Gold Sector having bottomed is NOW moving up strongly

by Barry Dawes

Key Points

  • Gold’s supply/demand picture suggesting major deficit developing
  • Strong physical demand for gold in China
  • Even stronger physical demand for gold from India
  • Technical evidence indicating powerful global move in gold equities
  • Gold stocks are extraordinary value
  • US$/A$ reasserting relationship with gold
  • Is there a whiff of inflation out there due to gross expansion of money supply?
  • Stock BUY recommendations: NCM, NST, OGC, SAR, SLR, MML, BDR,GOR,BLK

Gold has been in a broad uptrend since is its lows in 1999 at US$246/oz and the combination of strong physical demand from China and India, with the usual financial and monetary profligacy of the Western World’s banking system, suggests this 15 year bull market still has a very long way to go.

The 650% rise to US$1923/oz over 12 years and the subsequent 37% decline over two years to the June 2013 low of US$1198/oz is a reasonable correction to such an upmove.  However, the 65% decline in the US gold indices and the 80.0% decline in the ASX Gold index don’t really stack up as corrections that are reasonable.

The result though is an extraordinary opportunity to NOW buy highly valuable assets at a fraction of their current true worth and at an obscene pricing against their longer term values.   TALK TO ME NOW!

In 2009 I made a very public price forecast that we would see US$5,000/oz over the next few years and now consider that this will come to pass before 2017 as the next leg of the bull market takes hold.

So what are the key drivers to make these sorts of claims?

Yes, you say I am always optimistic.  Well yes.  I am bullish because of what the markets are telling me.  Gold rallied from the US$248/oz low in 1999 and in 2002 I forecast US$1500/oz would be achieved in the coming bull market.  The price target was exceeded.  Was that being bullish or optimistic?  The US, German and Indian markets are at strong all time highs as I have been highlighting over the past couple of years. Is that bullish or optimistic?  Well, who cares really?  As long as it is a correct forecast it doesn’t matter.  Have a look at the performance of most markets from cyclical lows (that are always accompanied by never ending pessimism) and you will be amazed at the percentage gains the subsequent rallies achieve.  Getting the direction right is 80% of the outcome.

Chinese steel production reaches new record levels as was forecast despite all the wails of it’s imminent collapse.  Was that Paradigm forecast of strong production growth optimistic or bullish?

When the Chinese steel mills finally sort out their inventory policies and the world recognises that record imports of iron ore into China and record exports by Australia against a backdrop of uneconomic Chinese domestic magnetite concentrate production result in a much stronger seaborne iron ore market into 2015, will that be bullish or optimistic?

The markets have been telling us very clearly that the claims of US Depression, banking collapse in Europe and China falling over were just wrong. Was that being bullish or optimistic?  Or was it really reflecting the `facts’ that the markets were telling us weren’t the same as the `facts’ that the Wall Street economists and their ilk were (and continue to do) forcing down our throats.

So being negative, optimistic, bullish or bearish is not so very important but what IS important is recognising what REALLY are the major issues as shown by the messages of the markets.

The daily evidence of far better than expected economic data from almost all countries puts paid to the bears and their stories of financial Armageddon.  And the bears have much to answer for.

But coming back to gold.

Well, what are the drivers for the renewal of the gold bull market.  Demand, Supply, Inflation, Wars, Bonds, US$?  All of the above?

I much prefer to think about supply and demand because the other issues are more guess work or just market sentiments that can wax and wane.

The Goldfields Minerals Services (`GFMS’) and the World Gold Council give some useful data on this supply and demand for gold and I have done some navel gazing and added my forecasts.  Forecasting is always difficult, especially forecasting the future as Samuel Clements (Mark Twain – one of the world’s true geniuses) would say.  Have a look at these numbers from GFMS with Paradigm forecasts.

These figures suggest a net change in demand of 1000-1200tpa to be drawn down from inventory is likely to occur over the next few years.

These are very large and possibly very important numbers for the future of gold prices.

But first let’s look at these numbers now and review what has happened over the past decade.

First, look at Mine Production.

From 2,504t in 2004 to 3,022t in 2013.  Long term compound growth rate is 2.1% pa.  Several big +5%pa growth years but many as declines or just modest gains.  Sth African gold production has collapsed as the goldfields on the Witswatersrand run out of easy ore and totally out of friendly high risk capital. Major players USA and Australia have also declined with Australia less so.  Peru is rising but it has been China that has surged to become global #1 at over 420tpa.

