Global Boom Bumper Issue

by Barry Dawes

Key points

Gold heading for US$1,400 then US$1,500 then higher
Silver following with something quite special
Global equity markets ready to surge
Heed the markets, not the commentators
Bifurcation concept set in cement
Wealth generation accelerating globally
Dawes Points 2015 Gold Stock Portfolio up 290% in 18 months
Buy BHP, RIO, FMG and S32
Buy Copper, Zinc, Nickel and Tin stocks
Paradigm Securities changing name to Martin Place Securities

What a remarkable few weeks! Brexit vote, Australian election, ASX Gold Index up 20%, negative bond yields and the US equity market within a hair’s breadth of all time highs. Stock markets around the world ready to break out and yet still such pessimism is abounding around us.

This is the 52nd edition of Dawes Points and whilst I never really imagined its publication would run so long it certainly has been a very good discipline in following the markets. It would have also been nice to have this Bumper Issue for the 50th but as we haven’t seen a US$100/oz one day price surge for quite a while I thought it was worth a comment. So we missed out on that great opportunity and I was on holiday anyway.

This is also the third edition in as many weeks so there are clearly things in the market that warrant attention.

I raised the Bifurcation concept a couple of months ago to highlight what I saw as mass sentiment that was railing against reality. The real world seems so robust yet gloom has been pouring out everywhere. Two paths lie ahead, one very positive the other just gloom.

The positive entrepreneurial spirit as personified by Australia’s gold industry is indeed robust and in other places really positive advances in technology worldwide are leading Main Street Planet Earth to greater things.

This is in stark contrast to the other road where the politico-banking cabal is parasitically entwined in the bulk of the US$100trillion tied up in the bond markets.

The entrepreneurs just want to grow the pie and create things.

The cabal just want to suck out the juices through taxes, fees, salaries, grants, consultants, personal empires, pensions, propaganda, bribes and welfare transfers. Were there really >1,000 Eurocrats/politicos that were better paid than UK PM David Cameron and did they pay any income tax, anywhere?

Trillions of dollars each year milked from tax payers. The Robber Barons never had it this good!

The facts as shown by the performance of the markets and the fundamental drivers of supply and demand have been very much at odds with so much of the market commentary.

How could the UK Brexit voting to leave the EU cause so much bearish wringing of hands and gnashing of teeth? Euro-sclerosis has been with us for decades and the +50% share of GDP of European countries taken over by government bureaucracies that in turn has provided 25-55% chronic youth unemployment is not the way forward. New model needed there. The Soviet Union finally collapsed after about eight decades of misallocation of capital and Euro-Bureaucracy has taken about five decades to begin to unwind.

But back to the markets. Those calling for the end of the world from Brexit (same people, different issue this time) were clearly not watching the markets.

The Dawes Points last month highlighting strong equity markets and rising gold were well before Brexit result.

Gold is very important in the future world.

Brexit brought out some gold bulls but gold had already had a nice little run on essentially Asian demand.

I consider strongly that the long term gold price trend is up. The trend will be long lived and great in magnitude and amplitude.

Thirty Five Years of Gold History – and it does look a strong +20 years future.

The demand is Asian driven as incomes and wealth expand for 3,300m people and with most of the freely available gold now already having been vacuumed out of the West into these strong hands in holdings as jewellery, bars and coin.

New gold exchanges in Dubai and Shanghai will also finally bring true price discovery to the true markets and gold prices will just stay firm for many years to come. And of course rise.

Gold demand from late comers in the West will have to fight with higher prices to get any of the dissipated gold back.

Gold will become the standard for value.

Clients are long gold stocks holders and I hope very happy. Still so much more upside to come.

The 2015 Portfolio is up an extraordinary 290% and 2016 up over 135%. Individual stocks have done even better. There is excellent potential for further upside in all the major stocks but some sector rotation may be appropriate into emerging gold producers like BLK, CYL, TYX, PNR, SWJ, AUC and AHK.

Very pleased to see BLK exceeding my A$0.90 price given in Feb 2015 when the stock was just A$0.09 and it is close to the A$300m market cap (about A$1.18 now) 18 month target for start of production this Sept Qtr. Of course the market has changed and as has the company, and as has my next 18 month target of A$2.50.

At today’s gold price of A$1800/oz BLK is still only 3x cashflow and its resources keep growing. The 58km of strike on the Wiluna Structure is similar to the Zuleika Shear at Kundana so BLK will be busy exploring in very fertile ground for decades yet. Of course I own BLK.

