- Gold price now in uptrend
- Gold stocks jump after rallying from Nov 2104 lows
- Downtrend breaks for several resources equities indices
- Gold price encouraging broader short cover rally?
- Price bottoms for oil and copper?
- New paradigm applying to resources investment
- Do have enough(any?) resources stocks?
- Call me to discuss +61 2 9222 9111 bdawes@psec.com.au
As noted in the last Dawes Points further rises in gold have given strong support for gold mining shares and these are now acting to reassert reasonable valuations again after years of underperformance, especially against gold.
Consider that the market place is extremely underweight gold and gold shares so the run may be longer than expected and the eventual pull back may come much later.
Gains to date have been over 100% for some of our major gold stocks and the smaller companies have great leverage and will eventually join the party.
And as was said, this rise is gold is extremely important and when put in the perspective of the BIG PICTURE so much is now becoming clearer.
A couple of months ago I wrote a piece titled ,
What if …a rising gold price forces a short cover rally?
Well I think it is coming to pass.
The gold price is rising in almost every currency.
Equity markets are rising.
You can get yourself tied in knots over the actions of the Fed, the ECB, The Japanese Central Bank and the PBOC or even the Swiss National Bank. Do you really understand what is going on? From the 10,000 views from 5,000 talking heads and economists I would say most of them don’t either.
So let’s just look at markets and tonnes. Prices for gold, oil and copper. Iron ore, tin and zinc. The Shanghai market, Mumbai, Hong Kong and New York. Tonnes of production, consumption and inventory.
What I see is truly fascinating. I am bullish on gold and economic activity. I am not a doom and gloomer who seems gold as the only lifeboat. Not a bull of the US$ for the infinite margin call that might be coming on all the debt funds utilised outside of the US, especially the Emerging Markets (whoever they might be). Not a bull of vastly over valued sovereign debt. Not a Greater- Depression-Underway fan.
Just a follower of tonnes and observer of markets.
I have been saying that something is not adding up for gold stocks and whatever I said there applies multifold for all other resources stocks.
This may be a very important Dawes Points.
My view of the world has been for some time a matter of the flow of funds. The movement of capital from one asset class to another.
The vast amounts of cash and the extraordinary commitment to government bonds has to flow from these vastly over valued sectors to those vastly undervalued. All resources are grossly undervalued.
Last week the focus here was the very attractive PERs and dividend yields applying to the Australian Gold Sector.
The numbers were 4.0x for FY17 and a yield of 10.0% for the Paradigm universe of gold stocks.
Under-owned, despised, hated, forgotten but such extraordinary value! And dividends coming along.
My clients have a portfolio of the best of these stocks. What do you have?
As most of you know, I have been watching the resources sector for over 40 years and have experienced many cycles but just as importantly have researched many more as far into history as can be accessed. I consider this allows me to have a different perspective than many others and has given me the experience to have remained long term bullish during this long period of falling resources shares and commodity prices.
My 2014 non-traded 30 stock portfolio established in late 2013 was up 24% in 2014 compared to -20.7% for XMM, -19.0% for XJR, -29.2% for XSR, and +7.9% for XGD.
I will explain my 2015 portfolio a little later this month.
I still expect the next move up to be very strong and last for a very long time.
Almost every cycle I have experienced has seen strong investment and consumer demand that pushes hard against capacity and results in higher prices for commodities and manufactured goods. Labour prices follow higher as do interest rates and debt.
High interest rates reduce demand, prices fall and newly committed capacity comes on line only to see operating and corporate failure. Equity markets fall and many bond prices rise. All commodities, including gold, fall in price, inventories rise and unemployment surges. Bad news, misery and Hard Times.
Then it all starts again.
But this time it is very different.
This time the world has a growing China with 1400 million people. IMF says its Purchasing Power Parity GDP figure is now US$17,600billion pa and growing at 7+%pa compared to US$17,100bn and 4%pa for the USA. This time the world has 1300 million people in India and growing at 8%pa. Add 700m people for ASEAN, 1,000million for Africa and 700m for Sth America.
Resources materials consumption is at record levels and growing. I have previously highlighted the strong demand for iron ore into China and the just-published 2014 import data showed an increase of 13.8% to 932mt. So much for slowing or falling demand from China. High growth rates are always unsustainable but slowing growth is not declining demand. It is worth reviewing all of this data to show what is happening on the demand side.
Spend the minutes to see the demand/consumption levels. See the growth rates. All these consumption figures are at RECORDS levels.
To see commodity price fall 50-80% and the resources shares fall even more doesn't make sense. In previous cycles, as noted above, demand fell and commodity prices collapsed. This time commodities collapsed and consumption reached record levels. Its true.
Recall that the commentary has shifted from incessant calls for demand shortfalls to tirades about oversupply. What is going to be the next mantra for Wall Street’s self absorbed IBs? The managements of resources companies have been pilloried by everyone. The operators working at the market edge have been replaced by the bureaucrats to help `steady the helm’. The entrepreneurs have packed up their tents and shut down their businesses to protect their core assets.
The financiers have been long gone and the funds themselves have been commandeered by even more colourless bureaucrats who would rather have safety at <2% on 10 year sovereign debt than back any cohort of risk takers and builders.
So come and look at this data.
Growth everywhere (except for Chinese crude steel production).
Some excellent work from Glencore is contained here.
See the Investors Day Presentations from 10 Dec 2014. Over 150 pages of graphs data and strategy. Enjoy. The link is here.
http://www.glencore.com/media/speeches-and-presentations/p/2014-investor-day
The oversupply issue seems to be ready to self-correct itself and for most resources commodities the swing from surplus to deficit is either already with us or due in the next 12-18 months.
Can you see what is happening?
