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 bdawes@mpsecurities.com.au +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
bdawes@mpsecurities.com.au
Dawes Points #72
22 December 2017
