
  • Gold Price Volatility very low – but likely to rise again
  • XGD.ASX Volatility also very low - calm before renewed action?
  • Gold price technicals very strong in medium and long term
  • A$ gold price ready to break 7 year downtrend
  • Australian Gold stocks prices appear to be ready to rise
Call me to discuss ways of participating +61 2 9222 9111
The Australian Gold Industry has been a global leader in operational activity and profitability over the past five years and, according to the Dawes Points data base, it has been the leading sector amongst most things raw material globally. The XGD.ASX Gold Index bottomed and turned up in November 2014, more than 12 months ahead of general resources stocks, North American gold stocks and US$ Gold itself which essentially all turned in Dec 2015/Jan 2016. The XGD.ASX rallied 250% from that Nov 2014 low of 1642 to reach 5760 in July 2016 before pulling back to 3345.  The Index has since slowly made it way higher and has been flirting with the 5000 level and wanting to move higher as the company operational actions continue to show the creation of shareholder value. The hard evidence is being delivered as rapidly increasing cash balances across the sector. Gold production is at 18 year highs and on course to make new record highs above 1997's 314 tonnes in 2018 and beyond. Western Australia is indeed the Golden State and is now participating fully in this great bull market in gold. Note that WA basically did not participate in the 2000-2008 section of the bull market.  Gold production here declined almost 40% while the gold price rose from sub US$250/oz to over US$1000. But the Australian Gold Industry operators are made of stern stuff and have brought about that brilliant recovery after taking back mines operated by overseas companies driven by different agendas. The leading companies, NST, EVN, NCM, SBM, RRL and SAR have done marvellously well. Gold production has risen, operating costs have generally fallen, ore resources have grown and mining reserves increased for longer mine lives. Stock price performances have been good with NST, the star, hitting all time highs and being closely followed by SBM which has also done exceedingly well by passing its July 2016 highs.  But all the leading (and many more emerging) companies have done well and are poised to do very much better. Very soon. These leading Australian gold companies are now paying dividends and many of the smaller players will also join the list of dividend payers.  And so they should. Gold mine resources are a wasting asset and shareholders need to be paid for providing the capital. The better news though for shareholders is the GROWTH in resources and reserves of these companies primarily through near mine exploration. This means that dividends from current operations will be paid for longer and at a higher rate. This increasing maturity in the Australian Gold Sector is likely to lead to corporate M&A activity. The current corporate activity seems is fascinating. Market Leader NCM is very actively upgrading its own operations and also acquiring strategic holdings in some very attractive large scale development JV plays.  Investment in Ecuador for Solgold's Cascabel and Lundin Mining's Fruta del Norte in are high quality high volume projects.    The joint venture with RandGold in the very important Birimian Belt in Cote D'Voire West Africa offers access to additional large scale gold projects. NST has been driving an internal operational programme that is increasing resources at Jundee, Kanowna Belle, Zuleika Shear and Tanami. Resources growth has been rapid so the corporate objective is to increase milling capacity.  The acquisition of a 20% stake in Echo (EAR.ASX) will underpin the reopening of the Bronzewing mill as a low capital cost option to treat new NST open cuts ore from Jundee.  Acquisition of WGX.ASX's Southern Operations will provide mill capacity for a substantial lift in Zuleika Shear ore production. SBM is focussing on the continuation of the great Gwalia mine, operations at Simberi, some additional exploration plays and investments in our favourite CYL.ASX at Bendigo and with PEX.ASX deep copper plays in NSW. EVN is focussing on near mine exploration at a very prospective Lake Cowal, at Mungari in the Zuleika Shear and at Cracow. These companies are now cashed up but are currently and prudently sticking to the knitting of concentrating on improving present operations. I imagine this will be a very different discussion in 2019. Exploration is picking up and the Australian Gold Sector geotechnicians are delivering. The near mine action from NST, EVN, RRL and SAR in particular has been very successful but it is notable that new exploration models in WA have provided some interesting outcomes.  The SW Yilgarn is seeing success in high grade metamorphics by AUC.ASX, EXU.ASX and CY5.ASX. This region is vastly underexplored but is delivering some outstanding results. The XGD.ASX Gold Index is really performing well and is being shown in this graphic. This says a major change is coming as the uptrending forces defeat the downtrending forces. XGD.ASX 2003 - 2018 The technical tension developing here will most likely send the XGD to a new high and I expect this in 2018. It will be mostly, as I see it, new incoming investor buying that pushes this index higher. The gold price in A$ has been reasonably steady over the past several years but here again the uptrending forces are meeting the downtrending forces.  The downtrending forces have been winning for the past SEVEN years but it will have been a pyrrhic victory for the bears as they now get mauled.  The pressure on gold to the upside is looking increasingly strong.  A good break here should see a sharp move to A$2000/oz.  Keep in mind that the A$ rises with US$ Gold so I don't expect a lower A$ to be driving this. This steadying of the A$ gold price has had a stabilising effect on the XGD.ASX which is exhibiting very low quarterly volatility ( ie (qtly high - qtly low)/opening qtly price). The average qtly volatility here is 26%.  The past 12 months has been well below this average. A change is due and likely.  Could we get another 50% volatility here?  To take the XGD to >8500? I think so. I still expect a new XGD high in 2018. Now come look at the individual stocks. NCM is the biggest producer with the longest mine life.  It is still emerging from corporate wilderness but it is now doing very well.   Production is being expanded, debt is being (slowly) reduced, costs are being reduced, dividends reinstated and the corporate strategy is, as noted , giving Tier 1 growth prospects. NCM 1999 - 2018 Being a very large cap stock (~A$16bn), NCM makes up a larger part of the value weighted XGD Index, and so NCM reflects the Index. A resolution of its ups and the downs is now due. Soon. Stop Press : Tailings Dam issue at Cadia has affected NCM but this should not be more than a short term issue. NST has performed spectacularly well and has made a recent new all time high. The success at Zuleika Shear/Kundana and the wonderful achievements at Jundee will ensure this stock continues to rise. Long Section of Jundee showing the potential doubling of the 10moz My three year target of >A$20 should be easily achieved.  Expansions with the newly acquired extra milling capacity will push both Jundee and Kalgoorlie above 300kozpa each and Tanami will provide some further production growth.  So much development has taken place at Zuleika and now we should see stope grades rising to reserves grades as development ore share declines. An excellent balance sheet including almost A$500m in liquid assets just makes this stock brilliant. NST 2003 - 2018 SBM has also performed spectacularly well as its debt has been paid down and the Gwalia mine has hit its straps.  The exploration potential is being examined through the application of seismic. At new 10 year highs and looking to go much higher. SBM has just announced a 10% holding in ABU.ASX for exploration in the Tanami SBM 1999 - 2018 EVN has made some outstanding acquisitions with Lake Cowal being wonderful and Ernest Henry providing a great revenues and reduced costs input. Lake Cowal exploration potential Acquisition debt is now well down so corporate activity should re emerge. EVN is testing all time highs in its current operating form). EVN 1999 - 2018 RRL has delivered strong financial results and dividends to shareholders and continues to add to its regional position. RRl is also looking for expansion in NSW and elsewhere. This graphic seems very powerful to me with a big upside target generated. RRL 1999 - 2018 Two other major developers are doing quite well GOR  1999 - 2018 DCN 1999 - 2018 Another important but smaller developer also about to commence gold production GCY 1999 - 2018 And a potential fledgling NST in PNR All these (other than NCM) are essentially outperforming the XGD. This means that many of the medium and smaller players have UNDERPERFORMED the XGD. It is interesting that many of the medium size stocks have similar price patterns to NCM and suggest resolution upwards too. In contrast, many of the smaller stocks in the XGD are hitting multiyear lows as the lack of investor interest results in a self perpetuating low liquidity. Interestingly here, most of these stocks are picking up longer term uptrend lines. Overall the Australian Gold sector is looking in excellent shape and should provide strong returns over the next few years.

Gold in US$

The big picture is still very positive in the long term as the long term uptrends are strong and the long term downtrends from the 2011 highs have been broken. The medium term shows the `battleground' of the past four years that will be resolved soon.  The 2011 downtrend is clearly broken and a successful retest on it has taken place.  A short term uptrend is in place and major resistance is at US$1350-70. The short term is getting quite exciting now.  How long will it take? The gold price seems quiet with the price within a relatively narrow band between US$1050 and US$1370.  Underneath it seems very active, But the net effect is a very low level of volatility.  Years of trading under the long term average. The long term average is 12%.  The past two quarters have been just 6%. 6% at US$1324 is US$79.  Another 6% or US$79 certainly breaks through US$1370. The impact on North American gold stocks is also interesting. The Big Picture from the Barron's Gold Mining Index is just exciting. Those of you following Dawes Points over time will remember this graphic giving a long term buying opportunity again in late 2015.  When everything else was so gloomy. The very long term history is so important and allows you to `heed the markets, not the commentators' The BGMI is hugging a downtrend from 1983 and may be signalling something big is about to occur. Just more evidence. Barron's Gold Mining Index 1940 - 2018 And I like this subset of that very long term.  The lows in 2000 clearly ended something and started something else. The pullback to those lows in 2015/16 ended something and again started something. If you keep your eye on the big picture you can see the patterns emerging with much greater clarity. If you wish to participate, talk to me about this. Barry Dawes BSc F Aus IMM (CP) MSAFAA +61 2 9222 9111 I own or manage in portfolios I control: NST EVN SBM NCM GOR DCN PNR CLY WGX

Perth Conferences

21-22 March 2018 Crown Perth Burswood WA I have been invited to Chair Day 2 of the Minerals and Investment Conference in Perth next week. Should be a great discussion on the potential of the Pilbara Conglomerates Concept. There will be three other strands Iron Ore and Steel Minerals Sands Lithium Battery Metals