Consumption/transport of major metals
| |
2013 |
2014 |
2015 |
2016 |
2013A |
2014E |
2015F |
2016F |
Swing to deficit |
| Metals consumpn (mt) |
|
|
|
|
% chg |
%chg |
%chg |
%chg |
|
| Copper |
21.3
|
22.4
|
22.6
|
23.3
|
5.8
|
5.2
|
0.9
|
3.1
|
2015
|
| China |
9.8
|
11.0
|
11.2
|
11.6
|
8.9
|
12.6
|
2.0
|
3.6
|
|
| Aluminium |
50.2
|
50.9
|
51.1
|
52.0
|
5.9
|
1.4
|
0.4
|
1.8
|
2013
|
| Zinc |
13.1
|
13.6
|
14.0
|
14.6
|
3.8
|
3.8
|
2.9
|
4.3
|
2015
|
| Lead |
11.1
|
11.5
|
11.7
|
12.1
|
6.1
|
3.6
|
1.7
|
3.4
|
2014
|
| Nickel |
1.8
|
1.9
|
2.0
|
2.1
|
6.8
|
5.6
|
5.3
|
4.0
|
2015
|
| Tin |
0.3
|
0.4
|
0.4
|
0.4
|
2.7
|
1.7
|
2.8
|
3.0
|
2010
|
| |
|
|
|
|
|
|
|
|
|
| Global Steel demand |
1531
|
1562
|
1594
|
1640
|
2.0
|
2.0
|
2.0
|
2.9
|
|
| China crude steel prod |
822
|
807
|
840
|
850
|
12.4
|
-1.8
|
4.1
|
1.2
|
|
| Seaborne trade |
|
|
|
|
|
|
|
|
|
| Iron Ore |
1 225
|
1 360
|
1 435
|
1480
|
7.0
|
11.0
|
5.5
|
3.1
|
2016
|
| China imports |
820
|
933
|
1000
|
1050
|
10.0
|
13.8
|
7.2
|
5.0
|
|
| Thermal Coal |
931
|
946
|
966
|
1019
|
3.4
|
1.6
|
2.1
|
5.5
|
2015
|
| Coking Coal |
314
|
320
|
328
|
328
|
8.4
|
1.8
|
2.6
|
0.0
|
2014
|
And note the lack of increase in LME stocks that is usually associated with falling demand and recessions. Note too that LME inventories are only a few per cent of annualised consumption and 2% is less than one week.
|
000 tonnes |
1-Jan-13
|
1-Jul-13
|
1-Jan-14
|
1-Jul-14
|
Current |
From Jan 13 |
From Jan 14 |
% Ann cons |
Ann Cons mt |
| Copper |
320
|
665
|
315
|
155
|
248
|
-23%
|
-21%
|
1.1%
|
22.6
|
| Zinc |
1220
|
1061
|
854
|
668
|
630
|
-48%
|
-26%
|
4.5%
|
14.0
|
| Lead |
320
|
198
|
214
|
194
|
215
|
-33%
|
0%
|
1.8%
|
11.7
|
| Tin |
12
|
14
|
10
|
11
|
12
|
-2%
|
22%
|
3.3%
|
0.4
|
| Nickel |
139
|
187
|
261
|
305
|
426
|
206%
|
63%
|
21.3%
|
2.0
|
| Aluminium |
5210
|
5435
|
5458
|
5046
|
4049
|
-22%
|
-26%
|
7.9%
|
51.1
|
Nickel is an exception here. Iron-rich lateritic nickel ore from SE Asia has been used by stainless steel producers as a ferronickel product that has displaced pure nickel metal units. How strange that nickel metal stocks are rising at a time of strong demand for total nickel metal units. A major deficit is predicted from 2016. And tin stocks are so low that even 1000 tonnes makes a big difference.
There has been no high interest rate policy and restrictive credit action for most of the 5 billion people mentioned here. These has been no collapse in demand for commodities or manufactured goods. No dramatic reduction in global employment.
Almost every factor is unlike any previous cycle.
And the internet is bringing us together into a global economy that offers extraordinary opportunities to everyone. Almost unthinkable levels of new access to buyers for your product in almost every country in the world. And so many new competitors against you and your peers.
Commodity prices have been falling and the call is for deflation, depression and misery. Is this the way it is to be?
Glencore is the absolute antithesis of tonnes-up-the-shaft mining companies. It is a marketing company. Mining companies need to be some version of Gerald Whittles’ Money Mining companies so marketing should be the critical issue to sell product and to optimise operational cashflows.
Have a look at this graphic from Glencore.
Interesting to see the strategy differences
Note the huge investment by BHP, RIO and Vale into iron ore and bulk commodities. Note Glencore’s commitment to industrial metals like copper, zinc and nickel.
Look at this Glencore graphic of the demand growth rates of metals against bulk commodities. 2014 was a very good year for demand but not prices.
Go back and look at the growth rates of copper, nickel zinc and aluminium. Note, in contrast, the turn to deficits in 2015-16 and the impact beyond.
And let’s use Glencore’s stock level analysis for copper (note LME inventories have risen by a miniscule 50kt since this was presented). Glencore also correctly points out that much of the supposed new copper capacity coming on line has been deferred due to availability of capital, corporate over-extension, environmental and political interference and just bad luck. Glencore things the Copper Deficit might just come earlier than expected.
Copper price action is indeed fascinating. Channel analysis picks up important support and the 2002 uptrend is helping out. Oversold and ready for strong bounce after falling for three years. And note that copper made a new all-time high in 2011. Strong underlying long term fundamentals applied then and still apply now.
Here you should be recognising that the old paradigms are no longer working so you need to be thinking what else might be happening.
So here is my paradigm. My way of thinking.
You will recall I have referred to my presentation of the MPS Disbelief, Pessimism, Optimism, Opportunity and Euphoria graphic in November 2008 at Mines and Money in London.
I have provided updates for this occasionally.
Why have I done this? I was amazed at the sentiment that applied to the Disbelief Leg 1 in this bull market. Believe it or not, from my perspective as a corporate financier, very few players were on board and the lack of market breadth was quite extraordinary.