I have lots more opportunities here yet.

North American gold stocks are also performing well and the rise in 2016 is brilliant.

I have had a bit more to say on gold in this CNBC interview.

Silver

Silver is similar to gold in being a precious metal but it has a larger use as an industrial commodity. Demand has been exceeding supply over recent years and inventories have been run down to very low levels.

Silver looks as good as gold in the long term although silver is a long way below its highs of US$50.

However, silver is making a comeback against gold and has strongly outperformed gold over the past few months. The Gold:Silver Ratio is still not far from the Upper Range but it has broken an important uptrend so silver should do better than gold for a year or so.

S32.ASX (market cap A$10bn) produces around 20mozpa of silver so it will be winner although it is only a modest A$500mpa revenue earner but US$10 change is A$250m pretax.

Global stocks outlook.

Typically I don’t cover the day to day economic issues and really can’t see the point of commenting on general economic stats in this letter but the latest US payroll figures released last Friday are very encouraging and come just as the US equity market is pressuring resistance at all time highs.

Important messages are becoming even clearer.

Particularly the Bifurcation concept.

S&P pushing hard against alltime highs and is still oversold. No Irrational Exuberance here!

And NASDAQ looks wonderful. Technology is the world’s leader. And still oversold.

Bifurcation.

And the other side of this is, of course, the Bond Market. How can 2.2%pa for 30 years compensate you for capital risk when inflationary pressures appear to be building? And after just looking at the quality of the management teams of any persuasion in the entire political sphere, would you lend money to any of them.

And European bonds have negative yield so you can pay the government to take your money and then lose it for you.

And have you ever seen a Prospectus or PDS from a government for a bond? Any Directors’ liability issues? Disclosures? Failing to meet Prospectus Forecasts on deficits?

When it all goes belly up, and many governments will (– mostly through debasement of the currency), will there be SEC or ASIC inquiries? Could it be that the judiciary could be part of the cabal and let the perpetrators off scott free?

Safe Haven. Flight to Safety.

Lambs to the Slaughter is more like it.

The US 10 Year Treasury Note peaked in 2102 and the price today is just a few percent above the levels achieved in the GFC and the S&P 500 is probably up >200% since the time of those 2008 T Note highs. You might have made 3%pa Buy and Hold. No significant gain for that `Safe Haven’.

Bifurcation.

I have been talking about the great Global Economic Boom and Prosperity now for quite some time but from the wrong side of the market. Most thought I was just far too optimistic but the evidence for such an outcome has remained very clear and quite compelling to those who have sought it out and ignored the continual avalanches of pessimism.

Yes, bond markets were still rising (falling yields) and commodities and gold falling. China and its equity markets were collapsing, the European Banking System was kaput and the US was still in the Greater Depression. Just about every economist was preaching gloom and/or doom. The A$ had to fall further and the iron ore price was down for a generation.

There was no way out.

Build up cash. And so everyone did. Trillions everywhere.

But what really has happened?

Let’s look at the US.

The trillions in QE rolled out by Bernanke went to rebuild bank balance sheets with next to nothing making its way into the general market place.

Despite the strangling it is useful to note that property prices in the US have still been rising and housing starts have steadily moved higher. But 1.164m units pa is still well down on long term new and replacement requirements of about 1.5m units pa and the area under the curve is about 6 million of pent up potential demand.

As an aside, if you have cable TV it is well worth watching the quirky NY real estate reality show. The commentary is almost current but the issues raised there and the way that market works suggest the US property has a long way to go in its own bull market.

Housing company stocks are testing 2007 pre-GFC level highs. The markets seem to like this sector too and it looks as if it might be breaking out to much higher levels.

Fed interest rate rises won’t hurt at all and should actually stimulate lending volumes especially at current low mortgage rates.

With all the bad news on everything out there one would expect that the most negative action should be falling on the banks as the weakest links. But the market doesn’t think so.

So the US seems to be doing just fine and I think we will see some real strength there as short covering takes place and new money from all the cash on the sidelines comes surging in.

China.

I am on my way there again as I write this.

`If you haven’t been to China in the past six months you haven’t been to China’.

Interesting observation and I think it is probably appropriate.

If you are bearish on China, which part, and, when do you wish to have been bearish and for how long?

1400m people and many regional economies makes generalisations difficult.