2018 Outlook – And it is only just starting #74

by Alison Sammes

Key Points

  • Brilliant year ahead for resources
  • Bond market peaking creates critical watershed
  • Global inflationary pressures building
  • Economic Boom broadening
  • Equity markets now playing catch up
  • Gold and silver now ready for major move
  • Resources commodities iron ore, copper and aluminium strong
  • Oil and gas (+LNG) rising as energy bull market resuming
  • Big caps wonderfully cheap
  • Mid caps proving production and earnings paths
  • Small and micro caps provide numerous opportunities
  • Small cap oil and gas stocks outstanding
  • Expect lots of M&A across the resources sector
Call me to discuss ways of participating +61 2 9222 9111 The Dawes Points Global Boom™ is now in its fourth year and has been accompanied by robust GDP growth in Asia and US and now Europe and Japan are fully fledged members of this expanding club. Also, China has just announced an uptick in growth in Dec Qtr 2017 to 6.9% annualized. Equity markets around the world have been showing enthusiasm and, quite frankly, rational exuberance as earnings growth accelerates and as new projects are being unveiled daily everywhere.Global trade is expanding again with major drivers in transportation, housing, construction and technology.  The list is ever-widening. The 3000-4000 Dow points surge called in early Sept provided 3000pts by end Dec and 4000 on 12 January and 4500 by 23 January. So much more coming over the next decade. The top of the channel has been hit by the Dow 30 so it will probably need some consolidation before moving higher. Other individual stocks have only just broken through their top channels so more upside is still coming and the US Banking sector is not overbought and still well below previous highs. The Australian market has been playing catch up but the Resources Sector is giving it underlying strength and will propel it higher in 2018. Commodities are looking strong and resources equities are starting to take off with gold now likely to move sharply higher after breaking the 2011 downtrend and providing enough retests, good bye kisses and fake-outs to deserve to go higher now. Gold has gained US$100 since early December and now has US$1350-70 as the major resistance. Pullbacks and consolidation may be expected but it just may be more powerful. Oil is in its next channel and should achieve US$80 (WTIC) and US$86 (Brent) in 2018. Demand side drivers, especially China where consumption is expected to surge again, are reducing the inventory position and supply side issues like no growth in Non-OPEC output and flagging US tight oil output. Iron ore will surely provide the U$100/tonne target set by Dawes Points early last year. Resource sector stocks large and small are having a wonderful start to 2018 and can be expected to provide a magic year. Keep the buy and hold mentality close to your nose. Fortunes are made by being patient, not by furious trading. This graphic is showing the long term trends and is notable how well BHP did from 2000 to 2008 when the S&P500 went nowhere.  BHP out performed the S&P500 over 12 years, has had a correction and is now moving on to outperform for another decade. RIO is a few months ahead of BHP but BHP should get a benefit from the rising oil price and should catch up. Again, keep in mind the time frames involved here. At least a Decade. Not a few months. Long term Dawes Points readers might recall the early 2016 discussion anticipating the `bifurcation' in markets with the bond markets, the bureaucrats, the public sector, snout in the trough politicians and the media heading for trouble while the backers of industry, raw materials, Asia and gold were heading in another direction. This bifurcation has been clearly underway. And in three dimensions.We are moving upwards in a new direction. They are stumbling down an old and treacherous path. Dawes Points continues to focus on the Flow of Funds concept for markets. 

Follow the money.

The vast amount of capital tied up in bonds and also in cash has been tied up with the left bifurcation and, in anticipation of the demise of this defensive sector, is now flowing out. And flowing to the Resources Sector and tangible assets and infrastructure. (Did you note recent ECB comments that its policy settings were for continuing downturn. Now inappropriate. The boom is happening there as well. Some clearly worried EU bureaucrats.) China has indicated an acceleration in GDP growth with 6.9% recorded for the Dec Qtr. The equity market is going to respond positively to that in 2018. As with China, the other emerging economies are also performing and receiving strong capital inflow. Some repatriation of safe haven capital and some is new investment.

Emerging Markets surging after nine years of consolidation.

The outlook is powerfully positive. These long term trends are so useful and inspiring. Take the bond markets. This is for US Ten Year T Notes. Almost 80 years of history in a single market and asset. Long term trends. Generational and hence easily ignored by each generation. Here, from 1946 to Sept Qtr 1981. 35 years of rising bond yields. Then until Sept Qtr 2016, 35 years of declining bond yields. Another 30+years of rising bond yields is now in train. Bond yields and bond prices get a bit complicated when the coupon ( ie the income component of a bond) differs from the actual prevailing interest rate environment and bond yields. The price of a bond itself is also complicated but the overall price is declining and a big fall is imminent. This is the 30 Year Tbond and you have seen the 10 Year has already fallen sharply. The 10 Year Price Index will include 30 year bonds from 1997 when rates were 7% and 20 Year bonds from 2007 when rates were 5%. These would now be trading at a premium to their issue price but are now falling back to par value as maturity comes closer. Before we go on, note how equity markets are rising as bond yields head higher. Now look at the yield on 30 Year T Bond. A major compression feature ahead of a strong surge in yields to probably 3.25% and then targets to 3.75%. Nothing much in 0.5%-1.0% in interest rates rises but it will have a major impact on bond yields and a significant decline in bond prices at a time of low coupons. Note that yield on 10 Year T Bonds have already jumped. Likewise for 3 years and all along the yield curve. Note that weaker TBonds are not necessarily a call for a weak US$. The DXY US$ Index is very narrow with just six components and is terrible given it is 57% Euro, 13.6% Yen and 11.9% Sterling, 9.1% Canadian $, 4.2% Swedish Krona and 3.6% Swiss Franc. The CNY and A$ don't figure in this index. This US$ Index may be ready to weaken. Or may strengthen. But look at this broader US$ Index. Doesn't look so bad at all. Note that the US$ is very strong against currencies of many smaller nations.  The proverbial s**tholes are still weak currency states. Also note how gold is rising with higher interest rates. And with equities. No Fear Trade here. Can you imagine the current anguish of those believing that rising interest rates will make markets in stocks, commodities and property fall.  Imagine their short positions in all these markets over the past year. Ouch. I have called this global boom for almost four years now so have given it a trademark -  The Dawes Points Global Boom™. I hope you agree that this is a fair assessment of things. The Wave Pattern graphic below was first presented on 1 December 2008 at Mines and Money London that happened to coincide with the major 2008 lows in commodities, resources stocks and most things China. The major equity markets kept falling until early March 2009 but the earlier upturns here in resources with gold leading gave strong confidence for the future of world economy despite the extreme pessimism at that time. The previous 8-10 years had been a good bull market but as long term readers would know, there was little participation by institutional investors and very little public retail interest. It was an excellent Bull Market that few believed in and hence the Disbelief leg. The Subprime/Lehman Bros debacle in 2007/08 created that sharp Pessimism leg that was the GFC. The Hope rally was encouraging with gold running to US$1923 in September 2011 however the resources rally petered out earlier in 2011 leading into the Despair leg that gave us an 80% fall in most gold sector indices into the lows of late 2014 in Australia and late 2015 elsewhere.

MPS Dawes Points Wave Pattern

The key issues to focus on here are the time cover of these trends.  Ten years Disbelief. Five to seven years of Pessimism/Despair. Now we have at least 10 more years of Optimism. This pattern can be clearly seen in the resources sector indices and in commodities. The big driver is GDP growth. Underestimated and disbelieved by so many commentators. GDP growth (and Industrial Production growth) is good for commodities and growth in China is the best growth.And it is accelerating again. Commodities have been priced for recession and resources companies have cut back on exploration and new capacity development. Particularly in energy. The CRB Index has a heavy weighting in energy so this should be very strong over the next few years. The shorter term is providing evidence for a sharp move soon. Commodities were covered in more detail in Dawes Points #73 2017 Year in Review but the 2018 Outlook is still the same. Record consumption demand still flowing through, restocking of inventory required, limited major new capacity coming on stream and, well, just no inventory. Higher prices are inevitable and the outlook still suggests the supply/demand imbalance will be with us for several years. Higher prices are just inevitable. The producers of resources commodities are generating very robust cash flows on balance sheets that are now quite favorable. The big commodities iron ore, copper and oil are really helping the bigger stocks. All are moving higher. So is aluminum with its 63mtpa and rapidly growing consumption level. The big stocks still appear to be very cheap and here BHP is on its way to test the previous high A$50 (US ADRs US$75) and perhaps this year. Just repeating targets from 2016. RIO is looking strong too. Aluminium, iron ore and copper here will send RIO up to US$75 and up 150% to my target from 2016 (100% from early 2017). Here is a link to my 16 Jan 2018 CNBC Asia interview on RIO. FMG is here too. Brilliant company with debt reduced and strong cash flow despite the discount for low Fe iron ore.

Energy Outlook

Energy is having its own resurgence thanks to robust demand and to supply side concerns. Inventories have fallen considerably. Source: HFI Research Oil consumption is likely to hit 100mmbopd in the Sept Qr of 2018. That is 36bnbbl pa. The largest oil field in the US was Prudhoe Bay at 16bnbbls recoverable. Australia's largest was Kingfish at just over 1bnbbl. Oil will remain tight for many years yet. Energy consumption is all about Non-OECD countries increasing their energy consumption while OECD has been flat due to stagnant economies and energy efficiencies. OECD is growing too now! BP does it differently with some more detail but the picture is growth in China and India and in lots of `other'. It is also useful to note the relative sizes of each source. Fossil fuels aren't going away anywhere soon! MPS Energy Consumption by Fuel Type Energy will be covered in more detail in the near future but the basic position is quite clear. Energy is the lifeblood of all economies. Demand is rising and LNG is already assuming an important role again in Asian energy imports. WPL looks quite exciting. And also Oilsearch. These larger companies need to be part of every portfolio. The Oil and Gas Sector on ASX is quite unloved and doesn't even get a sniff of an index.  This MPS index of 11 small explorers/producers shows a lag between oil prices and stock prices. These stocks are down 80% from an arbitrary 1 Jan 2007 basis and almost 90% against the oil price so should provide outstanding returns to astute investors. The market for many of these companies is the East Coast of Australia where decades of government and bureaucratic bungling and pandering to half baked ideals of special interest groups have put the entire well being of 80% of the nation at risk. Shortages can be overcome by increasing supply. So simple. Talk to me about them.

Gold Outlook

Gold continues to be looking positive and an appropriate switch is underway from T Bonds into gold as part of the great bifurcation. Which safe haven would you prefer? Gold itself is readying for another test of US$1350-1370 before launching a more powerful upmove. This may still take another three to six months to break through. Or maybe the coming week! Gold in A$ has travelled sideways for three years now but it has bounced off the long term uptrend and is still heading toward a A$2000 target within the next year or so. Gold stocks in North America have been trading constructively but have been net flat in 2017. The largest global gold stocks have had to unwind a lot of debt after some expensive new projects and mergers but improved cashflows and better balance sheets are making these stocks quite attractive again. In Australia the ASX XGD is leading the world resources industry, as it did from Dec 2014. The short term trend of gold stocks vs Gold is calling for a resolution soon. A similar wedging is apparent for these gold stocks against the S&P 500. Together these graphics suggest a VERY strong outperformance by gold stocks. And gold and gold stocks are important in the direction of the A$. Look at this long term correlation. Within all this the A$ looks very robust. The very long term is bringing about a change. To make A$ holders wealthier.