Remember when oil was surging to its high of US$147 in 2008 after the Lehman Bros and the sub-prime debacle? The 20:1 leveraged global hedge funds pushed the major oil stocks to very high levels but the local institutions and public yawned and stayed out of the market and ignored the small cap oil and gas companies. Ditto gold stocks and almost all resources stocks. The big stocks were making all-time highs while so many of the small stocks struggled in the cellars. No market breadth and no participation.
So a bull market that not many people came to.
The GFC brought about a major fall in 2008 that saw +60% falls in the XMM, XJR, XSR and XGD into Dec Qtr 2008. These sectors bottomed here, along with general commodities, Shanghai and Hong Kong, more than four months ahead of the All Ords, S&P500, Dow, FTSE, DAX etc that made their lows in March 2009.
This is important.
2008 was clearly the end of some economic cycle in the US, with housing the driver. Usual end of cycle action with commodities peaking then falling, debt levels rising, some interest rate rises, a brief and short-lived spurt of price inflation, corporate failure. This followed into Europe, Japan and elsewhere.
China with its centrally planned economy was able to stand and, with fiscal expansion financed by a major trade surplus, accelerated infrastructure expenditure activity from 2009 onwards. Demand for iron ore, steel and copper surged to extraordinary record levels.
This provided Australia’s Resources Boom with over A$400bn of capital spending mostly on iron ore capacity, new coal mines and ports and the new LNG gas gathering and export facilities.
The performances of the major commodities showed US$ price peaks in 2008 or earlier. Most commodities rallied from the 2008 lows to good prices that peaked in 2011. Interestingly, four key commodities had the underlying strength to rally to new and all-time highs – Gold, Copper (as noted above) and Tin and Silver touched its 1980 high of US$50/oz.
I consider these will be the leaders of the next upleg that is now already underway.
Nota Bene.
So coming back to the Wave Two Pessimism. I thought Pessimism had fully taken hold in 2013 and 2014 but the latest surge in the US$ and the US T-Bond market showed that Pessimism was still alive, well and thriving in 2015.
Have look at these. Who are the lemmings chasing yield on 10 year bonds?:
US 1.65%, ( US$14 trn net debt (81% GDP) Budget deficit of 4% GDP)
UK 1.33% (GBP1.4tn net debt (84% GDP) Budget deficit 4% GDP)
Germany 0.30% ( Euro 1.5tn net debt (54% GDP) Budget surplus 0.5% GDP
Australia 2.34% (A$254bn (16% GDP) Budget deficit 3% GDP)
Source: IMF data
These markets are clearly in the final phases of a collapse in yields (and a surge in price). The timing for the end is uncertain but it is likely to be very soon.
Samuel Clements (Mark Twain) was quite correct when he asked about return of money not return on money.
Would you prefer this paper garbage managed by some of today’s impressive world leaders or the `barbarous relic’ of gold? You tell me.
And Australian bank deposits. A$1,679bn as of 31 Dec 2014. Term deposits have flattened at about A$530bn but Savings Banks have increased by over A$70bn in the past year. Lots of Pessimism here.
Source: RBA
What can we make of this and what do we do next.
So let’s come back to the Australia Resources Sector.
These are the four key indices.
XMM Metals and Mining
XJR ASX 300 Resources
XSR ASX Small Resources
And
XGD ASX Gold Index
As noted, XGD, the Gold Index, made a new high in 2011 but none of the others did.
All these have done the Disbelief Rally that peaked in early 2008, the decline into late 2008 then the bounce rally into April 2011 and the unrelenting decline into the lows which I consider were in November 2014.
They all bottomed on 16 Dec 2014 except for the Gold Index which bottomed more than a month earlier on 6 November.
Now if all the above fundamental supply/demand data are correct (Glencore definitely thinks so) then there should at least be a good bounce in 2015 for all things resources.
Now let’s take a further step.
What are the global equity markets telling us now?
Starting at the heart in the US. S&P 500 - maybe overbought and concerns are developing over the strength of US$ on earnings but the long term trend seems OK. Renewed calls for a crash `tomorrow’ are still coming through. Mkt cap US$17tn PER 17.6x
The Russell 2000 for `small caps’ had a Gap Year in 2014 for a bit of rest but it too does not look over extended. Mkt cap US$2.0tn. PER is 50.9x.
And the broad Wilshire 5000 looks very stable.
And look at the rest. Germany is OK. Recent new highs. Mkt Cap US$1.1tn. PER 17.6x
But now look at where the real action is. Asia. China, India, Japan (sort of), Rep of Korea and ASEAN. And this flows into Middle East and Africa.
China and Japan have started major new uptrends after long periods of decline.
Singapore and Taiwan are ready to move up. Not quite all-time highs yet but certainly trying.
And now we have India under the new Modi administration.
1,280m people and GDP of US$900bn and growing at 6-8%.
India is the fourth largest producer of crude steel and whilst historically India has been an exporter of iron ore, its domestic policies have created a real uncertainty. Exports were banned and India became an importer. Now, exports are OK but net imports are likely to continue and to meet the proposed +8% growth in in domestic crude steel that will take India to over 200mtpa by 2015. A lot of iron ore and a lot more coking coal will be required. Have we heard all this before? Yes, but this time it does appear to be happening and the pattern of Indian crude steel has traditionally been skewed to EAF (Electric Arc Furnaces) treating scrap and operating DRI (Direct Reduction Iron) plants. It will be interesting to see if a new collection of conventional blast furnaces will be built to take imported hematite and I am sure India will take a fair proportion of any Chinese export steel in the short term.
India is growing, its stock market surging and Indians are becoming wealthier. And India loves gold and will import a lot more, absorbing anything global gold mines can produce.
It has to be expected that demand for zinc, copper aluminium and nickel will also benefit.
Coal imports, both thermal and coking, into India will only increase despite the proposed drive into solar and renewables. Domestic policies on coal tenements are as complex as those for iron ore so don’t expect much of a surge in domestic production.
China, India and all the other emerging economies will be taking more cheap oil and bring the market back in to balance as the US oil patch shrinks a little for the time being. Shale oil recovery in North America is very like mining now with the capital costs actually being operating costs. And the financing of this drilling activity has taken such a major hit that will take the oil drilling industry a few years to recover from.