GDP growth is slowing marginally but that is purely a matter of arithmetic as actual GDP additions are from ever higher economic bases. Personal disposable income is still rising strongly. Infrastructure spending is up again. Property is booming tech-heavy Shenzhen and elsewhere.

The Shanghai Stock Market is holding up very positively. No collapse here. What was the issue again?

The long heralded collapse in steel production simply hasn’t happened either. Talk of it however, resulted in the steel production decline into Spring Festival 2016 which also ran down inventories of product and raw materials. Inventories of wire rod, rebar, hot rolled coil, cold rolled coil and medium plater steel were almost 30% lower than a year ago. With a flurry of new infrastructure projects in 2016 brought forward as well, the steel mills were caught really short of steel product and production is back at near record levels.

Domestic iron ore production (all magnetite concentrates) has fallen sharply so imported iron ore is in high demand and are still at record levels. Iron ore prices are recovering and started with the typical short cover rally that no one believed and is now rising again.

RIO has shelved its US$20bn Simandou African iron ore project and about 250mtpa of iron ore capacity has been taken off the market so iron ore supply just might get a little tighter next year.

I expect US$80 within 12 months and perhaps by year end. I won’t dwell on it but the chart below looks awfully like the completion of a Wave 2 with a 5 wave C just finishing. If you know what that means. But that would be impossible, wouldn’t it. Wouldn’t it?

Interestingly I am seeing good references to demand for imported magnetite to replace the 150mtpa or so of very high domestic magnetite concentrate production shut down in China over the past couple of years. Several groups are looking at magnetite projects to get up to meet this demand. Don’t dismiss this. Keep watching. I like magnetite.

As noted a month or so ago BHP, RIO and FMG are strong Buys. These next three graphics are in US$.

BHP Copper, Coking Coal and Iron Ore are OK. Petroleum could come good as well. Stock is cheap.

RIO Now in the best shape of the past two decades. Iron ore, Aluminium and Copper.

FMG Brilliant performance in reducing costs and debt. And looking at Magnetite.

I like magnetite and clients have done very well out of Magnetite Mines Ltd (MGT.ASX) and expect to do extremely well through this rising resources market. Billions of tonnes of softer low strip-ratio magnetite ore and magnetic separation giving very low mining and production costs. And super low cost slurry pipelining to make it even more competitive. I own MGT.

Magnetite Mines Ltd MGT.ASX

Magnetite (Fe3O4) concentrates are a mining product, not an ore, so have higher Fe content (68-72%), fewer impurities, are exothermic in steel making and command a premium of 7-12%/dry metric tonne unit over 62% Fe hematite (Fe2O3) and 18-20% per dry tonne of ore.

Unlike hematite ore deposits which are steadily falling in grade for the major producers globally, magnetite deposits feed a concentrator that gives a long term steady grade magnetite concentrate product.

Something also seems to be happening in the seaborne freight market which has been significantly distorted by significant new capacity at a time of trade volume reduction.

Next year could see some rises in sea freight that would reflect higher trade volumes.

China steel production and demand strength also applies to industrial metals. The long term decline in LME inventories of almost all metals suggests that consumption is still robust. Copper, lead, zinc and tin look tight. Aluminium and nickel have shown significant inventory rundowns leading into 2016 and prices are looking to go much higher.

Copper is the leader. Oversold long term, running into a deficit over the next two years and no stocks.

So the general Resource Sector looks very good and share of ASX All Ords turnover is rising nicely and is up 40% from the lows at the beginning of the year.

And the Small Resources Index is surging, bringing liquidity, market breadth and participation. Turnover share is up almost 150%! Great fortunes are going to be made here. Make sure you participate!!

When we look at Europe and Brexit, the impact on the equity markets has been minimal although the flight to bonds has been strong. Look at these graphics.

London FTSE Massive ascending triangle with long term resistance at just under 7000. Just 5-6% away and the market is oversold.

Germany DAX Has already broken out from that 2000- 2008 resistance level and is oversold. Strong uptrend is OK.

The currency impact of Brexit is also interesting.

The A$ is rising against Europe.

Against the British Pound it seems we are well on the way to higher levels for the A$.

And against the Euro it looks very good indeed.

So the US looks very exciting, China is booming, UK and Germany are doing just fine and Asia is also booming. SE Asia is too and I have been there recently.

Japan – Whatever the reasons –the Nikkei looks good.