It is very clear that The Dawes Points Global Boom™ is well underway and the trends are coming into place that will last for quite some years. The broader resources sector has some excellent performances in 2017 and should continue into 2018 and beyond. This graphic of the ASX 300 Resources is at a critical juncture and a solid break above 4400 (now 4174) will unleash some massive buying that will take all these indices to new highs within two years. ASX S&P 300 Resources  2004- 2018 Equity markets around the world are acting as the barometers of improving economic prosperity in the years ahead as the vast savings in cash and bonds are redirected into equities, property and commodities. The markets have been indicating all this for these past four years and the markets have often been at odds with the commentators. Dawes Points has held true through all of this and we are looking at further outstanding returns to our portfolios. The year ahead will provide even better returns for resources sector investors starting with the major companies with strong revenues, balance sheets, earnings and dividends. The mid cap sectors will also perform well and should be at the forefront of M&A activity. The hundreds of small to micro caps offer outstanding value if you know how and where to look. These will also be the targets of the M&A and once mid caps are comfortable with their own cashflows they will be looking for growth opportunities. Talk to me if you want to participate. Barry DawesBSc F AusIMM (CP) MSAFAA +61 2 9222 9111 Dawes Points #74 25 January 2018 I own BHP, WPL, FMG, NST, OSH, PSA, LNG

2017 Year in Review #73

by Barry Dawes

Key Points

  • Global economic boom confirmed
  • Global equities surging to new highs for many markets
  • Resource sector commodities performed strongly
  • Copper, Iron Ore and Oil reached strong levels at year end
  • Consumption data indicated more record highs for metals in 2017
  • Peaking of the bond markets
  • Gold breaks 2011 downtrend and readying for strong 2018
  • The surge in EVs and their raw materials
  • Resources Sector market outperforming again
  • Capital flowing again to the resources markets
Call me to discuss ways of participating +61 2 9222 9111
2017 was the year the where many in the world woke up to the sunshine of the global economic boom unfolding against a dark sky of gloom promoted by the defensive economists (see below) and their fellow travellers in news media. The markets had been indicating better times ahead for some years now as has been emphasized by Dawes Points in the past 70 odd editions and now investor interest is finally catching up. The economic data has been quite positive for some time and both OECD and IMF have upgraded their historic GDP figures and forecasts. Nevertheless their commentary is still that it won't last into 2019. (But really these are just more bureaucrats!) I expect further upgrades throughout 2018. These numbers seem to Dawes Points to be quite robust and clearly underpin the strength of equity markets. The equity markets have done well with focus on the US.  DJIA 30 was up 25% with Nasdaq Comp up 29% and S&P500 up 19%. The best of the others was Hong Kong with the Hang Seng up 36% in 2017 and the Indian Nifty Index up 28%. On a two year view the DJIA was up 42%. The strong performances by the Asian markets reinforces the long term Dawes Points view on the rise of 3300 million people seeking a better life. The Australian All Ordinaries was woeful with just 7% but the Resources Sector in contrast did very well.  The recent break upwards through 5800 and then through 6000 was resources driven. The bigger resources stocks outperformed the S&P 500 in 2017 and all stocks did vastly better over the past two years. The ASX Small Resources Index was up 36% in 2017 and 114% in two years. As pointed out previously, the so called Small Resources Index had 38 stocks in Dec Qtr 2017 with a market cap of around A$45bn with almost a third with market caps over A$1bn. Not truly representative of what was really happening with smaller stocks in 2017. The broader small resources market was somewhat of a lottery but many very strong gains were seen, especially in the Electric Vehicle raw materials stocks in lithium, cobalt and graphite. The Dawes Points of 5 September (Global Boom Well Underway #69)  picked this up nicely:- In the longer term focus, should stocks break higher from here then the move could be quite sharp and rapid.  If this view is correct then there could be 3,-4,000 Dow points added by year end. Just snuck through with 3010 points gain. (Who could have thought a 3000 point Dow Jones 30 gain in four months possible?) This channel analysis is quite useful. Everyone would be familiar with the FANG stocks and technology but this graphic on US banks is highly relevant and very useful.  This sector has just broken 14 years of underperformance against the S&P500 and is doing so at a time of rising interest rates.  Very encouraging. The housing market is also very significant and with this index making strong new highs and the housing shortage building up then the US should be stronger for much longer. The resources sector did very well in 2017 and is positioned to do even better in 2018. The industrial LME metals in particular performed well reflecting record consumption levels and limited inventories. Average gains in US$ were around 28% (net of tin) in 2017 after 27% in 2016 (including tin). Cobalt was a star again and at US$75,500/t that is a great money maker for the few producers and also an aspiration for the newcomers. The two year gains averaged 54% but these prices are yet to be adequately reflected in Resources Sector stocks. Precious metals had steadier time with significant volatility and palladium hit a major new 17 year high and rose 75% in 2017. The Dawes Points Composite metal price Index of monthly closes on LME broke its downtrend as noted in August 2016 and now seems on its way to new highs. Probably before 2020. The individual metals provide their own interest. Note how steady lead has been and how it will certainly rise further from here. Copper and zinc have been strong but aluminium is looking to move higher from a low base and nickel should be following soon. The inventory position whether it is LME or Shanghai is very low with massive drawdowns experienced in the past two years in aluminium, copper tin and zinc. It has been fascinating to note over the past few years the steady weekly drawdowns in LME inventories for most metals then observing large increases as some trading group delivers a significant tonnage (against the current relatively low stock levels!) of metal across the warehouse. These have nothing to do with production or consumption. Nor mining or refining. Just some speculative inventory. Once these large positions are gone then these metals will be super tight. The MPS LME Inventory Index is dangerously low at just one week. The inventory position of metals on LME (and to a lesser extent on the Shanghai Futures Exchange) is now very low leaving no buffer at all for any increase in user inventories. In any upturn it is typical for users to increase stock throughout the inventory chain such that DEMAND exceeds consumption. This should be expected to cause sharp rises in prices of metals. This is already happening in zinc and copper will be following. The rise in cobalt reflects rising consumption demand, limited supply sources and no inventory. Consumption numbers for most metals show new records each year and the 3.35% pa CAGR has been remarkably resilient since 2009. The numbers suggest that growth rates will be ACCELERATING over the next few years. Where will the metal come from? Dawes Points has considered for quite some years that the industrial metals are far too cheap relative to their intrinsic value.  This value is not just conductivity, strength, casting abilities, coating properties or coverings.  The ever expanding uses of high performance alloys or specific metals based chemicals make them truly valuable materials. From the stainless steel cladding of the NY Chrysler Building, ancient and modern bronzes (copper and tin), copper roofing in Hamburg, zinc roofing in Paris, lead sheet in London, brass (copper and zinc) door knobs to the feel, texture and shiny look the real value of metals is long lasting and true. This channel graphic on copper gave us the targets of US$3.25 when copper was around US$2/lb in 2016 and it now gives US$3.59 in March Qtr 2018 and US$6/lb further out. Producers of metals had a difficult five years from 2011 and those bringing on new high capital cost capacity treating low grade ores felt it worst. With oil prices likely to move higher again to push up bulk mining costs and power costs up on comminution processing the long term attractiveness of such new mines becomes difficult. All this should only be resolved with higher prices.  And possibly much higher. The global steel industry did well led by China but India is catching up and should be the world's second largest producer by end 2018. Iron ore achieved the Dawes Points forecast US$95/t in the March Qtr and after a pullback seems on its way to reach US$100 in 2018. Energy rebounded in 2017 and also just reached the Dawes Points US$60/bbl for WTI at year end.  The demand side has been stronger than the consensus and inventories have been drawn down. Despite the improved oil price and the debacle in Australian East Coast gas policies the ASX smaller oil stocks were surprisingly friendless.

Weakening Bond Markets

Dawes Points has highlighted the topping of the bond markets and the long length of their bull markets. Long term trends attract large volumes of complacent capital which in turn need long term bear markets to unwind. From the 1942 lows in US bond yields to the highs in 1981 (39 years) and back to new lows in 2016 (35 years) are long term trends. Where will 35 years take bond yields? New highs? The 30 year T Bond is now precariously positioned.  The fall will be quite sharp when it comes (likely to be quite soon now). The 10 Year peaked almost five years ago and is showing danger is at hand after the most recent breakdown. Accelerating breakdown says it pretty well. The direction of US T bonds will probably determine the fate of the US$ and the decline underway is possibly answering that question now. The US$ Index is useful but not perfect and the channels suggest a re-entry to the 1984 downtrend is possible but the US$ is oversold.  The next few months will show us. The A$ had a reasonable year and a break above US$0.81 will see it heading toward parity and beyond.

Gold Market

Gold kindly popped over US$1300 to welcome 2018 with some enthusiasm.  The four year fighting in the trenches in that US$200 band below US$1370 is still on but the breaking of the 2011 downtrend is encouraging the bulls like us. There had certainly been some false starts in 2017. The short term technicals showed the breaching of the 2011 downtrend line and a series of retests of this line and the pick up of a two year uptrend. Text book performance I think. This short term break is only part of that bigger picture that is indicating a very strong gold market for many years. It seems Wave 2 is just about finished and Wave 3 is getting underway.

Electric Vehicles (EVs)

I declare my hand as an unbeliever in AGW because the empirical data does not show it, the relative percentages are infinitesimal and so much of the presented data is fraudulent. (Dawes Points has done much due diligence on this so stands on its research findings) So the surge in EV excitement is based on a false foundation.  Nevertheless, the world likes the idea of clean electric vehicles so lets all enjoy it. EVs will capture a large share of motor vehicle sales by 2030 but with around 1000m current vehicles and 1500m by 2025 EVs will still be less than 10%. The impact on oil consumption is likely to negligible against 110mmbopd consumption by 2025. Taxes on fuel are very high in most countries so the revenues losses on gasoline and diesel will probably need to be made up by taxes on electricity somewhere. And someone will need to pay for roads and infrastructure. Battery efficiency and cost will need to make substantial improvements and we all know they will. And at the end of the day the increased demand for grid power to recharge these batteries will put enormous strain on distribution infrastructure and will need more coal and gas fired ( plus nuclear) power stations to charge the batteries. But for now cobalt and lithium are in bull markets that have strong fundamentals as new gigafactories and EVs are built. Performance of these stocks in 2017 has been very strong and volatile. Expect more in 2018. And in 2018 numerous new Battery Metals stocks will have the market caps to be hitting the various indices and adding spice.