But the oil price does look to me to have very limited downside now and each severe sell off seems to correct within a few months. This time should be no different.
Conclusion
There can be only one conclusion.
Equity markets are telling us that sufficient liquidity exists for the world economy to survive. The dive to unsustainable bond yields is coming to an end and will bring about the final stages to a 33 year bull market in paper financial assets.
The supply/demand picture for commodities is still tight and as the flow of funds runs from cash and paper into equities and commodities the resources stocks will be the greatest beneficiaries.
Are you set for the Wave Three (Optimism) Upleg?
Gold and gold stocks are leading.
BHP at 4.5% yield is coming next.
Then all the second and third liners. Copper, oil, uranium, zinc, tin, mineral sands and of course iron ore.
Do you hold enough resources stocks?
2 February 2015.
Barry Dawes
If not contact me to see how you can benefit.
The comparison of the Shanghai index against the FT 25 Index shows the top 25 hardly overextended at all. The pull back is classic. Off to new highs. These blue chips are doing just fine.
China Globalx Financials Index
This says bull market only just starting and still on <10xPER.
China Globalx Industrials Index
Only just starting here too.
China certainly is an immature market with high volatility but look at the Hong Kong Hang Seng.
Hong Kong Hang Seng Index
And for a bit of history and volatility just see what happened when Shanghai opened in 1991.
Clearly an immature market.
Up 1300% then down 73% before running 300% to new highs. All within 24 months.
And how are the other major markets round the region coping with China’s supposed meltdown?
Japan? Yawn. India? Cruising.
Japan’s Nikkei
India’s National Exchange Nifty Index
And China’s steel industry still hasn’t collapsed.
Steel consumption in China has been lower but exports to ASEAN and now India are rising and should exceed 100mt in 2015.
And China port iron ore inventories have been down more than 25% from the highs.
An apology here on incorrect comments about the low volumes in the iron ore futures markets. The data on the Dalian Commodity Exchange gives stupendous volumes of over 1,500 million tonnes per month which is about the same volume as annual seaborne trade. It seems everyone trades in it.
So the outlook on these simple indicators is not one of collapse but probably a bottoming and resumption of world growth.
Don’t forget that Dawes Points has highlighted the current or looming deficits in most LME metals and the continuing declines in their LME inventories.
Australian resources stocks are so cheap and the latest production data pre the formal June Qtr Reports show some cash laden gold companies on very low single digit PERs.
More on this next time but for the moment let’s just focus on China.
So coming back to Dongfang Modern Agricultural with its 200,000 tpa of citrus and camellia fruit produce generating A$175m revenue and A$75m forecast earnings and looking for another twenty years EPS growth, what is there not to like?
The IPO roadshow starts this week and include presentations through Wholesale Investors (www.wholesaleinvestors.com.au) on Wednesday 15 July in Sydney ( I am presenting) and Melbourne on Friday 24 July in Melbourne. You can register online to attend.
Talk to me +61 2 9222 9111 bdawes@psec.com.au
Or Les Szancer 0418 260 937 or +61 2 9191 0427 lszancer@psec.com.au
For Dongfang the publically available numbers in RMB and A$ look like this (and special note should be made of EBITDA Return on Investment (RoI) and the 35% RoI after the IPO):
Dongfang Modern will be available through ASXBookbuild so if you do not have an account with Paradigm you can apply for shares through your broker.
14 July 2015
Edition #38 
China Industrials Index ETF
China Financials ETF
These are not over extended markets in my view.
In India the picture is much the same. Market has surged but is not over extended given the correction of the past few months. The two main indices are the BSE 30 and the NSE 50.
The Bombay Stock Exchange Sensex Index
And the Nifty Fifty National Stock Exchange Index
The India Fund is seeking to raise a minimum of A$35m and a maximum of A$100m at A$1.00 per share and will have a 1:1 loyalty option (only available to shares purchased in the IPO and held to the entitlement date of 6 months after listing) with strike price of A$1.00 and expiry date of 18 months after vesting.
Source: Ipsos Report - Dongfang Modern Agriculture Holding Group Prospectus
China and India populations are also buying more gold and silver.
So who now owns the gold and who will be making the rules?
The demographics of the West are strongly influenced by the Baby Boomers who grew up in a rapidly changing world that was actually a slipstream sucking them in behind a World War II-depleted generation of cold-reality shaped stalwarts and but then the BBs also graduated into a generation of the Lyndon Johnson Great Society of publicly funded under-achievers.
The initial gains were spectacular but the aging hippies and their uninspiring Generation X progeny gave us all massive government spending, Budget Deficits and the Welfare State. And generations of reactionary bureaucrats.
For us unreconstructed Baby Boomers, the 1960s and 1970s were a time of revolution in thinking after the conservatism from the Great Depression of the 1930s and the upheaval of World War II in Europe and in the Pacific. The Depression said money was hard to come by and your savings were hard to hold on to and then WWII said that your life and personal safety, as well as savings, were hard to hold on to.
Lord Keynes in the1930s with his Deficit Spending backed up by some US attention seekers announced to the world that `Government’ knew better and it could invest OPM (Other People’s Money – yours, as the Taxpayer) better than the people who earned it, i.e., you and corporations you might have invested in.
The Revolutionaries of the 1960s and 70s are now the Reactionaries. And their children too. Governments and quangos and NGOs all wanting to tell you what to do and how to do it. Using your tax paid dollars of course. Groupthink and consensus overruling facts and natural evidence.
And calls for an inquiry on iron ore. For heavens’ sake. Dawes Points set out precisely in early May what was happening within the iron ore market. The expected short cover rally is now underway. How far will it run? The bureaucrats are wanting to be heard now but the horse has bolted. Yet another thought bubble.
But perhaps the people overall have their own special way of responding to the uncertainty . Building up cash deposits. It is truly fascinating how people everywhere have taken to building up savings. Inventory of Money. Conserved labour. Private Savings. (And in contrast, Public Profligacy). This Inventory of Money has come up often in these Dawes Points. As does flow of funds. These funds will need to flow!
