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$gold is probably meaningless overall but it does seem to have some meaning to the marketplace because it has provided support and resistance over the past 16 years or so.
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The market happily played 4, 5 and 6 times the A$ 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