It is quite sobering to review the high level of global exploration expenditure for gold and the low gross discovery results to date. Mine production has only achieved 2.1%pa despite the 12 years of rising gold prices.  However, don’t be fooled by the gross numbers because focussed gold explorers are still doing well in Australia and also in other parts of the world such as Africa, SE Asia and Sth America.  Just watch for the key players mentioned below!  Some explorers are better positioned than others.

The net conclusion is that gold mine production growth is unlikely to be able to exceed 3%pa for the next five years from my assessment and primarily because the big players such as US, Russia and RSA are likely to decline and offset strong growth in Africa and Sth America.

Unit production costs have been rising due higher input costs, overall declines in mill head grades and increasing operating depth of mines.  Some established mines have suffered from these rising costs but most new mines have been engineered on much lower head grades so will be pushing unit mining costs higher.   The GFMS latest figures for all-in costs have been at over US$1600/oz. Cost pressures are definitely reducing and everyone in the gold mining industry is now extremely cost conscious.  Expect to see significant drops in some operations.

Nothing as volatile as gold will allow gold production to grow at a steady 3%pa.  Try up 10% or down 15%.  But let’s use some 3%pa numbers to guess what we think the gold industry might achieve.  3,082t in 2014 and 3,271t for 2017.

The next issue in Scrap Supply.

High prices bring out a lot of scrap and high prices into 2009-2011 brought about a 100% increase in supply to a peak of over 1,725t in 2011.

Gold is a strange beast given that almost all the estimated 170,000t mined in history is theoretically still available as supply yet as gold is shifted into strong hands and as weak sellers are probably exhausted it may be that scrap supply does not increase greatly from here.

So total physical new supply is plateauing around 4,400tpa with a modest annual increase expected.

Part of new `supply’ was reduction in hedging and eventual netting out of gold sold forward.  Mines had `borrowed’ and sold gold from bullion banks in their hedging and so as they delivered gold into these hedges they were `repaying’ bullion banks and not adding to new supply to the market.

Miners are likely to add to short term hedging positions but as these are likely to be `current’ items of less than 12 months it should not significantly add to annual figures.

Central Banks used be a part of the `supply-side’ equation but as they are now on the `demand’ side they don’t figure here anymore.

So total gold supply, whatever that means, is around 4400tpa and has been growing at about 4.2%pa over the past decade.

The demand side is now very interesting.

Jewellery demand (mostly high carat (20-24ct) investment chain) is driven mostly by Indian Diwali requirements from rural villages in weddings and dowry gifts. Western jewellery in 18ct rings, watches and the occasional pendant don’t add up to much compared to Indian demand.  India’s love of gold is underpinned by a traditional drive to improve family wealth and as the rising middle classes in India increase their affluence, so the demand for gold can only increase. Indians save about 30% of their incomes and about one third goes into gold with about 75% into jewellery.

Quotes from The World Gold Council’s 2010 survey of India include `Gold is an integral part of daily life where purchases of gold jewellery are considered as a form of liquid and tradable investment for the accumulation of wealth.  It is important to highlight that in analysing the gold market in India, traditional perceptions between jewellery and investment demand and demand drivers do not apply.’  And also that the allure of gold is its hedge against a depreciating currency and preservation of wealth.  Jewellery demand is really investment.

Primary gold demand in the domestic market in India is almost all in the form of 3.75oz `TT’ bars (10 tolas) and in chain for jewellery.

India in 2013 introduced an import tax on gold that eventually reached 10% to try to offset a balance of payments crisis and also required importers to re-export 20% of imports.  The new Modi Government, elected in May 2014, is likely to reduce the tax in stages and allow substantial pent up demand to flow through.  Substantial smuggling of gold to avoid the import tax appears to have been underway through China and Myanmar so the immediate impact may be muted but longer term demand following rising living standards in India is likely to remain firm.

The brilliant work from Koos Jensen ( ) in tracking down Indian and Chinese gold data is truly illuminating and this graph below shows that monthly demand into the Indian market in 2013 exceeded 110t/month.

In China where the economy is far more advanced, the demand for gold is also for jewellery but more is for bars.  The character of the Chinese market is fascinating in that government decrees require ALL gold brought into China or sold to the market must go through the Shanghai Gold Exchange.  In 2013 China produced 428t of gold and imported 1,540t to give a demand of about 2000t.  As at the end of May 2014 850 tonnes of gold had passed through the exchange into the Chinese domestic market.  Bars are usually 1kg and 100g bars that have been produced from reconfiguring 400oz London Bullion Market inventory via Switzerland, London and Hong Kong.  Interestingly, gold market participants are not reporting ANY Chinese refined bars in the export markets!