Now with that flows of funds. Recall that we have gargantuan annual expenditures in USA (US$3tn), Europe (Euro 2tn) and here in Australia (~A$430bn(US$320bn) Federal Budget Expenditures) with deficits that add annually to the debt burden. Funded by bond sales. Government bonds now have higher yields than corporates!
Dawes Points has been talking about the bond markets for some time now but I hope you have noted what has happened in the major bond markets over the past couple of months? A volatile top and then carnage! The bank shares are following.
Just think about bond prices. The lower the coupon the higher the volatility. Doubling in yield. Halving in price? Well, not quite but horrible anyway. And much more pain to come.
Germany 10 years are now 0.88% after falling to below 0.05%! And the UK has blasted through 2.0% after seeing 1%.
This next one has to be one of the great technical graphics in my investing life! US 10 Year Treasury Notes by price. The peak in 2012. The break of the break of the uptrend in 2013. The rally in 2015 back to the trend break line for the `goodbye kiss’ then a sell off! A break through about 122 (but probably 125!) might just put the fear of God into the `safe haven’ believers. The falls this past month have been truly horrendous. No wonder banks stocks are weak. Keep watching this key indicator because it is not yet “oversold”!
And China crude steel production is still confounding the doomsters. 838mtpa in April 2015. Up just marginally on 2014 and the second highest rate ever! Iron ore inventory movements will be so important to watch and will strongly influence iron ore prices. Expect a rally to US$80 by year end.
There is just so much more to come here. I hope you all have an understanding of the significance of the Chinese Silk Road Infrastructure programme and the Asian Infrastructure Investment Bank. No slowdown in China and acceleration in ASEAN and India.
You have seen how the probable iron ore short squeeze as suggested in the last Dawes Points is materialising. It might be one of the largest volume global markets but it is still a very thin market for traders.
The inventory shift highlighted there has seen China port inventories down over 25mt (~20%) to <85mt.
So the basic fundamental supply/demand data is overwhelmingly positive and a commentariat environment has been created that is overwhelmingly negative.
I am seeing dozens of small resources stocks attracting good volume and recovering stock prices. The opportunities are many. Companies with decent projects trading at a few % of their NPVs and are just awaiting funding. Producing companies trading a low single digit PERs. Explorers with some outstanding results. Technical geological and geophysical evidence is building up for the most extraordinary decade of new major discoveries in Australia in oil and gas, copper, lead-zinc-silver and gold.
The indefatigable Kerry Stevenson and her recent Symposium at Broken Hill has just delivered a focussed insight into the massive potential for new discoveries in central Australia. Knowledge and technology that begets new knowledge and then great wealth. The mining and exploration sectors provide some of Australia’s most dynamic Intellectual Property.
Hats off to the staff from the universities and Geological Surveys of NSW, Sth Australia and the Northern Territory. The base that is being laid out before us is truly exhilarating. Australian exploration will be having a vintage decade.
I hope I have the time to cover this in more detail in the next few months because the implications are vast.
So here is your chance to do very well on most resources companies.
I know dozens of these companies with outstanding operations and projects and there are scores more that I don’t. Many are already up 100s of % in 2015.
Most are too small to even fit within the ASX 300 sub indices but I am seeing improving volumes, increasing market breadth and the rising prices that go with them.
Participation by a broader section of the market place is still not with us, reflecting the fear and pessimism but this has been a very long period of bear market so it will take time to bring this back to normal. That means this bull market will last a very long time too!
Call me if you want to make some real money in the year ahead!
But now however, the evidence can be best seen in the actual performance of ASX the Small Resources and Gold Sector Indices.
Market share of ASX turnover is picking up and the four year-long downtrend declines have been broken. The momentum is now with the Resources Sector.
Have a close look at these graphics and I haven’t done them because they look colourful.
Each one suggests major changes are coming in the markets.
There is a downtrend trend break for the Metals and Mining.
Small Resources had its bottom in June 2013 which is my `low’ for this cycle and many stocks outside the XSR have done very well indeed.
The XGD is showing leadership after bottoming in November 2014.
Gold sector turnover is rising as breadth and participation increases. Appreciate that the ASX Gold index is still down 70 % from its high and is now turning up.
Certainly the weakness of the A$ in late 2014 helped kick the market and some people might have thought it was just an A$ gold adjustment that would soon peter out. Nice jump. Take profits. Now what?
Well it has held its ground and then moved marginally higher.
In my view, the XGD is readying itself for another major move up. Perhaps mirroring the bond markets that seem to be expecting an even bigger thump to come there. Timing suggests mid to late June so you may not have much more time to dilly dally.
This looks very interesting and a break above 2800 could see a sharp rush to 4400 (up 64% from here). Will we get it?
Looking at this index more closely there is much to like.
It is showing intra sector rotation as some stocks have weakened, some have moved sideways and some others have surged.
Dawes Points has its favourites. NST, MLX, TBR, BLK, SBM, OGC, NCM, EVN, BDR, MML, GOR, DRM and CGN.
XGD Gold stocks against A$ gold had fallen 80% from April 2011 to the Nov 2014 low! A$ gold at the low was the same as at peak in April 2011!!
Other sectors are moving up and the takeover of Sirius by Independence Group along with the consolidation in the gold sector should be giving everyone confidence.
And I do like the oil and gas sector. Oil is holding up well with strong demand from Asia and the US output is stabilising or falling.
The thesis in Dawes Points hasn’t changed these past two years even though some things have gone terribly wrong in the A$, the iron ore price, the oil price and…… oh yes, resources stocks themselves.
But the rest of the scenario of:-
Of course higher steel production means more iron ore needed so steel mill ore stocks may actually be quite low. Finished product stocks are also well down over the past 18 months.
And there is nothing here that suggests a decline in imports has happened or is likely.
This is a take on China Port Inventories as a % of imports. 89mt of port stocks is only 32 days at 1,000mtpa imports.