Resources Sector Performances

As noted above, the performances of the resources indices have been excellent. The chart performances look outstanding and suggest a major further rerating is immediately ahead. 10 Years XMM Metals and Mining   breaking through a neckline and soon to break a downtrend 10 Years ASX S&P 200 Resources XJR   On its way higher 10 Years ASX S&P 300 XKR Resources  Recent new breakout 10 Year S&P Small Resources  XSR  Break out with sharp acceleration coming 10 Year S&P All Ords Gold Index XGD  - Massive breakout about to start after 18 mths consolidation.

Capital Flows

Capital is flowing back into the resources sector with vast volumes raised by small companies after years of drought. The larges caps are reporting strong earnings and dividends are flowing and many more companies are reporting earnings and dividends from new projects started in recent years. Many opportunities and most with management that has seen tough times for over a decade. Capital is flowing from cash deposits which are large and sufficient to stoke the markets for years. Market liquidity in these smaller companies is rising and is probably the best in a decade.


Yes it was a true watershed year with the long term bearishness that continued into early Sept Qtr seeming to be dissipating by New Year's Day. The data was strong, the markets were improving and many stocks had great years. The peaking of the bond markets at a time of surging equities is good and the commodities and gold are lifting off nicely. It is really only just starting and there is so much more to come. Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 Dawes Points #73 3 January 2018

Gold now ready for stronger 2018 #72

by Alison Sammes

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 +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 Dawes Points #72 22 December 2017

Yet more news on Small Resources Companies #71

by Alison Sammes

Key Points

  • Most global equity markets making new highs
  • Bond market about to have a sharp fall this quarter
  • Commodity prices looking very robust
  • Resources stocks returning to rightful prominence on ASX
  • MPS Portfolios well positioned for this coming uplift
The acceleration of the US equity market has brought renewed enthusiasm to almost all equity markets and the local All Ords finally broke through 5800 after a long consolidation. This has all been flagged for the past few months but the important initial upthrust has now taken place. The next few weeks should see some serious short covering and a strong move in all these equity markets that will take the resources sector to new highs in a surprisingly short time. The resources sector has seen the battery raw materials sector (lithium, graphite, cobalt and nickel) provide good gains amongst the leaders but the mood is spreading to companies with assets in industrial metals, mineral sands, rare earths, iron ore and petroleum. Note that uranium is stirring again. Much more to come here. Gold is moving upwards with some zigging and zagging but all seems well with much better times coming again in 2018. I still expect to see new highs in the XGD (ie doubling) by third qtr 2018. The limited funds in the market at this stage are seeing some switching out of gold into some of these other sectors but this should be only temporary. The Pilbara gold conglomerates story can only get better as results come through later this quarter. The concept is exploding across the Pilbara and the `me too' players are out in force so we need to be careful but also watchful because the area in the Fortsecue Basin is very large.  If the concept proves correct this is potentially the world's second largest concentration of gold after the 160,000t Witwatersrand in Sth Africa. No closed minds allowed here. Of course this will boost activity in the gold sector but there might not be many players in the actual ASX XGD Gold Index in the near term.  However, should Novo Resources be listed here and Kirkland Lake most certainly will then it will impact the XGD in 2018. It is certainly pleasing to see the Dow Jones Industrial Average perform so well as this shorter term graphic was suggesting. I cannot recall seeing this feature of a market pushing against an upper channel line like this but it certainly was telling something. The move should accelerate. 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 Dawes Points #71 24 October 2017

The rise of the small cap resources stocks #70

by Barry Dawes

Key Points

  • ASX.XSR Small Resources Index up 5% for week 6 Oct and about to surge
  • Commodity prices rising
  • Battery metals looking very strong
  • Pilbara 'Wits' stocks providing boom concepts
  • Industrial metals stocks ready to rise
  • Oil and gas stocks offer outstanding value
  • The world still awash with cash
  • All Ords finally through 5,800!
Call me to discuss ways of participating +61 2 9222 9111
The Global Resources Sector is now well on its way to substantial value rerating as investors have their awakening to the perfectly robust economic data from most countries and especially from China and the US.  The whole concept of rising living standards Chindia and ASEAN is coming back to mainstream. Resources commodity prices are rallying and multi year highs have been achieved by zinc, copper, aluminium and lead. Many other positive and exciting actions throughout the broad resources sector are assisting. The lead in this Global Resources recovery has been taken by the Australian gold sector which bottomed in Dec Qtr 2014, a full year ahead of the next sector which has been the large resources stocks such as BHP, RIO, S32, FMG and OZL. The resources sector small caps have had mixed results but recent action, especially the 5% gain in the week ending 6 October 2017 has set them ready for a strong run. Dawes Points has continually pointed out the strength in the Chinese and global steel industries and the positive effects on iron ore. Steel is just a proxy for consumption of all metals and the price responses in copper, zinc, lead, aluminium and tin amongst the industrial metals and even stronger price responses in technology metals tungsten, antimony, lithium and cobalt reflect robust demand, supply limitations and low inventories. Price responses over the next few years should be very strong. This graphic was displayed last month but is still is telling a very strong  story. The world is on track. It is pleasing to see BHP taking up the One Belt One Road Initiative (Belt Road Initiative - `BRI') and pointing out the need for another 150mt of steel for already identified projects over the next decade. The BRI will affect many countries in Asia and Eurasia so it is no coincidence that this graphic of emerging markets is telling us that the recent break out of this portfolio has many, many years to run. And even the Australian Department of Industry, Innovation and Science has entered the commentary on growth scenarios for India for 2035 with >1000mt of steel demand in the high intensity option. Source: Department of Industry, Innovation and Science Some fancy numbers for an India that might surpass China in resources commodity consumption. All these add to the Dawes Points expectation of at least a decade of economic boom to benefit Australia's resources sector. Sorry if this is repetitive but it is happening and the markets have yet to properly value the stocks.  This expectation has been tenaciously held here and has been unwavering. The Australian Department of Industry, Innovation and Science has produced some helpful graphics on various Australian key exports. This one depicts the iron ore markets:- And this one is thermal coal. Note that despite the ravings of most Australian State Governments and the nonsense from so called environmental activists there are 365 advanced technology coal fired power stations planned or under construction around the world.  135 are in India and it will be importing very large tonnages of low sulphur coal.  Where will it come from?  Mostly Australia. It defies logic that closing of coal-fired power stations in Australia will have any impact on global emissions when 100 times Australia's near term needs are being built elsewhere. All this has been excellent for the larger resources stocks as seen by the rises in BHP, RIO, FMG and S32 and as being suggested by Dawes Points over the past year. The Metals and Mining Index has broken its downtrend and has moved higher after its own `goodbye kiss'. This index is matching the Global Resources Indices as mapped by S&P. But more importantly for us is the increase in market share of All Ordinaries turnover and the five week trailing moving average is now above 20% again. So all that is very good for the bigger stocks but now let's just focus on the ASX.XSR which closed at 2342, up 5% for the week. The current 2342 is now finally above the Dec 2008 GFC low of 2265 and the targets I see are over 4000 by end 2018 and 5000 within two years. Note, too, that XSR market share of ASX.XAO turnover was 6% for week ending 6 October! The five week trailing moving average is over 4%. This is a vital indicator and it is so positive. The XSR has 38 stocks of which
Gold companies 12
Oil and gas 8
Battery tech materials 6
Mining Services 6
Metals 4
Coal 2
Total 38
