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Gold sector activity

by Alison Sammes
Recommendation to buy gold and best quality gold producers The ASX has hundreds of gold producers, developers and explorers listed with companies holding assets in Australia and throughout the world.   Should the US$ gold prices rise further as I expect then many of these stocks will be recover and make new highs.  It is encouraging to see that most gold producers have completed their capital expenditures and now have fully operating mines.  The shake out in the mining industry has cut operating costs everywhere and open cut mines in particular will benefit from the lower oil price.   Earnings will rise and these companies will soon be paying or increasing dividends. Paradigm considers that these producers and a few near term producers offer the best risk adjusted returns  at this stage of the market cycle and of course as the gold price increases the number of opportunities in higher risk/return plays surges.  Recoveries from stocks that have fallen 95-98% over the past several years could give some very high returns as they are revived.   To begin with Paradigm suggests buying a gold share portfolio from 16 recommended stocks.
  • Call me or Les Szancer on 02 9222 9111 to discuss these opportunities
The Resources Sector around the world has experienced a long and difficult bear market that has resulted in major declines in stock prices for almost all resources companies. You would be aware of the well-publicised price declines in iron ore and coal and most recently with oil as increased commodity supply has exceeded growth in demand.  Other commodities have been weak but not significantly compared to iron ore and oil.  Many resources commodities have real supply side issues over the next few years as key mines are exhausted and LME inventories are at historically relatively low levels. Consequently, Resources Markets have been difficult to read given that, in contrast, the major economies of USA, China, Germany and India are reporting robust economic growth rates and global equity markets are at or near all time highs.  Indeed, the two most populous countries, China and India, are continuing with substantial infrastructure programs that require many of Australia’s mineral exports. However, there is now some encouraging evidence that gold and the precious metals may be bottoming after over three years of decline and the shares of companies that produce them are now moving up.  Physical demand from India and China now exceeds global mine production and central banks around the world are buyers of gold so that the gold market is now tightening up.  Where will the new supply of gold be sourced? In addition, threats from the Islamic State terrorists are affecting Western civil safety and financial markets can be unsettled by  physical and cyber threats.  Gold bullion prices may have this crisis factor now creeping.  Gold is rising in most currencies and especially with the current strong US$. The key markets for gold stocks in North America are showing good signs of accumulation by new investors and strong rises have been achieved. Here in Australia, the ASX Gold Index has risen over 40% from its lows in November 2014 which were at levels last seen in March 2002.  This Index is still 72% below the 2011 high so there is still much upside. The US$ gold price has moved up to over US$1220 after falling to US$1130 whilst the A$ which has fallen over 20% to around US$0.81 has pushed the A$ gold price to over A$1500. It is notable that the ASX Gold Index peaked in April 2011 with a gold price of A$1404/oz but is now 70% lower at 2220 yet the gold price is currently around A$1500/oz.

Time for action

You have been receiving my Dawes Points newsletter and if you have been reading them you would have noticed the recent emphasis on gold and gold stocks.  You can download the last two letters here.   2 December 2014   Gold – Now ready to rise?  7 January 2015  Gold stocks up >35% in continuing recovery – much more to come Since the 4 December newsletter the ASX Gold Index is up over 35% and up over 40% from the November low. Some of those recommendations are up over 50% in just 5 weeks. I expect to see much higher prices for gold and gold stocks in 2015 and made recommendations and gave price expectation targets for 16 key gold stocks. Outstanding value exists in the sector amongst scores of companies but for now it is best to focus on the best of the current gold producers and a growing number will be dividend payers with yields well in excess of current interest income rates. The stocks are
Company Code Price Year end Target
Current producers      
Doray DRM 0.53 1.10
Evolution* EVN 0.80 1.80
Kingsgate# KCN 0.75 1.80
Medusa# MML 0.79 2.50
Metals Ex* MLX 0.84 1.80
Newcrest# NCM 12.12 20.00
Northern Star* NST 1.70 4.50
Oceana Gold OGC 2.41 6.00
Regis* RRL 2.14 4.50
Resolute RSG 32.5 0.60
Saracen SAR 0.31 0.90
Tribune TBR 2.94 4.50
Near term producers      
Gold Road GOR 0.27 2.00
Crater Gold CGN 0.115 0.50
ABM Mining ABU 0.315 0.60
Blackham BLK 0.075 0.25
*Dividend payer  #dividend currently suspended The improvement in the gold price and gold stocks may be a leading indicator for recovery in other resources sectors but there may yet be time for this to unfold before we need to commit. For those wishing to have exposure to gold bullion itself the Paradigm/Bullion Capital arrangement allows clients to acquire gold bullion through taking delivery or having safe custody in segregated accounts in secure vaults in various capital cities. Please call me or my colleague Les Szancer on 9222 9111 to discuss your needs in gold shares or gold bullion. 13 January 2015 Barry Dawes   If you are on our mailing list you would have received this recently, to you to encourage you to participate in the recovery of gold bullion and the ASX Gold Sector and, hopefully, later, the recovery of the entire Resources Sector after a bear market that has lasted almost eight years. You can do this by opening an account with Paradigm Securities for stock market transactions and also through Paradigm’s arrangement with Bullion Capital for gold bullion. A link to Paradigm Securities account opening forms is here.  Please call me to discuss a precious metal bullion account through Bullion Capital. Please note the account opening process can be complicated by the compliance process so please follow the instructions given in the package.