Koos Jensen’s numbers on Chinese imports and jewellery are higher than the GFMS data presented above but it is notable that there have been months when Chinese gold demand ( in RED)  has exceeded annualised global mine production (in YELLOW).

It is clear that most Indian and Chinese gold demand is primarily for investment so when we add it all up (jewellery, bars and coins) total investment demand it looks something like this:-

Jewellery demand is expected to grow by 6% in 2014 as the Indian tax is reduced and then removed and forecast to grow by 4%pa out to 2017.

The demand for gold bars for investment and for coins has been extraordinary over the past decade.  215t in 2004 to an estimated 1500t in 2014.  Very strong demand from China and India.

Coins have increased from 125t to over 400t and climbing.  Robust demand from all over the world should keep growing for years to come.

The EFT phenomenon from 2004 to 2012 saw a massive 2300t directed to these funds and then a substantial 880t drop in 2013.  The numbers appear to have stabilised at about 1800t and may be resuming an upward trajectory.  But EFT demand of 200tpa for gold is tiny compared to that from China and India.

In 2014 total investment demand of over 4800t should well exceed mine production of 3100t plus scrap of 1300 tonnes totalling 4400t. If EFTs and Central Bank demand are added then a significant deficit of over 500tpa will be developing from 2014 onwards.

This is in great contrast to the substantial `surplusses’ of the decade prior to 2013.

*(central banks and ETFs excluded prior to 2010 as were small or negative)

These numbers also clearly suggest that gold demand is ignoring `Fed policies’ and Wall Street arm waving about US-centric values and is just getting on with life. Who cares about Fed interest rate policies if the Monsoon harvest is going to be good this year!

So what does this mean?

Essentially the graphic says that gold is moving from Western inventory to Asia.  The tonnages involved are so large that you have to ask just where is all the gold coming from? It is unlikely that it is coming from retail scrap or from local US `investors’.  Oil prices are high and rising again so Middle Eastern players probably don’t have to sell their gold right now.  Indeed, you can ask, just who are the suppliers of gold now?

The gold market is also very suspicious of US activity in the gold markets through intervention by the US investment banks.  The outstanding contracts to COMEX gold inventories ratio recently exceeded 100:1 and it is clear that heavy selling has kept gold prices subdued.

The high market shares in the gold market held by China and India have led to concerns over the role of COMEX on price discovery so the establishment of active cash gold exchanges at Shanghai and Singapore may soon leave COMEX as a price follower and not a leader.  We all have seen the lack of connection between physical gold demand and the action in the future markets. Let us just say that it hasn’t made any sense.

Looking behind these numbers also strongly indicate the sale of gold from someone’s inventory but the question is whose inventory?

And can there be much left?

And where would the gold come from if there was no-one left to be selling?

Well, let’s ask the markets.

The long term uptend is still intact and the indicators are still oversold.  A rally is due now.

In A$, gold is not so clear but I consider the supply/demand pressure will soon clarify the matter.

Note that the A$ gold price today is A$1,400/oz.  About the same as in April 2011.

I can’t discuss the gold outlook without reviewing the US T Bond market.  Rising bond yields can indicate many things but the most important indication to me is the end of disinflationary times that have accompanied the 30 year bull market in bonds.  This bull market is ending in a drawn out saga since the bond prices peak in July 2012 and the rearguard action to hold prices up against the evidence.

Rising yields indicate a growing global economy, rising commodity prices and a recognition that far better returns can be made in equities than sitting in low interest rate bonds and face capital losses.

And the US$80 trillion global bond market is going to provide a lot of cash to drive up other markets, like gold, commodities, resources stocks and general stocks.

The 10 year T Bond just looks ready for a major surge in yields.  Don’t jump to a false conclusion that rising bond yields is bad for the stock market.  Think of it as a flow of funds out of bonds into stocks!

Inflationary pressures appear to be building in many areas (other than labour!) and the Middle East issues are exacerbating the passing of Peak Conventional Oil.  I expect higher oil prices to come through and new highs before 2016.

Now coming to gold stocks.

It is worth starting with the major US gold index, the Philadelphia Gold Index (XAU). Still very oversold but suggesting a bottoming out and a rally starting. And a very long way to go!

Even better is looking at the SPDR GOLD ETF GDX which parallels the XAU.  This is an ETF and it shows trading volume.

Note the very large volume in Dec Qtr 2013!  This is a classic high octane reversal pattern that supports a major rally from here.  And it is underway NOW!  Up 17.5% from the low.