The gold sector therefore has a big bearing on this index. Given that almost all the gold stocks in the XSR are gold producers and about half are paying dividends. Market share of turnover is creeping up again after the last pullback in US$ gold.  Expect this to be averaging closer to 5% in 2018 as gold prices head higher. The ASX XGD Index has not been a particularly good index prior to about the beginning of 2015 and so not surprisingly the XSR isn't too wonderful either. As noted, it has 38 stocks in various subsectors but I would question the inclusion of the 6 mining services companies and it has just 4 industrial metals-related and no iron ore stocks. Also for a small cap index, 15 of the 38 are over A$1,000m in market cap including 5 over A$2,000m.  Just five are less than A$300m. 38 stocks with a combined market cap of $41bn. Nevertheless, I particularly like the oil and gas sector and there are 8 here in the XSR.  The Australian Eastern Seaboard gas debacle will assist gas producers capable of supplying this need and benefit will also flow to WA Perth Basin players.   In addition, global oil demand continues to exceed forecasts whilst US tight oil output continues to underdeliver.  Expect higher oil prices. Also the XSR has six companies in the battery technology resources that cover lithium, graphite and cobalt. Note that lithium producer Orecobre (floated by MPS in 2007) is making >US$6000/t operating margin on its FY18 target of 14,000tpa lithium carbonate and aims to more than double output to 35,000tpa. ORE has a market cap of around A$1000m (is this really a small cap stock?) and has recently made new highs above A$5.00. Orecobre's view of electric vehicle demand is suggesting that the supply of lithium carbonate will not match demand so that higher prices are inevitable. Source:Orecobre The lithium battery market will require supply from many new sources and graphics like this show many players are in the game at differing stages of development.  Opportunities are many. Selection of Lithium Development Project Companies Source: Sayona Mining Ltd Graphite is the other key component in lithium batteries (along with cobalt and nickel) and within that expansive universe of development projects these are some with reasonable prospects. Selection of Graphite Development Companies  Source: Bass Metals Ltd Of the four metals companies in the XSR only one is under A$600m and the two coal companies have a combined market cap of A$5,300m. In contrast, there are literally hundreds of small cap resources stocks with market caps below A$100m and many under A$10m. So these do not get representation in any index but so many are very active. One subgroup that is having its own boom is the new Pilbara Conglomerate Gold Rush that is bringing forth an exciting new concept. The Witwatersrand Gold Deposits of South Africa are the by far the largest gold source so far on the planet.  The gold occurrence is considered to be an alluvial accumulation of gold in thin layers of conglomerate (ie rocks made up of other rocks and generally deposited in some active riverine environment) rocks.  The source of the gold and the actual occurrence of the gold is not yet conclusively determined but it certainly is a lot of gold. Schematic Diagram of Witwatersrand Gold Deposits The global inventory of gold combining all the gold ever mined is around 180,000 tonnes.  About 60,000 tonnes at about 15g/t are considered to have come from the mines of the Witwatersrand and current estimates are that there are another 35,000t as resources and there would probably be another 50,000t that would be unmineable due to depth and other considerations. This is around 150,000t of gold. In comparison, Australia's biggest and best (so far) Kalgoorlie Golden Mile has produced about 3,000t (or about 100moz). The idea of a Witwatersrand paleoplacer conglomerate analogue in Australia has been mooted around the Nullagine region in WA for many years and several groups have explored this target.  Additionally small gold recoveries had been reported along the north west and north east rim outcrops of the basal unit of the Fortescue Basin but no economic significance had been given to these. However in more recent years around Karratha, about 350km to the north, prospectors had been fossicking with metal detectors along a 10 km zone of outcrop of conglomerates and had a reasonable degree of success.  (I have been advised that Karratha has the highest number of boats per capita in Australia.  And the highest number of metal detectors per capita!) Their shallow diggings have actually left a clear geochem signature over about 8km for professional explorers to now follow. This surface rim outcrop is a basal unit of the Fortescue Group sediments. The Fortescue Basin is a mafic (iron and magnesium-rich) volcanic rock dominated sedimentary formation that sits unconformably over the Pilbara Craton.  The basin dips about 3-5% to the south.    The age of the Fortescue Basin is the same as the Witswatersrand basin and the stratigraphy is quite similar. The Beaton's Creek paleoplacer conglomerate deposit at Nullagine was in more recent years actively explored by Canadian company Novo Resources as a Witwatersrand target.  The deposit is multiple stacked alluvial gold reefs and Novo considers it a major target for low cost near surface mining.  Sumitomo has an option to farm in. This project has resources of 6.4mt @ 2.7g/t (558koz) made up of Measured and Indicated Resources of 3.39mt @ 2.7g/t and Inferred Resources of 3.0mt @ 2.7g/t. Novo Resources became intrigued with the success of the prospectors subsequently revised its strategies and over the past year acquired extensive tenement around Karratha. Source: Novo Resources Recognition of a larger scale to these other conglomerates led to Novo Resources acquiring the Comet Well tenements and consequently in July 2017 entering into a JV with Artemis Resources at the contiguous Purdy's Reward tenement which has actual surface outcrop and an opportunity to economically test the concept. As far as the exploration industry is concerned this is probably universally seen as a unique style of gold mineralisation not seen before. Gold nuggets in the shape of watermelon seeds have been found throughout the thickness of the strata.  In addition, quite high volumes of fine gold has accompanied the larger nuggets. A few of these per cubic metre can give you those high grades. Source: Artemis Resources The Witwatersrand is similar but very different. A paleoplacer conglomerate is also known in Ghana at Tarkwa where a very large +15moz gold deposit @ 1.2g/t is being mined by AngloGold-Ashanti.    Conceptual Cross Section of Basal Conglomerates Extending 10km downdip Source: Novo Resources CRA had drilled a 2200m deep vertical hole deeper in the basin in the 1980s and intersected conglomeratic sediments at a depth of 1756m that assayed 11.7g/t.  The important basal units were evidently not assayed. This hole was about 65km away from Comet Well/Purdy's Reward to the south so the continuity down dip is possibly very high.  Keep in mind the dip is only 3-5o. Recent trenching bulk samples at Purdy's Reward provided 67g/t and some further trenching work with metal detectors was beamed live into the recent Denver Gold Conference.  You can see it here. Worth spending 10 mins on this. Novo is now undertaking a programme to further test the surface outcrop with trenching and some innovative 17.5 inch large diameter RC drilling rigs in a two month programme that should provide some definitive answers on downdip continuity by end 2017. Novo is also using some innovative X-ray ore sorting machines to reduce ore bulk and processing costs. Detailed Cross Section of Comet Well/Purdy's Find showing Drill and Trenching Programme Source: Novo Resources The drilling programme will be to confirm the extent of the conglomerate along this section and down dip.  With the nuggety nature of the gold it will be the presence of the conglomerate itself rather than an assay that will be important. Prominent Canadian Gold Producer Kirkland Lake owns the Fosterville mine in Victoria which produced 77,000oz in the June Qtr at 17.2g/t and is rumoured to have found over 500,000oz @>50g/t deeper in the mine.  It likes high grade mines and has taken a C$50m investment for a 9.2% holding in Novo Resources. Prominent Canadian Gold Producer Kirkland Lake owns the Fosterville mine in Victoria which produced 77,000oz in the June Qtr at 17.2g/t and is rumoured to have found over 500,000oz @>50g/t deeper in the mine.  It likes high grade mines and has taken a C$50m investment for a 9.2% holding in Novo Resources. Novo is now cashed up for a big exploration programme and with Artemis also having the 450ktpa Radio Hill Mill ready to start production here or on its own tenements after minor refurbishment. Another ASX gold minnow De Grey Mining has also tenements at Louden's Patch in the Fortescue Basin and has also received funding from Kirkland Lake. Cross section showing orientation of target area at Louden's Patch Source: DeGreys Mining Loudens Patch nuggets Source: DeGreys Mining The potential size of these deposits is without peer in Australia. The Chairman of Novo, Dr Quinton Hennigh, is a highly regarded geologist and his view of the formation of the Witwatersrand was through precipitation of the gold from seawater and this allows for very large areas to collect the gold. The areas covered by Novo's tenements are over 10,000km2  and, like coal deposits or iron ore deposits, tend to be quite continuous. Trying to put together a target size is very difficult. If the 8km strike length at Purdy's Reward is continuous as the metal detector fossickers' track suggest and if the conglomerate is at least 5m thick (most up are up to 20m) and if it continues for at least 1000m down dip (as indicated by the cross section above) then a large volume of 40million m3 is generated. If the grades are 10g/m3 (say 5g/t @ a Specific Gravity of 2.0) then 13moz would be a reasonable target. Increase any of the components other than strike then we could have any of these:- 300moz is only about 10,000 tonnes. And consider that the CRA hole was 65km away at 1756m depth. Witwatersrand is 150,000 tonnes. But clearly, proof of continuity will be critical. Small resources stocks just might have a very strong run. And the Gold Index just might double within the next 10 months. Don't forget Mustang, ASX.MUS, now with over 350,000 carats of rubies to auction this month.  At what received price? At US$60/ct this is US$21m (A$27m)gross revenue but with US$100/ct it is US$35m(A$45m). Costs should be well under US$10m. MUS currently has about 65% equity. Not bad for 9 months work against a market cap of A$85m! Of course as was noted in Dawes Points #69 local investors are very well cashed up. Class Super SMSF asset Allocation Showing Low Equities and High Cash The bigger brothers in the Future Fund have had a good steady record of appropriate returns but with just A$8bn in Australian Equities (6.0% of funds) and A$28bn in cash (21%) they will be missing out on the Resources Boom. But, they are not alone.  Look at the cash in China. And Singapore. It should be a very interesting few years. I hope you are on board. Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 Dawes Points #70 10 October 2017

