Key Points
- Needless fake-out for gold
- New highs in US equity market
- US economy roaring ahead
- Sub-Sector evidence strong
- Inflation picking up
- US Bonds look vulnerable again
- Emerging markets picking up after pullback
- China doing just fine
- No reason for current price of gold and gold stocks
- Still like the best in the big stocks – BHP RIO WPL OSH
- Gold stocks are so cheap
- Massive cash build ups in NST, EVN, SBM, RRL, OGC, SAR, PRU, PNR
Talk to me about resources
bdawes@mpsecurities.com.au
+61 2 9222 9111
This 2018 year is passing very quickly and the middle of the September Qtr is now behind us. What an extraordinary year so far. News on the economic front is frequent and strong as US consumer and business confidence rises and all sorts of economic indicators are moving into hyperdrive.
This is indeed a US boom that is now truly global and pointing strongly to the Dawes Points Global BoomTM thesis. Heed the markets, not the commentators.
The US equity markets rightly get the attention of the world with Apple becoming the first company to have a trillion $ market cap but so much in the US just seems to be getting better. Look at these:-
The S&P500 is working its way higher and has just made new intraday and closing highs.
As is the Dow 30 mega stocks. This channel analysis allowed us to call that Dec Qtr 17 sharp upmove and also to see the support in the correction and now a probable new high is ahead soon too.
And the Russel 2000 looks ready to burst higher into its next channel. Expect the microcaps to do much the same.
The basis for the higher share prices is well founded.
Earnings are good and profit margins in tech companies are high and rising.
In addition, this group of US economy graphics from World Economics and the Wall Street Journal are confirming boom and inflationary pressures.
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These graphics are also highlighting the ever tightening labour market in the US but other data is showing that labour is even tighter in Japan (no immigration there!) and Germany.
Inflationary pressures could just be much stronger than you might be imagining.
The performances of some old fashioned sectors are are doing very well – retailers:-
Dow Jones US Food Retails and Wholesalers Index
And consumer discretionary stocks are out performing the S&P500.
Consumer Discretionary ETF vs S&P500
And the transports led by airlines are hitting new highs.
Dow Jones Transportation Index
The 4.1% June Qtr growth is unlikely to be a flash in the pan that so many are flagging. The bears are still growling 9 years into this massive bull market. Still growling!!
It was interesting to note that Warren Buffet’s Berkshire Hathaway is also still aiming high and could soon move into its next channel to further new highs.
Interest rates are rising to better reflect borrower risk and inflation.
You will recall this from Dawes Points #78 where the CPI is equal to the 3% on 10 and 30 year Treasuries and the 4% on Finished Goods PPI is higher.
And bonds in my view are readying for another major fall in 2018.
The US$ – Where to now?
The US$ is very strong because of……… you can fill this in because I don’t know.
The emerging markets crises in Venezuela, Argentina and Turkey with US$ denominated debts might be a key feature but I don’t consider higher interest rates to be the dominant factor in the long term level of the US$.
I have been agnostic on the US$ over the past few years and whilst this DXY US$ Index is remaining firm, it is well off its highs and lower than it in early 2015. So much bullishness at lower highs? Might be just some more of that fake news against gold.
US$ Index – downtrend broken but not with real conviction
Now whilst the relentless torrent of bearishness over Emerging Market economies is OK for Turkey, Argentina and Venezuela the rest of the world’s emerging markets are just pulling back to the breakout line.
This graphic is telling me that China and India markets are in buying country for uptrend that will last a decade or more.
Morgan Stanley Institutional Emerging Markets Portfolio
This analysis of Emerging Markets from Oxford Economics paints a very different picture than that from the Commentariat.
But look at Shanghai from this graphic. Just pulling back to a 26 year uptrend. Many years of upside ahead.
Shanghai Stock Exchange Composite Index
India is just surging along as an important long term global leader. No Emerging Market claptrap here. Just more new highs.
India’s Nifty 50 Index
So what does all this have to do with gold?
Stating the obvious, as people feel wealthier, so they buy more. For much of the world’s population in China and India it is buy more gold as you get wealthier.
These countries together with most of Asia, Africa and Eastern Europe have already seen currencies debased and debauched by inappropriate rulers so gold is very important. While some commentators might be concerned at gold priced in US$, just think of gold making strong new highs in the currencies of Turkey, Venezuela or Argentina. Just like Zimbabwe a decade ago.
The demand for gold is still strong out of Asia and it is stronger than the ability of gold mines in the West to produce. Deficits run to market tightness and then to shortages. And then to squeezes.
The fake news for gold has focussed on the US$ but stories of margin calls on Chinese speculators in gold and copper and a hundred other reasons were trotted out as to why some commodities had a pullback and that after a US$200 15% fall from US$1365 to $1165 gold should now collapse for another decade.