See any oversupply here?
Certainly the world has new iron ore capacity coming on stream over the next few years and you might ask yourself why would that be? Could it be that demand will be increasing and finally Chinese domestic production is sharply declining?
Or is it that the mining companies and their bankers are stupid and just want to blow shareholders’ funds?
We can accept that Chinese steel consumption growth rate declined in 2014 to just over 1% and the increase was the lowest for many years and that China maintained steel output by exporting about 90mt of steel products. But there are many aspects to this equation.
Firstly, iron ore imports at record levels displaced Chinese domestic magnetite production then greater Asia shared China’s steel output. India has complained about dumping of steel but with its own archaic capacity of only 85mtpa and steel demand growing at almost 8%pa then it must be welcoming the opportunity of gaining access to new steel. Per capita steel consumption there is only one tenth that of China. India’s own forecasts are for 140mtpa by 2017 with imported iron ore to figure prominently.
Secondly, East Asia (including China) and India consume over 1,000mtpa of which ASEAN consumes about 80mtpa whilst producing only about 20mtpa.
India wants 150mtpa domestic steel capacity quickly but I am sure it would take lots of Chinese steel now. Chinese steel anyone? Yes please!
Overall ASEAN with its 700m people has a steel use per capita of about one fifth of China. It will take a lot of Chinese steel in the immediate term and then build its own furnaces. More iron ore needed.
The inventory adjustment that has taken place in iron ore into 2015 will probably have added 40-50mt to supply. We have already seen 20mt rundown from China ports. Probably 10mt from the steel mills. Fortescue and other Australian producers have had mine cuts to give another 10mt port reduction. Now that has gone will it be rebuilt and increase demand? And overall global demand should soon pick up as well. But probably not yet for high cost producers.
These inventory shifts could cause a serious short cover rally in iron ore price. Watch this space.
Keep in mind iron ore is an illiquid market and the shorts in the futures market may have some heart burn trying to pick up a few cargoes if the market goes buyer no seller.
All three Australian iron ore producers BHP, RIO and FMG are strong BUYs and recent operational rationalisations by each has only improved their prospects.
And the individual metals. Don’t manganese alloys look interesting! Strongest of all the metals!
Looking at LME inventories over the same period against consumption it is clear that the denominator has risen 30-40% for the LME metals.
Nickel metal inventories have surged wildly as stainless steel producers have sought far cheaper nickel pig iron made from nickel iron laterites. Perversely, reductions in availability of such ores from Indonesia will leave nickel in a deficit very soon. Watch the price of this metal.
Most other inventories have been heading south rapidly over the past two years. Some inventory levels are now very low. Against 40% more consumption they are VERY low.
If we leave out the distorting effects of aluminium and nickel, a composite can be established. This says the average LME availability of these four metals copper, lead, zinc and tin is just over six days (just 1.78%!!!).
This certainly doesn’t say a collapse in demand.
Is there anything in the above that suggests Dawes Points is incorrect in being bullish?
Now just look at copper.
In US$ testing downtrend but in Euros it is already away and will move higher.
Copper in A$ is looking ready for a massive upmove. After a compound annual growth rate (CAGR) from 2000 of 3.21% and 4.58% pa from 2010 in consumption, copper is moving ahead of supply and has only 1.5% of annual consumption as LME inventory.
I have some favourite stocks here but Cudeco (CDU.ASX) is now finally so close to production. Inventories (>200kt) of high grade ore and native copper have been built up ( 
Lead has had a good move up in the past two months and a 14 year CAGR of 3.76% and four years of 2.80% but there is less than a week’s supply on LME. Should be much higher in 12 months.
Nickel has a roller coaster ride with a long term growth of 3.70%pa since 2000 but 6.16%pa since 2010. The appearance of nickel rich iron laterites being turned into nickel pig iron has left demand for metallic nickel high and dry and hence the big build up of LME inventory. The export bans by Indonesia on unprocessed ores have now changed the market balance so we should see a draw down on LME inventories, and if this takes place, nickel prices could surge.
Tin has the lowest long term growth of all the LME metals but the real story here is the requirement for new supply. Nothing much coming, no inventory (down 25% in past 3 months!) and the interesting characteristic of being the only LME metal other than copper that made a post GFC high in 2010/11. Should be one of the better performing metals for the next few years.
Zinc has had a slower consumption growth rate but has moved up strongly as inventories have declined sharply with a decline in supply that will only get worse in 2016. A much bigger price coming here.
These don’t suggest recession is upon us.
And as you can see, no LME inventory buffer is available for these metals.
In Australia this means anything in LNG export or the Cooper Basin or newly developing unconventional is now very cheap.
Ask me about my favourites.
This is finally turning up and it would suggest that over the next two years this means ASX Gold Index should almost double against A$ gold from 1.6x to 3.0x.
Are you bullish on US$ gold? I am bullish on US$ gold but also the A$ so if both rise then ASX Gold stocks will be really flying.
Dawes Points has picked some real winners here from the lows in November and December 2014.
As noted previously, the issues for individual stocks are complex of course but we are talking about stocks still down 70% and in the very early days of a new bull market in gold.
Risk is still low, reward is still high!
This rise of the ASEAN nations (over 700m people) with Indonesia with 250m people and strongly rising living standards should not be ignored either.
The preoccupation with the defensive chasing of yield thesis just seems wrong to me because the markets are saying something different. Note that the US small caps (Russell 2000 and S&P 600 Small Caps) here are again reasserting the market leadership after a year’s hibernation. This says expanding US economy. Don’t ignore the recent wage rate rises in the US either. Inflation is coming. And this spells doom for deflation-priced US and European bonds. And for the defensive yield and high cash strategy.
Why be defensive in respect of our resources sector when the world is out there having fun?
The global economic boom is now well underway fuelled by central banks flooding the world with liquidity. Watch for changes to the velocity of money in circulation. Commercial banks are starting to lend gain. Everywhere. Especially for takeovers.