Global Boom Well Underway #69

by Barry Dawes

Key Points

  • The Fear Thesis has failed!
  • Global GDP growth all on track for accelerating expansion
  • Commodities are signalling boom times have arrived
  • The Dawes Points Global Economic Boom is well underway
  • Expect 15 years of prosperity
  • Gold now above US$1300 and 6 year downtrend broken
  • Copper exceeding US$3/lb
  • Iron ore on its way to US$100/t again
  • Zinc, Aluminium, Lead and Tin strong
  • A$/US$ testing 100 year down trend
  • Resources sector earnings powering along
  • Equity markets continuing surge
  • Seaborne freight rates moving higher
  • Australian investors massively underweight resources
  • And hundreds of smaller resources stocks
'Heed the Markets, not the commentators' has been the defining theme of Dawes Points these past few years and this approach has held up very well.  The Fear Trade Thesis has failed. The Global Economic Boom rolls on!  And it will last a long time! How often have key investment banks, journalists, newsletter writers and `gurus' given you the Fear Trade Thesis and told you China would fall over, Europe would crash and the US enter its Greater Depression.  Debt would overwhelm everything.  That oil would be US$20/bbl, iron ore sub US$30/t commodities would fall and gold was not required because there was no inflation?  That the world needed income at any cost and that fixed income such as bonds was the only answer. Often. North Korea is the latest Fear but Australian shares holders have been more nervous than those in Sth Korea, China and Japan.  This particular Fear has been around for a year or two but look at the past four quarters for stock indices in Asia and in the month of August 2017. China and Hong Kong powered away in August and in the last week the All Ords was down 0.4% with Japan up 1.23% and Sth Korea down just 0.88%.  Some Fear Trade! But look at the past 11 months.  Australia how pathetic. Quarterly Performances of East Asian Stockmarkets Well, whilst the North Korea Fear has really yet to run its course, NONE of the other gloom has really  happened. So the question for all the Bears is why hasn't the Fear Trade worked?  What do you have to say for yourself? In contrast to the Fear, economic GDP growth figures have remained robust, equity markets around the world have gone to all time highs, prices have risen for many commodities and property remains in a global bull market.  What is to Fear? OECD's GDP Data and Forecasts More recent data have been stronger in the US with estimates revised upwards and also for Japan which is showing life again after almost two decades in the doldrums. Growth is accelerating! The US$ which was supposed be strong with rising interest rates just isn't. Market data, earnings data and prices of equities and commodities have continually exceeded general 'consensus' forecasts and those reading these actions would not be happy. For the Bears who have been fortelling gloom for all of the past eight years since the lows in general equities in March Qtr 2009, what will their story be?   An epiphany or is it a generational change coming. The only real answer to why the Fear Trade hasn't worked is that people make the markets. Not economists, Presidents, central banks, politicians, public sector bureaucrats, journalists nor 'the media'. People. And people make the decisions. People outside the professions, bureaucracies and corporate operators. People and their dreams and fears. There are just times when people feel enough fear and bearishness to continue to withdraw from all markets and commerce and to just sit pat and build up a large wad up of cash.  Stay calm.  Reduce risk. But new clothing, birthday dinners, a new car and just general stuff need to be bought. The coming of age party, the wedding, upgrading a house or new child just have to be paid for.  Personal technologies always become `must have' items. The list goes on. And life goes on, steadily.  Wonderful. However.  1400m people in China have next to no consumer debt and just want to raise their living standards.  Another 1300m in India.  600m in ASEAN.  1000m in Africa. Lives of these people are tearing along at a great pace albeit from a lower base.  Around 1000m will be entering the `Middle Classes' by 2025 we are told. Those living standards will require much more steel, copper, aluminium, zinc.  And oil and gas and other energy sources. And food, especially protein. The dreams of these people in Asia and Africa are far different to the fears in the West but rises in equities and commodities and falls in Western defensive bond portfolios are changing these Western fears to dreams again. And the dreams just might get a solid boost very soon in the Dawes Points World. It is when the sirens are loudest on gloom that the best buys are made. Heed the markets. The biggest markets are the most important markets.  And the biggest market, the bond markets, has had all the hallmarks of bloated, irresponsible (read government deficits) and speculative (`free money' for amoral politicians to buy votes) activity that marks a market high.  Professional and Retail Money to the tune of around US$100trillion was sucked in.  There probably has never been such a concentration of global capital in one sector ever in economic history. A crowded trade.  A one way market. How will it end?   Slowly declining at first because massive pension funds continually need long term confident yields to match long term liabilities.  Pension inflow keeps rising but when safety refuge is no longer required then bond risk rises and pushes up yields and then coupons. In contrast, global equity markets have surged higher with the US amongst the leaders but it is not necessarily the key driver. But with the US, there is a definite change in mood. Consumer confidence is at a ten year high but note that this Index was already moving higher and has accelerated under Trump's Administration. US Consumer Confidence Index Heed the Markets! Now look at this graphic of the Dow Jones 30 Industrials. Pushing on the trend channel overhead resistance line. I can't recall ever seeing a market do this. Usually markets hug the bottom channel trend line as support. This market is continually pushing against resistance!   This is suggesting strength.  And probably great strength. No Bear here???!!!! I am still seeing so much commentary about stock market crashes to be caused by something but I also keep seeing data about investors seeking the safety of bonds. This graphic doesn't suggest a market rolling over after spiking into a major high but rather one about to move up strongly. In the longer term focus, should stocks break higher from here then the move could be quite sharp and rapid.  If this view is correct then there could be 3,-4,000 Dow points added by year end. Long Term Dow Jones Trend Channels – Coming acceleration?? Keep in mind it is always `Sell in May and go away. Come back on Labor Day. (1st weekend in September)'. September might just get a few underweight investors excited when they return from holiday tomorrow. Here in Australia the All Ords has been woeful.  Truly underperforming. All Ords Long Term Trend Channel  -  Big upside coming But there is hope.  The short term picture is suggesting a sharp break higher through 5800 and to targets above 7000.  This should come very soon. All Ords Short Term Trend Channel  -  Big move coming very soon Dawes Points considers that it will be the Resources Sector through copper, gold and iron ore that pushes this index sharply higher. Dawes Points has also highlighted just how long this correction has taken after the preceding 10-12 year bull market.  Strongly indicates that this new bull market leg will now last for years.  Fear takes a long time to flush out but as early entrants make very high returns and book profits so will new entrants keep coming in a virtuous circle that will last many years. It is happening right now. The Australian Resources Sector relies primarily on the global steel industry with the three major stocks ASX.BHP, ASX.RIO and ASX.FMG being critical drivers. This focus on the steel industry in China has been so important as it is a true real time indicator of economic activity in the world's largest economy for raw material consumption.  China produces almost 900mtpa of crude steel and consumes about 800mtpa.  The US produces 84mtpa and consumes 120mtpa. China consumes over 50% of the world's steel and over half of most other metals.  What happens there determines what happens in resources commodities and steel is an excellent indicator. India, is also emerging as a major force in the demand for commodities. Crude steel output in India exceeded 100mtpa in early 2017 and is on track to soon pass Japan as the world's second largest steel producer. China and India with 1,400m and 1,300m people respectively have rising middle classes that have rising personal disposable incomes that produce rising living standards that require more consumer goods and governments there are to provide improving infrastructure to cater for more housing, services for health, education and welfare and transportation. Again, this is most easily seen in steel production and consumption. It is also seen in demand for gold. China and India almost ARE the gold market. So the mine supply vs Chindian demand results in a major transfer of gold from the mines in the West (and from bank vaults) to the people of Asia. Copper is moving up strongly as it should with no inventory, improving economic activity and insufficient new supplies.  This bull market should run for many years so you can pick your own price target for your time frame.  US$6/lb within four years is my call. Why do we say this? It is not just a `chart target'.  Disjointed supply and demand in commodities produces some very low prices and some very high prices.   Short covering doesn't just occur at lows.  It also occurs at highs! VERY IMPORTANTLY note that the rally in copper into 2011 exceeded the 2008 high.  This indicates very great internal market strength. Or in other words, much higher demand than is currently forecast, no inventory and insufficient near term mine supply. Long Term Copper Channels – Now in next channel with resistance around US$3.50 This US$ Gold break upward is of MAJOR significance. The six year downtrend from 2011's US$1923 high is now broken. And Gold's 2011 rally above 2008 shows even more internal market strength. The 11 year bull market followed by a six year correction should lead to a 15 year or more bull market to come! Or in other words, transfer of gold from West to East, Asian jewellery demand exceeding mine production, severely depleted gold inventory in the West and some serious short covering to come. Long Term US$ Gold Chart  - Six Year Downtrend broken  - Price Targets are High!! Iron ore is still considered by Dawes Points to be in a major bull market and, as we saw with copper and gold, new highs were made in 2011. Dawes Points very successfully called the US$ iron ore price in 2016 and US$95 into 2017 and the US$100 by mid 2018 target still holds. Current focus on the high grade >62%Fe haematites is showing the strong markets with premiums for grade but substantial discounts for lower grade material.  This market action is indicating that global reserves and resources of high grade iron ore are being depleted.  Blast furnaces operate on volume of the furnace so higher grade iron ores put more Fe units (1 unit = 1% = 10kg/tonne) for the same volume.    Strong demand for steel in China is keeping blast furnaces at high operating rates so high grade is better.  Also higher Fe grade means better operating efficiency, less coke and fuel and marginally less furnace slag to dispose of so reduced emissions and environmental benefits are noted. RIO's new Silvergrass  mine is higher grade ore to meet current demand. Most of the 140mt of China port stocks is lower grade from marginal mines  (and not from FMG) so it does not really affect overall iron ore prices just now but there is always the price/grade trade off and the market should move back to reduce discounting over the next year. Iron Ore CIF Tianjin 62% Fe The preference for high grade Fe content brings us back to the need for our favourite magnetite concentrates as furnace feed.  Fe3O4 is just better all round than Fe2O3. Magnetite with 69-72% Fe delivered as a concentrate product not an ore. Consistent grade, fewer and lower impurities and worth US$20-40/t more than current 62% hematite. Lot's to like. House stock ASX.MGT along with ASX.IRD, ASX.HAV and ASX.CAP have some lower capital and opcost magnetite projects in Sth Australia. Watch them. The monthly check on crude steel shows boom times still with close to 900mtpa in China.  India, RoK and Japan did well also. Crude Steel Production in China Close to 900mtpa - US Hit 7mt in a single month – first in 2 years So it will be the Resources Sector Leaders that will push up the Australian market. And note this:- A recent survey by ASX-listed Class Super (ASX.CL1) on its 140,000 Self Managed Super Funds (~24% of all Australian SMSFs) showed only 29% of total capital was invested in listed equities and 22% of total capital was in cash and term deposits. Only BHP and Woodside as Resources Stocks were represented as having  more than 1% of all capital. And less than half the accounts held them. An article on this asset allocation referred to the Future Fund and Family Offices had similar defensive portfolios.  Bizarre. Class Super SMSF asset Allocation Showing Low Equities and High Cash The world is underweight Resources Stocks through the Fear Thesis So look at these Resources stocks that will drive the All Ords. BHP   Copper, Iron Ore, Coking Coal and Petroleum BHP to Reach New US$ Highs by end 2018 BHP is much leaner and the balance sheet is better.  Dividends will be flowing through. RIO  Copper Iron Ore Aluminium RIO Has Broken Out with New US$ Highs Likely RIO is in the best shape of the past 20 years. FMG  Iron Ore Just a brilliant company!  Output 170mtpa and costs under US$12/t.  Balance sheet improving and dividends really flowing. We should add BHP spinoff ASX.S32 to this list.  A great company! Did you see the recent June half results for the iron or operations of BHP, RIO and FMG?  Some strong numbers.  Much more to come. Hard to imagine they will be lower in the Dec Half of 2017.  A stronger A$ might crimp June 2018 but with >US$100/t maybe not. The improving resources market is showing up in rising global sea freight rates. A major increase in the supply of shipping caused a major decline in freight rates and distorted the significance of this Index.  However, over the past few years, balance has returned and it is now closer to its previous indicator status. And it is saying global trade is improving. Baltic Sea Freight Index on the rise again And bringing this all together is the A$/US$ rate. The A$ was strong into 2011 (note this was another market that was strong in 2011 so will be very strong in this next leg) and broke the 1913 downtrend. This is over 100 years of history. After the pullback into 2014 the A$ is rising and will again break this 100  year downtrend once US$0.81 is broken. 103 Year Long Term Graphic of US$/A$    A Major Turn Here. Heeding the markets not the commentators has paid off handsomely. Investors have numerous opportunities to increase your wealth significantly over the next few year. Seize the opportunity! Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 Dawes Points #69 5 September 2017