Gold stocks up >35% in continuing recovery – much more to come

by Alison Sammes

Key Points

  • Australian Gold Index up 7.8% in 2014
  • Australian Gold Index up 35% from November 2014 low
  • Nth American gold stocks testing downtrends
  • US$ Gold price still holding around the US$1200 level of a year ago
  • A$ gold price closed up 7.5% for 2014
  • Gold in other currencies moving higher
  • Gold stock recommendations NST, TBR, NCM, GOR, OGC, RRL, EVN, ABU, BDR, KCN, MML, SAR, MLX, RSG, BLK, CGN, DRM  
The technical evidence is mounting for a significant change in market sentiment for gold and the gold sector in North America and here.  The evidence may still be tentative but important changes seem to be underway in a number of markets.   The long overdue new bull market in gold and gold stocks looks promising for 2015. After 2014’s annus horribilis for resources stocks I look to enjoy 2015 as an annus mirabilis, one that is "amazing, wondrous, remarkable". Gold itself had a tough time in 2014 with early 2015 US$ prices barely higher than a year ago and the US Gold Index (XAU) was down 18% (after a 49% fall in 2013).  The ASX Gold Index (XGD) benefitted from a lower A$, improved operational performances and some better market sentiment to actually achieve a 7.8% gain with almost all of it in the last week of December.  Falling oil and other energy prices can only cut costs further and help operating margins. This is all very encouraging. The evidence shows that US$ gold is much the same as a year ago.  It was some times higher and sometimes lower but the low at US$1130 in November may prove to be the low for the correction from US$1923 in September 2011 in a 38 month bear market.  This is a good overall performance for gold against the very strong US$ and with so much pessimism about. Steady gold in a strong US$ meant that gold in other currencies in 2014 was much higher, particularly in Japanese Yen and Euros.  The technical evidence here is suggesting higher gold prices are coming in these currencies.   And this is the main reason people should hold gold  -  debasement of currency.  Just ask the holders of Russian Roubles.
Gold in Japanese Yen    Gold in Euros
US gold stocks have fallen a long way and this graphic from last month still offers an indication that the worst may be over and that if it is over then the upside is substantial. It would be good if the turn was here, but some bearish views still consider the bottom test should be the lows in 2001 with a much lower gold price! The gold stocks here are suggesting that the low is probably in place and should rally to new highs. The performance of gold stocks against gold has also been a disaster of epic proportions.  The key North American index XAU has fallen over 85% against US$ gold, since a peak in 1996, and is now still less than 25% of its long term average rating.   Encouragingly, the XAU has just made a tentative break of a short term downtrend against gold.  A rerating here would be very significant and particularly so if gold does move higher in US$. US Gold Stocks vs Gold
- Long Term    - Short Term
Another measure of gold stock valuations has been that against the general market.  After a magnificent ten year run of 16%pa against the S&P500 from 2000 to 2011 these golds stocks fell 85% to give up almost all of that gain over the ensuing next three years.  Extreme relative value now exists.  Also a short term downtrend is being tested and broken here too. US Gold Index against S&P 500
- Long Term - Short Term
Moving from the indices to the ETFs where volumes can be noted, both the GDX and the GDXJ (smaller companies) ETFs have seen a massive increase in accumulation in the past three months.
These are indeed tantalising and stock standard technical market-bottoming developments.  The implication is that gold stocks could strongly outperform both gold and the S&P500 for an extended period if the trends get momentum and strength.  Let’s keep watching carefully.

The US$ and T Bonds

Gold and the US$ often act divergently and T Bonds are really US$ with a coupon so should act as US$.  But gold has risen with a strong US$ over the past decade on a net basis. The strength of the US$ has been amazing, as has the performance of the US 30 Year T-bonds with yields down to just 2.5%.  Looking at the long term and the most recent market action suggests that a spike high may be developing. These markets have been far stronger than ever imagined so clearly no superior knowledge lies here with me!!  But. But. But. How long can this go on? US$ Index is overbought and is approaching the 30 year downtrend.  Short term it is `gapping’ in a strong move but this can lead to an overextended market and a trend reversal.
T-Bonds have rallied toward the top of the 33 year uptrend resistance line. I had expected a weak bond market in 2014 but we have had a surge. Short term trends show the same overbought market as the US$ Index – complete with `gaps’.   Possible trend reversal action.  But how high can the biggest markets in the world go?