Its junior cousin GDXJ is looking even better!  Note the big volume in 2014 and not 2013.  Early investors went into the large caps first and now into the smaller caps which are up over 20% from the low!

Short term moves are classic market-direction changing reversals in both ETFs.  Expect some back and filling in both GDX and GDXJ but NOW IS THE TIME TO BUY FOR A MAJOR RERATING.

What was that I heard about someone saying an equities explosion was underway?

First in gold stocks.  Then watch oil stocks get another move on up. Then Copper, Zinc and Lead.

Here in Australia the ASX Gold Index XGD also had a magnificent 12 year run that took it up 750% to the April 2011 and post GFC highs of 8499 to then retreat 80.0% to just 1703 in Dec 13.

As was noted above, the A$ gold price of about A$1,400/oz today is almost identical to the level when the XGD peaked in 2011.

And the XGD is now >70% lower.

The Index is a proxy for gold sector companies but many non-Index companies have done far worse than the 80.0% decline in the XGD since those highs in April 2011.

But overall, the Australian Gold Stock Market presents a fascinating grouping of companies that offer some exciting opportunities to join in on the ride.

Focussing initially on the ASX Gold Index which is currently made up of 25 stocks you can find that like any good index it has its performers, also rans, laggards and duds.

Of the 25, 5 are in good recovery uptrends, 15 are basing readying for an upmove and 5 are still looking at downtrends.

The diabolical performance of gold stocks around the world since April 2011 has never made much sense to me at all and hence the continuing bullishness based simply on value.

Extraordinary value exists in ASX gold stocks.

The table below looks at the current ASX Gold Index  XGD.

I have reviewed these 25 stocks in the Gold Index in a very simple and superficial analysis that that has more to do with price than value.  In my opinion the valuations are so low that the Index could be up 200% before we would need to sort out the best relative value.

Most stocks are BUYs because they are so cheap and the current run in gold prices makes them even cheaper.

So let’s look at them

Note that many stocks have their assets overseas and for most country risk is in the eye of the beholder. With MRRT, Carbon Taxes and restrictive workplace practices many consider Australia a country risk but the rising Middle Classes around the world are making most jurisdictions more secure so country risk is declining everywhere.  Obviously some places in the Middle East and the former Soviet Union are still very risky but most of Africa, Sth America and Asia seem reasonable risks today.

A = BUY stocks in uptrend B = BUY stocks needing a pull back before entry   C = Stocks that need time

No stock in the XGD is considered a fundamental SELL at present.

The strong moves of some stocks against the XGD Index’s 9% since 30 June 2013 are very encouraging and shows the market does appreciate good operating performances, particularly if it is corporate buyers paying a fair value rather than the low participation rate markets just looking at price not value.  Some stocks such as SAR, are up 2-3x from their lows and are well outperforming the Index.  It is indeed a matter of a rerating of the gold stock market.  Fears of a major fall in the US$ gold price are just part of the drivel from Wall Street hustlers trying to cover their large short positions.

From these stocks in the XGD and a few more I have put together a portfolio with biggest weightings to large stocks and a collection of mid cap growth opportunities and a selection of more speculative plays.  The stocks highlighted in YELLOW are my SUPER STOCKS that I expect to do very well indeed.



Price (A$)



Large caps



  Australasia Big cap market leader


  WA Yilgarn Major rerating


  Philippines Growing production
Mid caps        


  WA Yilgarn Low cost growing output


  WA Yilgarn Rationalised operations


  Philippines Low cost growing output


  Brazil Very low cost producer


  Australasia Overcoming issues
Small caps


  WA Gascoyne Developer


  NT Producer/Explorer


  Canada Developer


  WA Yilgarn Producer


  WA Yilgarn Explorer


  WA Yilgarn Developer


  NT Explorer



*Super stocks

Let’s monitor this portfolio over the next six months or so.  I am not a trader so the portfolio won’t change.  WYSIWYG

The implications of a strong gold price and strong gold stock market come back to the A$.  This graphic tells me a lot.

And this one even more.

A$ long term from 1913.

The short term is looking very good.

Don’t be worried about a high and rising A$.  You will just become wealthier.

For exporters, Australia’s structure of high labour and other costs is simply unsustainable.    Current work practices just have to collapse and become totally flexible.  The rising A$ will ensure big changes are going to have to be made.

And finally to those who don’t think that an equities explosion is underway, try these two Paradigm SUPER STOCKS that I have been referring to over the past 9 months or so.


So much more to come!

Barry Dawes

Follow me on Twitter @ DawesPoints


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