Diggers and Dealers 2017 Report #68

by Barry Dawes

Key Points

  • Gold rally starting on cue
  • Expect ~100% upside in ASX.XGD over next 12 months
  • Australian Gold Industry excelling again
  • Gold production surging
  • Cashflows increasing
  • Dividends rising
  • Exploration success everywhere
  • Mines going deeper
  • Seasonal performance of XGD highlighted
Preferred stocksPremier Golds ASX.NST, ASX.EVN, ASX.TBR, ASX.RND, ASX.SAR, ASX.DCN, ASX.WGX, ASX.RRL, ASX.SBM, ASX.RSG, ASX.GOR. Secondary Golds ASX.BLK, ASX.KIN, ASX.PNR, ASX.AUC, ASX.EGA, ASX.TNR. Other resources ASX.MLX, ASX.MUS, ASX.FND, ASX.AMN, ASX.SFX, ASX.HRR.   Australian mining Industry, please take another bow!  What a performance there at Kalgoorlie this year. For the Gold Sector, another year of production and resource growth and some outstanding brownfields `discoveries' in WA's goldfields. And a year of some big operating cashflows rolling through that is boosting exploration, operating capex and paying some big cash dividends. Other sectors like iron ore and copper are also doing well. Diggers and Dealers is skilfully timed to catch the end of the Northern Hemisphere summer and the seasonal run in the gold price and the ASX Gold Index. Ridiculous as it may sound, the world gold price usually manages to kick up on the Friday before Diggers to get the faithful aroused but gold decided to wait until the middle of the Gala Dinner after the conference closed on Wednesday to put on US$15 and set the XGD firing.  More gains (almost US$30) to test US$1300 came over the next couple of days. As an unabashed bull of most things and almost everything gold Dawes Points considers the timing is pretty much on schedule.  Gold has shown clear seasonal strength after the Northern Hemisphere Summer and into the following February. Source: Seasonax And gold is just about ready to move much higher.   It may take a couple of weeks to back and fill and to whipsaw aggressive traders but a move through US$1,300 with appropriate retesting and consolidating should send it much higher later in 2017. If Nth Korea is the issue, the buying pressure could get quite serious although the issue will probably be more bluster than bother.    Recall that the Sth Korean KOSPI Index has risen 20% in 2017 and seems to have been anticipating re unification and an end to that abominable repressive regime in the north. But do not lose track of the bigger picture. Rising living standards in Asia are driving demand for gold and the gold price.  Gold has moved from the West to Asia and a short squeeze is likely to develop. Should gold break upward here to above US$1300 and begin moving higher then the 2011-2017 downtrend will have been broken! Note that the move from US$246 to US$1,032 over 8 years was US$786 and to US$1,923 over 11 years was US$1,677. These are just numbers but it always astounding how they will recur. We have two important points to consider here from my perspective.
    1. If the US$1,032 is the intermediate high then there is US$600-700 to come quite quickly to take us to US$1,900-2,000. The run to from US$1,032 to US$1,923 with that US$891 gain is cream on the cake and could come again later as the next leg to almost US$3,000. This move would really show me the power of this bull market that is brewing in gold.
  1. However, if the US$1,923 is the intermediate high then, perversely, gold might `only' get to US$1,923 then have considerable consolidation over a longer period and this market would not be quite as powerful.
Let's just see.  And don't be too dismissive.   A strong 11 year bull market rising US$1677 is to be respected.

A$ Gold price.

The recent strength in the A$ has been as expected and the A$ gold price has just clung on to its uptrend.  It has bounced nicely now and it on its way to the top of the uptrend channel.  The first target is up around A$2,000/oz.   The next channel projects much higher prices. So let's come back to the XGD and the seasonal influences. The 2000-2011 bull market in XGD (note this was at least eleven years) rose 750%. The very first upleg into 2002 of the 2000-2011 stage of the bull market had a 130% gain before its initial 27% ten month correction ahead of the longer term gains which included 72% over the next nine months. The very first upleg in the current next stage of the bull market was up almost 230% in 22 months before its ten month correction (which has now finished after a similar 27% decline). The XGD should be looking to at least test of the 8499 April 2011 high within the next 12 months. Big call, but higher gold and a still very share price depressed but highly operationally and financially successful Australian gold industry could do it easily. Note that the ASX.XGD has 27 companies which are almost ALL Australian based companies, not the 52 often foreign and often not gold producers in the XGD in 2011!! Let's hope S&P doesn't repeat the previous idiocy with choice of stocks in the XGD. NST has pointed out that there are only 20 mines producing 300kozpa or more in Tier 1 jurisdictions (Australia (8), USA(8) and Canada (4)) (+3 in Ghana) around the world and its Kalgoorlie and Jundee mines would soon add two more to these 20. These ten Australian large mines should give Australia an extra quality boost and eventually an international premium. Seasonally the XGD has kicked off after Diggers since the XGD was initiated in 2000.  Taking all 17 years we get an average gain of 8%.  Taking out the misery years of 2008, 2013 and 2014 gives a 14 year 'adjusted' average gain of 23%. FY18 with all the current action couldn't possibly be an average year so expect at least 23% in the December Half 2017 and more before June 2018.

Diggers and Dealers 2017

Another brilliant event after a brilliant year. 48 presentations and over 100 booths so a lot to see. Starting with the Mining Company Awards let's look at these:

Best deal

Gold Road (ASX.GOR and component of Dawes Points 1 Dec 2014, 1 Jan 2016 and 1 July 2017 Portfolios)   - Sold 50% of Gruyere 6moz discovery to new JV partner Goldfields for A$350m and is reinvesting into more Yamarna Belt exploration St Barbara (ASX.SBM and component of Dawes Points 1 July 2017 portfolio + independent acquisition at A$0.21 in Feb 2015)  - brilliant recovery to A$3.77 through Gwalia mine producing 265koz @ 10.7g/t and repaying A$347m debt) Kin Mining (ASX.KIN and component of Dawes Points 1 July 2017 portfolio) Acquisition and rediscovery of Mertondale  (12km strike on Shear) and Cardinia Belts(~4km strike) with open down dip potential. Fully deserved. Other stars gave Kalgoorlie its renewed life and Australia is now entering a truly Golden Age as its (mostly) WA gold miners re examine old gold fields and push exploration and mining down to depths the rest of the mining world has considered normal for decades.  Don't think 600m. Think more 1500m and as St Barbara is showing at the Gwalia Mine, 2600m and more.  And think higher grades. Try 10-15g/t. Technology is assisting here with 2D and 3D seismic being adopted. The WA industry is now pushing on strongly after the production decline that essentially left it out of the 2000-2011 bull market in gold. This graphic may just be too conservative as well. Kalgoorlie has again become the regional centre of attention.                         Kalgoorlie Geological Terranes To the west of Kalgoorlie, the Coolgardie Domain system incorporating the Zuleika and Kunannalling Shears is prime gold production real estate.  This domain extends from Kalgoorlie over 150km to Ora Banda. This is giving us today's The World's Most Exciting Goldfield with Northern Star and Evolution utilising highly skilled teams to crack the codes to new and extended high grade deposits that have given us Tier 1 mines with >10 years life. Both these stocks will be rerated as mine lives are bureaucratically confirmed. EKJV partners with NST, Tribune (ASX.TBR) and Rand (ASX.RND) should also more than double in the next year. The evidence was there in front of us more than a year ago but some people are just a bit slow on the uptake.  Note too little ASX.TNR that has a very large footprint in this region. This is now the fourth largest goldfield for Australia with production of about 420,000ozpa and growing. Table   Major Australian Gold Mines  (current output kozpa)
Boddington 800
Big Pit 700
Cadia 620
Zuleika 420
Tanami 400
Telfer 366
This is a group effort and all players are likely to add to growing gold output over the next five years. And the resource growth has also been spectacular for NST, TBR and RND as concentrated and committed exploration programmes have been running hard although EVN's Phoenix acquisition is being reappraised after being severely reduced in 2016. Overall resources should be much higher for annual reviews by mid 2018. NST spent ~A$18m on Zuleika exploration and has added a net 35% to resources to the East Kundana Joint Venture (EKJV) below. Source: NST And increased its 100% owned Kundana/Zuleika operations to 1.8moz with much more to come. Source: NST NST's 100% operations will be rising to 175kozpa to give an overall net 300kozpa to NST during 2018. Evolution is also now in full swing with 9 months of Zuleika exploration and its equally talented discovery team, whilst a few years behind NST, is finding extensions to its White Foil mine and also may have found down dip indications at Frog's Leg and recent Innis target drilling has picked up the structure trending to the south east.  Zuleika Shear will take 50% of EVN's FY18 exploration budget. Source: Evolution The Phoenix acquisition is being reappraised after early disappointment but the results are now coming through. Keep watching for results from exploration further to the north at Blue Funnel, Emu and Burgundy. All the way up to Agnes at Ora Banda, to the north of the Zuleika Shear. Blue Funnel has 7km of Zuleika Shear tenements and will be a major exploration focus for EVN. Emu is providing some Zuleika Shear style grades and intersections along the Kunannalling Shear to show that much more is come from this World's Most Exciting Goldfield. Source: Evolution This is just part of a major reassessment of the exploration potential of the Kalgoorlie region. In just Evolution's Coolgardie Domain drilling the historic records show a very modest % of drilling has exceeded 200m vertical depth. Source: Evolution Repeat this over the Yilgarn with an industry generating cash and many new players raising new equity. And then all of WA and then the rest of Australia. Source: Evolution To the North and East of Kalgoorlie we have many more very interesting goldfields:- St Barbara Mines ASX.SBM - 265kozpa from Gwalia at Leonora – SBM expects to be mining this to depths beyond 2600mbs Saracen  ASX.SAR - 300kozpa from operations near Laverton (Carosue Dam) and Leinster (Thunderbox) Carosue Dam is 160-170kozpa.  Open at depth. Thunderbox is 130-140kozpa and also open at depth. ASX.NST's 300kozpa Jundee Mine The brilliant NST has repeated Zuleika at Jundee with a truly outstanding effort. Resources have grown from 500koz on acquisition in July 2014 by 590% to 3.0moz with reserves up 350% to 1.4moz whilst output has exceeded 233kozpa with a 335kozpa rate achieved in June Qtr 2017.  Note that gold output over 2008-2010 exceeded 350kozpa (410koz in 2009) on much lower resources and reserves. Source: NST NST expects it will exceed 300kozpa here within 24 months through new mining faces and a plant expansion to 1.7mtpa. A properly funded exploration programme at Jundee might have a major impact here.  Note that the upper zone in the green box down to 700m might just be repeated in the next 700m. Source: NST The Armada Trend is already showing continuation of mineralisation into the lower zone and the deeper Zodiac discovery of 4.8m @ 21.2g/t is very exciting. Source: NST Could NST find another 10moz in the next 700m?  Probably. In another year it might be that Jundee becomes The World's Most Exciting Goldfield. WestGold ASX.WGX  Combining 5 goldfields and 5 mills for >400kozpa Gold Road ASX.GOR  Yamarna Belt Exploration continuing after selling a 50% JV interest in the 6.2moz Gruyere deposit for A$350m to Gold fields Ltd. Dacian Gold ASX.DCN  Completing construction of 2.5mtpa plant for >200kozpa Regis  ASX.RRL  Duketon operations giving 350kozpa Blackham ASX.BLK  Wiluna is still very attractive and BLK is very cheap Pantoro  ASX.PNR   Expanding to 100kozpa Kin Mining  ASX.KIN Mertondale and Cardinia Projects near Leonora