It seems strange that the world commentary focus should be on the US Fed and interest rates with players cheering down the Euro and thumping commodities while chasing impossibly valued sovereign bonds and an overvalued US$. The markets are saying something very different.
These markets are barometers for future economic conditions so steady growth for China and rapid and increasing growth for India and ASEAN seem very likely. Iron ore and coal commodities might soon surprise us to the upside. Maybe quite soon. These countries with low installed steel capacity but strong demand will be taking surplus Chinese steel.
Good signs of global economic expansion are there despite this current rout in iron ore prices gripping the locals.
Small resources stocks are starting to move higher and many with gold or technology materials are outperforming. Capital raisings are happening again with funding available for advancing new projects whilst survival capital is still hard to raise.
I see many brilliant opportunities and clients are making money again. This is the time when small investments spread over tiny nanocaps give the highest returns and lowest risks. Are you on board?
And on iron ore, what will happen to the 300mtpa of Chinese magnetite production which has cash operating costs of close to US$100/t? At US$48/t that is at least about a US$30/t loss. Times 300mt that is US$9,000m in losses. Atlas Iron is small beer. How long will these low prices last? Production cuts in China must be coming soon. With low steel mill inventories, lower port inventories and short positions in the futures there might just be a major short cover rally. The declining iron ore price has never seemed right to me. I have been clearly wrong but let’s see what the next year might bring. Or even the next month.
Here in Australia the All Ords is flirting with 6000 again and making 7 year highs but Resources are still being spurned. BHP is showing a 5.5% yield. Great buying.
Can the world be slowing that much while markets are moving up?
But as ever, I simply ask, `What are the markets saying?’.
It seems to me that the choir and what’s on the new song sheet are not yet in sync.
Try looking at this
The bond markets.
Major new low for yields in US 30 yr T-Bonds last month.
But the new lows not confirmed by the US 10 Yr Notes.
And bonds globally are just ridiculous. Germany at 0.18%.
Japan has said this was ridiculous. The capital losses from buying at 0.20% to 0.40% are unimaginable. Try 25%.
And then look at the UK. Big losses here too.
Why is this so? Why is there a rush for income at such low rates? And why the love of sovereign bonds when government and bureaucracies in so many countries around the world continue to show utter incompetence in managing taxpayers money at every level? Unelected officials with their own agendas.
And just look at prices for US 10 and 30 year bonds. 10 Year bonds hitting the uptrend return line for a Good Bye Kiss (a lovely term for when a market breaks then returns to the break out line then surges in the other direction) but 30 year bonds hitting new spike highs. Overbought signals everywhere. New highs in the 30 year Bond Index but no new lows in yield. Danger, Will Robinson.
I keep noting references as to who will buy these bonds once the decline does get underway. Could be a case of seller, no buyer.
Now look at some currencies. Starting with the commodities currencies the A$ and C$. Both are in long term support and are heavily oversold. Dawes Points has not got this right for the past year but I repeat the point above, nothing has changed in the Big Picture.
A$/US$ C$/US$
Now just for lark let’s look at the A$ on the crossrates. Well this is not bearish against the Euro.
Nor is this against the GB Pound.
Nor this against the Yen.
Well I find this interesting and not what most people are talking about.
Now here is another view on life. Commodities in other currencies. Reuters/Jefferies has decided to discontinue the favoured Continuous Commodity Index so let’s use copper and Brent oil. Start with copper in Euros. That’s interesting! A break out!
And in Yen.
And in this context just recall the consumption data from a Dawes Points earlier this year and the turn to deficits over 2010-2016 for most major resources commodities.
Annual consumption and consumption growth data
Where are the demand decline-driven bear markets?
Do not ignore the biggest traded commodity in oil. The US shale oil production is only part of the equation. Why has Brent surged to a 20% premium over WT when the proposed dropping of the 40 year old US export ban was overturned was supposed to bring them to parity?
Could it be supply concerns. Iran is now backing Shia Iraqi fighters against ISIS and Saudi Arabia is Sunni and is fighting against Iran-led incursions in Yemen, right on the Saudi border. A civil war here could affect oil shipments in the major shipping lanes such as the Straits of Hormuz. The tentacles are spreading. Export cuts at Libya. Iraq output down. What if Qatar fell? The impact on LNG would be immense.
Nor here. Oil price recovery may be coming sooner than you think.
Shell might be thinking so with its bid for BG Group. Great confidence for LNG. And LNG Ltd (LNG.ASX)!
Gold has bounced after the US Jobs Report selloff and is readying itself for another run up. The emphasis made here for some time now on the rapidly rising demand for gold from Asia can only be increased as we see the Shanghai and Mumbai stock markets roar to add wealth to citizens. Jewellery demand is robust in these countries and low gold prices can only increase demand.
Needless to say, the gold price in most currencies is in a good bull market. You knew that of course so I won’t show it again. Well I will anyhow. In Euros and A$
And the US market for gold stocks has given us some fascinating market action. Reversals patterns last month. When a market makes new low (or high) then closes above (below) the previous day’s high(low) then it generally indicates a direction change.
Our collection of US gold sector Indices makes for some very encouraging analysis of reversals.
The HUI unhedged gold index.
The XAU, the major US Gold Index.
And then the two major gold stock ETFs GDX and GDXJ.
Here in Australia, the ASX 300 Gold Index (XGD) has moved up nicely too to reflect the A$ gold price over A$1550/oz. I see it moving up strongly to 4500 quite quickly.
We are still down 70% from the 2011 high.
And the ASX 300 Gold Index is down 83% against the A$ gold price.
Gold stocks are picking up market share and the three decline in the 12 week moving average has broken its downtrend.
Newcrest and Northern Star have been the leaders in this new bull market for gold stocks. I hope you are on board.
Remember these stocks as well as my recommendations for this long term bull market. Most are over their recent capex, have reduced debt and costs and are making money. Dividends soon and for a long time :-
Metals Ex MLX
Doray DRM
Tribune TBR
St Barbara SBM
Resolute RSG
Evolution (EVN)
Beadell BDR
Blackham BLK
Crater Gold CGN
Don’t let global ignorance cloud YOUR own judgement.