Gold Sector - Annual volatility

The gold sector is also very volatile with gold having a 10 year average annual following volatility of about 30% (high less the low, divided by opening price) and gold stocks about 50%.
Gold Gold A$ XAU XGD
2015 3% 1% 7% 10%
2014 22% 15% 54% 57%
2013 31% 21% 56% 71%
2012 17% 15% 36% 44%
2011 43% 35% 26% 31%
2010 35% 27% 52% 58%
2009 49% 35% 82% 48%
2008 37% 46% 83% 68%
2007 38% 25% 53% 54%
2006 39% 32% 42% 23%
2005 30% 32% 52% 61%
10 Year Ave 34% 28% 54% 52%
It would be nice to see the volatility being positive from here and making January 2015 the low period.  The average as a positive gain of 30% for gold and 50% for gold stocks would represent major technical breaks of downtrends.

Gold demand

The importance of the rising middle classes of Asia, especially India and China, on gold demand for jewellery cannot be overstated.  The recent monthly demand statistics continue to show growth in imports to India and China at a rate that completely exhausts annual global mine production and recycled scrap supply and then eats into `inventory’.  The graphic was in last month’s issue. Who actually owns this inventory will be important.  Central banks are net buyers, China and India are unlikely to be sellers and the ETFs are down to just the true believers.  Indeed, rumours are circulating that the central bank in China has also been a very large buyer of gold. Perhaps some Middle East players may feel the pressure of lower oil prices.  Government to government sales to China would help. Recent data on sale of gold coins in the US and Australia shows lower figures but these have always been very small beer compared to India  and even much smaller against combined China and India.

A$ gold sector market

The weaker A$ has assisted the A$ gold price to over A$1500/oz so it has broken a downtrend and is now in an uptrend again. Gold in A$   The XGD here in Australia has provided some relief to the 43 month and 81% down bear market by ending with an annual gain in 2014 of 7.8%.  But only after making a new 152 month low in November at 1642 (last seen in March 2002) and making 6.5% of 2014’s gain in the last few days of December. It is worth keeping in mind that the A$ gold price was A$1408 at the 8499 peak of the ASX Gold Index in April 2011.  It is about 75% lower now with a 7% higher A$ gold price at A$1507. As noted in the last Dawes Points, the `wedging’ in the ASX Gold Index and many key gold stocks was suggesting a change was coming.  The move could be strong and `violent’ from here.  The latest portion of the XGD rally has broken a 20 month downtrend and acceleration could take place now. Hopefully it will be the Wave 3 that takes the XGD to new highs. ASX Gold Index (XGD) The table in the December Dawes Points gave some price targets for these gold stocks and the performance since 1 December 2014 has taken us part of the way. The market leaders were identified as NST, TBR, BDR, TRY, MLX and ABU with OGC, GOR, DRM and SAR as stocks with good market potential. In addition, important stocks such as NCM, KCN, EVN, RSG, MML and RRL had strong rebound potential from oversold positions where former market leaders may have had stale institutional shareholders bailing out.
Dec’s preferred stocks in bold 1 Dec Price 5 Jan Price Change
Index XGD 1701 2221.3 31%
Anglo Gold AGG

221

218

 -1%
Alkane ALK

20

23

 15%
Alacer AQG

205

277

 35%
Beadell BDR

19

26

 37%
Doray DRM

27

47

 74%
Evolution EVN

43

74

 72%
Focus FML

1.6

0.8

 -50%
Kingsgate KCN

62

75

 21%
Kingrose KRM

25.5

27.5

 8%
Medusa MML

57

76.5

 34%
Newcrest NCM

918

1173

 28%
Norton NGF

14

13.5

 -4%
Northern Star NST

96

167

 74%
Oceana Gold OGC

207

230

 11%
Perseus PRU

24

28

 17%
Red 5 RED

8.7

9.0

 3%
Regis RRL

129

198

 53%
Resolute RSG

23

30

 30%
Saracen SAR

21

28.5

 36%
St Barbara SBM

8

13

 63%
Silver Lake SLR

22.5

23.5

 4%
Tribune TBR

265

290

 9%
Troy TRY

46

52.5

 14%
Gold Road GOR

20.5

28

 37%
Crater Gold CGN

12.5

12

 -4%
ABM Mining ABU

22

32

 45%
Metals Ex MLX

70

82.5

 18%
Blackham BLK

6.7

7.5

 12%
Looking ahead, the gold stocks that interest me for the next six months are set out below with 12 month targets.  More will be added later.  Stocks are listed alphabetically.  All except GOR are producers or very near producers.  With most capex now finished, costs under better control and a high A$ gold price, cashflows should soon allow new or increased dividends. Top ranked are the best companies with the best prospects.  Second ranking is for stocks with operating or locational risks.  Speculatives are two house stocks with resource upgrade potential but likely to require additional capital over time.
5 Jan Price Target Dec 2015 Gain
Top rank
EVN