Dawes Points bullish expectations on gold have not been met so far and the 15% decline wasn’t quite what was expected. Ouch!
Well sentiment as shown by this gauge has reflected that 15% fall and I have seen other gauges at even lower levels.
Gold Miners Bullish Percent Index
Gold itself has come down to test the 2011 downtrend again. And has bounced back over US$1200.
Daily US$ Gold Price
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The long term graph broke its uptrend but more importantly it has bounced off that 2011 downtrend line in a very important manner. And the RSI is very oversold.
Long term US$ Gold Price 1980-2018
US gold stocks have been savagely hit and the XAU Index sent back to the 2008 lows giving a decade of nothing. This is definitely buying country.
Philadelphia Gold and Silver Share Index
Gold stocks against gold bullion have provided another round trip but this too is screaming BUY!.
Van Eck GDXJ Gold ETF vs US$ Gold
But this seems to be very positive in the symmetry that has been created.
Surely there is some major upside developing here. This is now a typical reversal pattern extended over five years. Resolution of this to the upside would produce a powerful upmove.
US$ Gold 2008-2018
Stepping back is possible to see here a very oversold market pulling back on the flimsiest of fake news to a major long term buying opportunity.
Do keep in mind that today’s PESSIMISM is high and that pessimism ONLY occurs during Wave 2.
Pessimism and Wave 2s represent the building up of cash by investors and build up in value in stocks.
Wave 2 pullbacks are followed by Wave 3s which are major surges and lead into that Optimism Leg.
We are there right now!
In Australia we have been much more fortunate with strong gold production growth, earnings and dividends boosting our key gold stocks. Dawes Points favourites NST and CYL made new highs in the weeks before the sad scene in North America where gold stocks made lows equal to 2008 and that great performer Kirkland Lake, with its Fosterville 1.1moz @ 61g/t masterpiece and its bold investment in Novo Resources’ Pilbara Conglomerates, also made a new high.
With clients having their NSTs and CYLs rising, it was hard to be bearish.
RRL, SBM, EVN, OGC, RSG and SAR have done well although these have been caught up with the malaise despite many recently reporting outstanding operating and financial results. And major cash builds. I have never seen so much cash on the balance sheets of important mining companies.
Never during the 1980s or 1990s did the leading mining companies CRA, WMC, NBH or NDY ever have this much cash. It was always a matter of how much debt!
This cash is likely to make these good companies into great companies.
Site visits have recently been made to NST’s Jundee and KLA’s Fosterville super mines and I can assure you there will be much more coming out about these two great mines.
Many smaller stocks however have been savaged so bargains exist all along here.
Why have stocks like PNR, BLK, GOR, GCY been treated so badly?
The gold price in A$ has held up reasonably well and the 13 year uptrend from 2005 is holding nicely so it looks ready for a bounce and resumption of the uptrend. Another break through A$1700 should lead to much higher A$ gold prices.
Gold in A$ 2000-2018
It has also been apparent that silver has been behaving in much the same way as junior gold stocks. I see it as an important weather vane to closely follow. It has been threatening to move higher against gold for a few years now.
It could be emboldened to advance quite soon.
20 Years of Silver Vs GolD
Well known silver bug Ted Butler has credibly concluded that JP Morgan actually owns about 800moz of silver bought cheaply by continually keeping the price down and also has bought multi million oz of gold. Waiting for the squeeze to come.
Copper has been brought back on similar concerns out of China with speculators and also copper-backed loans getting margin calls.
China consumes about 50% of all copper and also other metals so whatever happens there is important. However, the longer term issues of consumption growth and the lack of new supply and a very small inventory buffer still says copper prices will be higher.
Long term Copper Price 1980-2018
Even platinum is back at important support.
Dawes Points has highlighted the long term strong relationship between Nth American gold stocks (and also gold) and the A$.
Also I have been a bull of the A$ vs the Euro and Sterling.
This is what these look like.
A$ vs Euro 1999-2018
A$ vs Sterling 1999-2018
And of course against the US$ itself.
We are close to breaking the 18 year 2001 uptrend in a very oversold position but the 105 year downtrend is now at only US$0.78.
A$ vs US$ 1999- 2018
So it seems that the past few months has provided loads of irrelevant fake news like the continuing decline of China, the peaking of the US economy (the recession bears just seem to ignore the data shown here in this issue) and the collapse of the US equity market just because it has gone up (most of these people have been short since 2009).
This has brought about a four month correction in a major long term bull market for gold that has been consolidating for five years.
The outlook is just as positive as ever and extraordinary opportunities are here for resources stocks of all sizes and sectors.
Barry Dawes BSc F AusIMM MSAFAA
+61 2 9222 9111
I own BHP, RIO, WPL, OSH, NST, CYL, RSG, PNR, BLK, GOR
22 August 2018