Barry Dawes
BSc F AusImm MSEG MSAA
I own NST TBR SBM DRM CGN BLK MLX BHP and LNG 
Should it be just one oz and 1 million per month then that is 12moz or 375tonnes pa. Two oz is 750tpa or 25% of world gold production. We will find out in just a week but this could make gold “cool” for the ``techies” demographic (read China!) and physical gold demand could really overwhelm the bears.
This market can only go higher. And much higher at that.
In the short term, gold stocks in Australia have consolidated recent strong gains and the shallow and short correction I expected was certainly shallow but has been rock solid for over 6 weeks.
ASX Gold Index Daily 12 months
(Source IRESS)
The leaders in this index Northern Star (NST) – are you on board yet? - and Newcrest (NCM) are leading.
I expect the market will hear much good news from many of these companies as operations are properly bedded down and as the benefits of the lower A$ and fuel prices work through. March Qtr figures should show very good cashflows from producers and exploration should be picking up again.
This confidence will flow through to developing companies and the capital raisings underway will be able to replenish severely depleted bank accounts. Watch this space.
ASX Small Resources
With that in mind, have a look at this. The ASX Small resources Index. The XSR did not make a new high in 2011 but it had a 72% fall which has finished and now will move back up to new highs.
ASX Small resources Index Monthly 20 Year (Source IRESS)
What extraordinary volatility. What extraordinary opportunities!
I have continued to point out the Disbelief/Pessimism stuff and labelling the ASX Small Resources Index (XSR) like this makes so much sense. The Optimism Leg is underway now at long last.
My recent 
Are these attractive enough for you now at A$1630?
PER 4.0x FY16 and 4.1x FY17 this universe? And yields of 10.0% and 15.0%.
And at a range of higher prices?
It is still 71% below that high. Cheap here.
And gold stocks have fallen against the A$ gold price. About 73% from the April 2011 highs and 78% from the 2008 relative value. Very cheap here.
And with XGD market share so low at about 1.5% of ASX All Ordinaries turnover (it was down to just 1% in August 2014!) compared with 4.5% in 2011-12 and over 6% in 2010, NO-ONE owns these stocks. A downtrend break has occurred. Huge pent up demand coming here. Remember the A$1,660bn in bank deposits.
And just remember the ASX Gold Index history.
Well, did you get aboard? And do you have in your portfolio these producing stocks that will be big dividend payers in 2015 and beyond now that most sector capex is complete and debts are being paid down?
If not, 
Those large dividend blue chip gold companies should be making shareholders very wealthy over a very long time. Have you enough gold and gold shares?
I am going to come back to this concept in another Dawes Points very soon. The implications are extraordinary.
The 10 year bull market was saying something and something big was afoot. Many reasons. Currency, debt, inflation, wars and deficits. All contributed. Many more reasons out there too.
For me, the build up in public sector debts and the gyrations in currencies are my preferred reasons. Who can really trust politicians or their government bureaucracies and their welfare recipient supporters to protect a currency and the population’s wealth?
But then we had the extension of the 30 –year rally in the US T-Bond market that brought yields down even lower and bond prices into the sky. And a US$ that rallied hard.
Do keep in mind that the US$ Index is made up as follows:-
These suggest the rally is real and, even with some technical pull back, gold in these currencies will be heading higher.
This `market breadth’ says buyers everywhere are buying gold not just arbitraging currencies.
The big buyers throughout 2014 have been India, China and, surprisingly, Turkey.
Here we have gold in Indian rupees, Chinese yuan and Russian roubles.
Source:24hGold.com
Demand from China has continued to explode with recent figures indicating 70 tonnes of gold withdrawn (i.e., acquired by Chinese citizens) from the Shanghai Gold Exchange in Week 2 of 2015 and have brought the year to date figures to 131 tonnes ahead of the Chinese 2015 Spring Festival starting on 19 February.
Source: Koos Jansen Bullionstar
This is 3400 tonnes annualised from China alone and EXCEEDS annual global gold mine production of 3100 tonnes!
The numbers from India are reported to be even more after the new Modi government made major changes to import restrictions. More market liberalisation could take place and further increase demand for gold from India.
Note that the Shanghai and Mumbai equity markets have been on a strong tear in the Dec Half of 2014. Shareholder wealth has increased and demand for jewellery has been boosted.
I have adjusted my Supply/Demand graphic to show this increased demand from China and India.
Demand for gold from Europe in recent months has also increased sharply to reflect fears of Islamic State terrorism, QE threats by the European Central Bank and the continuing general European malaise.
I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections.
I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections.
The `Deficit’ may also in fact be exacerbated by a decline in the 1400t annual availability of scrap. The GFMS numbers indicate that high prices in 2008-2012 drew out an extra 3000 tonnes of scrap gold. Aunt Audrey probably doesn’t have any scrap jewellery left now.
Where will the gold come from?
These numbers do show that there is a real game in play for physical gold and the market manipulators in gold futures markets do not have much more time to cover before the final whistle is blown. If large short positions do in fact exist it will be very difficult to buy back any such gold.
The playground is also being tested by the emergence of the new gold exchanges in Dubai (for Indian demand), Shanghai and Singapore. New gold only contracts are now being used so unless traders have the gold, they can’t sell. In addition a new 24 hour COMEX 1 kilo physically-delivered contract is planned to accommodate Asian buyers who will now be able to have a real pricing presence in the US time zone with physical delivery in Hong Kong. It will be interesting to see if the gold price manipulators try to attack the futures market while the physical market stays aloof. No gold to sell, no play.
The retreat by Switzerland from its peg to the Euro has added another dimension to the declining trust in central banks and fiat currencies. I understand it has been an important game changing event in Europe.
The demand for gold keeps rising, the supply is inflexible and so the gold price must rise.
A major turning point was probably seen in the Dec Qtr of 2014 and the outlook for gold is very strong.