Special mentions

Resolute  ASX.RSG  With >300kozpa RSG is due a serious rerating again. Metals X   ASX.MLX   Base Metals with excellent tin, copper and nickel operations Agrimin  ASX.AMN  Lake Mackay Sulphate of Potash (SOP) Project   Excellent presentation BHP Nickel West ASX.BHP Nickel sulphates for Nickel-Cobalt-Lithium-Graphite Batteries.  Interesting approach to managing your product for a changing market Kirkland Lake TSX   Gold intersection of 15m @1421g/t for the >200ozpa Fosterville operating mine in Victoria West African Resources   ASX.WAF  Sanbrado Gold Project Burkina Faso with high grade core zone of 245koz @ 34g/t. Sheffield Resources ASX.SFX Minsands development project in WA Mustang Resources ASX.MUS   Ruby producer in Mozambique Egan Street Resources  ASX.EGA Redeveloping the Rothsay Gold Project Finders Resources ASX.FND  SX-EW Copper mine in Indonesia on PER <2x from 25ktpa copper metal Heron Resources ASX.HRR  Has Woodlawn Cu-Zn-Pb-Au-Ag resurrection financed (A$240m) and ready for production in FY19. The Diggers and Dealers Forum does showcase Australia's robust mining industry and the location in Kalgoorlie at the centre of gold mining never fails to impress with the entrepreneurial skills of the WA mining industry. I own NST TBR TNR EVN MUS BLK PNR AUC GOR HRR or control in portfolios. Barry Dawes BSc F AusIMM (CP) MSAFAA  +61 2 9222 9111 Dawes Points #68 14 August 2017

Global Equity Markets Take Off #67

by Barry Dawes

Key Points

  • Global equity markets breaking out in global economic boom!
  • US a leader but Germany and India also in vanguard
  • SE Asian markets finally breaking higher
  • Global bond market is US$100tn in long and wrong positions
  • Massive bond sell off to provide ample funds for equities and commodities
  • Economic activity to accelerate everywhere
  • A$ to remain firm
  • Resources stocks are still unloved and underowned
  • Major rerating expected
Preferred stocks  ASX.BHP, ASX.RIO  ASX.FMG Observing world events at this extraordinary time is a truly inspiring experience.  The Trump emergence and the reaction of denial and hysteria from so many sectors is fascinating.  The changes taking place are of epic proportions and the world appears to be at a major watershed moment.  It seems the world is moving from a certain period of fantasy back to reality Watching global equity markets and also the bond markets is actually quite exhilarating because these developments are truly once in a life time events.  I have said it before but these are times you will be able to tell your grandchildren that you were there. Equity markets are breaking higher in a massive bull market. Bonds have peaked and are on the way to eventual collapses and probable oblivion for many issues and issuers. Dawes Points has been resolute in maintaining the same consistent story for some time and, apart from the undeserved weakness in my own resources sector itself, everything in the outlook of the past few years has just about come to pass. The US didn’t slip into the Greater Depression, the US equity market didn’t collapse, China didn’t implode, the European banking system didn’t collapse and the Great Australian Recession of 2014/15/16/17… hasn’t happened. The A$ didn’t dive to sub US$0.50.  The iron ore price is not US$20/t.  Oil isn’t at US$20/bbl. In contrast, global equities are making new highs, global economic activity has improved and resources consumption has continued to grow. So let’s review it all for the fabulous bull market unfolding for most things and resources in particular. The equity markets outside Australia are now booming on as noted but first let’s look at the global bond markets. The bond markets are currently far larger than the equity markets.  This is mostly due to government budget deficits in so many nations where social spending is growing along with ageing populations and also an ever-growing range of services that politicians bribe with and voters demand of government. The artificially low interest rates have allowed these expenditures to continue but now this game is over. Interest costs now make up a significant proportion of budget expenditures and as the coupon interest rates demanded for bonds keep rising, that proportion can only increase. Many governments may be issuing sub 2% coupons on 10 year bonds today but in another year or so the rate may be 4% and the interest cost share of budgets might just double given that most bonds issued to date have not been 10 years but are in fact very short dated. Globally, the US 10 Year Treasury Note is a critical component in the outlook for all bond markets. It is probably the largest individual component of the global bond market and it sets the global `risk-free’ rate. You need to be able to imagine that the `price’ of a 10 year bond is a moving feast and so a `price index’ must be made up of a collection of a wide variety of bonds with exactly 10 years to maturity.  This can be 30 year bonds issued 20 years ago, 20 year bonds issued 10 years ago and current new 10 year bonds.  The interest rate from the time of issue (`the coupon’) could be 12, 10, 8 or the current 2.4%. The bond price index is thus a true cocktail. This index, however, peaked back in 2012 and has been telling us all something of what is to come. Sharp initial falls, partial recovery then more sharp falls.  More falls to come. To understand all this you should be aware of how bond pricing works and what might soon be happening in these markets. A simple assessment points out that rises in interest rates cause falls in the price of bonds and falls in interest rates cause bond prices to rise. Also increased buying of bonds can increase bond prices to drive down yields (interest rate coupon divided by bond price, e.g., simplistically, 5% pa paid as $2.50 half yearly  on a $100 bond so bond buyers bidding up the bond price to $105 will only get $5/$105 = 4.78%,). Selling down of bonds to $95 gives a higher yield of $5/$95 = 5.26%. The selling of a bond may reflect the holder’s wish for liquidity and not the overall interest rate environment. Here also the lower the coupon on the bond the higher the price volatility. And, the longer the duration of the bond the higher the price volatility. The world now has a lot of low coupon bonds. So expect high bond price volatility. Note the fall here in the 10 year bond from 133.21 in mid 2016 to 125.36 has given a capital value 5.3% lower and that bond now has only 9 years to run. If you bought that bond at the yield to maturity of 1.35% in July 2016 you have already lost in capital the equivalent of 4 years of 1.35%pa income. Remember last year when you were told the world was seeking income at any price. Sell your 2,3,4,…..5% yielding stocks and buy 1.35%pa 10 year bonds.  What a bargain! With the 30 Year T Bond the stakes become much higher. A year ago these bonds peaked at 176.06 when yields were just 2.1%. Buyers then are now 29.6 points or  16.8%  less wealthy and have lost 8 years of 2.1%pa income in capital losses. Unlucky. The long term for bonds looks just awful.  Very unlucky if you own these instruments. A very long term Rising Wedge has been in play for some years. The deadly rising wedge has uptrends having lows in price rising faster than highs in price and at resolution usually falls sharply. The US 30 Year T Bond has a 35 year rising wedge life history.  Note the sharpness of the fall from that July 2016 high of 176.06 to 146.46 in March 2017. Nine months and 29.6 points is 16.8%.    The next fall would be to 140 and then to a target of about 120  - equal to about ~20% capital losses in `risk-free’ investments. Very unlucky. Now this is the bond market for the US of A.  It is not Italy.  Or Spain.   Or Greece. Have a look at these numbers on the US Budget.  The numbers from are actuals and best guess forward estimates.  These may be different to other numbers currently circulated but they are a fair indication of the trends. Some important things to note. The deficits are well down on the peak years of >US$1000 over 2009-2012 but even with a recovering economy the deficits are growing again as the interest rate cost rises. Interest expenses could rise from 6.5% of all other expenditures (6.1% of total Budget expenditures) in FY2016 to 12% by FY2020. And look at the projected average interest rate of 1.90% for FY2020 and compare it to FY2017 at 1.49%. Now look at this Projected Maturity Profile from the US Treasury (late 2015 I know but I could not find a more recent version. Why?)  which shows <12% was longer than ten years and >65%  shorter than five years. Source: US Department of the Treasury August 2015 You could feel despondent about all this but rather than think about bond markets setting the interest rate level you should see this ~US$100tn globally as a wonderful source of capital. The capital that has for years been denied to you to develop your project. Keep in mind that the world should get by with 5% Ten year bonds as it has for most of its history. The market place and equities and commodities will withstand these falls in bond prices as the capital flows out of this overbought, over-owned and wretched asset class. It is already. The US Housing Sector thinks it is wonderful!  Bricks and mortar before paper assets. Housing starts seem to be having a normal summer seasonal breather and should turn up for the Dec Qtr. Banks just love higher interest rates because they give improved lending margins.  And a rising Fed Funds rate forces banks to lend more of their outrageous QE money to the general market place at last at much higher margins. And hope you noticed that banks last year ended 14 years of underperformance against the S&P500 and are amongst the market leaders now.  Clearly higher bond yields aren’t important here either.  So coming back to other 10 year bond rates look at this graphic with the US 10 year, US 30 Year ($TYX), UK 10 Year, German 10 Year and Japan 10 year included.  The `negative interest rate’ hysteria was the top of this bubble! Just as the US ten year bond has broken a nine year downtrend so have German and Japanese bonds. The UK is just at its downtrend and about to break through as well. So back to equity markets and what about them? The markets are speaking.  While the bonds are selling off, equities are rising. The Dow Jones 30 is making new highs and is accompanied by the Dow Utilities and Transports. Nasdaq is making new highs. And small caps indices like the Russell 2000 keeping making new highs.  Remember when you were told to sell small caps and stay only with the large stocks because the end of the world was coming?  More recently it was `FANG stocks were the only things pushing indices higher so watch out’! So the US recovery is real and it is helping everywhere else and Germany is also leading the world to new highs. India is next and what a leader this is.  Loads of upside. So much for Brexit bringing down the UK. This Morgan Stanley Portfolio represents a composite of emerging markets and would include most Asian markets.  The performances of Singapore, Thailand, Taiwan, South Korea, Philippines are similar to this proxy. However, the most important markets are Japan, Hong Kong and Shanghai. Japan is heading for new highs in this post-2009 rally. Hong Kong is now ready to move substantially higher after a decade of consolidation. Shanghai is parallelling the other markets and is now ready to approach and break through 3300. In Europe as noted, Germany is leading with the UK next but France, Spain and Italy are also moving up constructively. Closer to home, the New Zealand market has been one of the best performing indices. What an outstanding run! Which brings us back to Australia.  The perennial underperformer. But it could now be ready to play catch up. Look at the ASX:XMM Metals and Mining Index. The 2011 downtrend is broken and the index is getting ready to fly. BHP, RIO, FMG and other resources majors are ready to run at last.  (Note these are US$ prices in US market.) Dawes Points has been an unrepentant A$ bull and should we break above about US$0.79 then a bigger rally should ensue. And note also that the 104 year downtrend from 1913 comes into play at just over US$0.80. So, what does all this mean? Well, a major global economic boom is underway.  It has taken much longer to develop than has been expected here but in turn it should now last much longer than you could imagine.  Resources commodities from iron ore, coking coal, copper, aluminium, zinc, lead, tin, cobalt, gold, silver, palladium, platinum, minerals sands and much more will have higher prices.  All will reflect record consumption demand, low inventories, insufficient new resource developments and not enough exploration. Are you on board? Make sure you have your portfolio together because big gains are coming. Contact me to participate. Barry Dawes BSc F AusIMM (CP) MSAFA  +61 2 9222 9111 Dawes Points #67 18 July 2017