74

180

143%
GOR

28

200

614%
NCM

1173

2000

71%
NST

167

450

169%
OGC

230

600

161%
RRL

198

450

127%
SAR

28.5

90

216%
TBR

290

450

55%
Second rank
ABU

32

60

88%
BDR

26

40

54%
DRM 47 110 134%
KCN

75

180

140%
MLX

82.5

180

118%
MML

76.5

250

227%
RSG

30

60

100%
Speculatives
BLK

7.5

25

233%
CGN

12

50

317%
The platform is being set, from all the evidence I can gather together, for a strong gold price uptrend to soon take hold.  Physical demand is strong, sentiment is very poor, gold prices are rising in many currencies and the gold stocks may yet again be proving to be the key indicators of future direction of gold.  The relative performances against the major indices are also strong evidence and here in Australia we actually have some good gains in gold stocks that are showing recoveries and downtrend breaks. Keep in mind there is only very minor Australian institutional interest in the gold sector.  Potential for a robust catch up is strong. And Australian bank deposits are A$1,661bn as at end November 2014 with A$534bn in term deposits and A$632bn in savings accounts. Let the markets tell us the true story and if what Dawes Points hears is correct then a strong market should ensue. Keep in mind also that where gold stocks go, so do other resources.  It may take a little more time but resources will probably improve significantly in 2015.  Even iron ore and later oil will participate. Sydney 7 January 2015 Barry Dawes I own TBR, BLK, DRM, GOR, NST, CGN, MLX, ABU, KCN

Gold – Now ready to rise?

by Barry Dawes
  • Gold stock extreme negative sentiment readings dominant
  • Demand for gold and silver coins strong at lower price levels
  • Increased `open interest’ on COMEX gold and silver
  • `Wedging’ of gold stocks and indices showing probable trend change
  • Be prepared for a major upmove
  • Preferred gold stocks are NCM, NST,OGC, KCN, DRM, MML, GOR, ABU, CGN, BLK

The extreme poor sentiment readings for gold indices and the rebound of the US$ gold price from the important US$1137 low give good indications of the probability of an improved medium term outlook for both gold and gold stocks.  The technical picture for gold stocks has been encouraging and the valuations for gold stocks are extraordinarily attractive. The move could show considerable violence.

Demand for physical gold and silver has been very strong throughout the world and particularly in China and India where monthly imports appear to be well over 300 tonnes per month and so in excess of monthly mine production.  This graphic shows the robust increase in end-user/investor gold demand in China that was about 40 tonnes per month in 2009 and is currently over 200 tonnes per month.  This graphic shows essentially just gold imports and not Chinese gold mine production where China is also the world’s largest producer at well over 400tpa. Changes to India’s gold import rules under the new Modi administration have allowed imports to be over 150 tonnes per month. Perhaps even higher.  
Source: Koos Jansen   BullionStar

Demand for coins from the major mints has been very strong and supply has faltered.  As the gold and silver prices decline the market increases its physical demand. US mint sales have been very strong and Bloomberg recently noted gold sales from the Perth Mint (Australia at about 280 tonnes is the second biggest gold producer after China) climbed 89 percent in September to the highest level in almost a year as gold prices declined. Sales of gold coins and minted bars rose to a 12 month high of 68,781 ounces from 36,369 ounces in August.

Bringing these all together gives a model that says demand for jewellery, bar and coins is firm and rising and when combined with growing central bank purchases and a minor increase in ETF holdings now exceeds supply from new mining and a declining availability of scrap.

Gold has about 177,000t of above ground stock so any or all of this may be available for sale at any time.  Nevertheless, outside the ETFs any holder of gold in size is a central bank or a true believer and unlikely to be a seller and certainly not engage in dumping in the large quantities we have seen in recent years.  So the market could be remaining tight.  

Interestingly the US COMEX gold exchange is providing some fascinating data of the activities of traders in the futures market. 

As of late November over 50,000  100 oz gold contracts (5 million oz) had not been rolled over and might suggest party or parties were looking to take physical delivery of gold on COMEX.

Moreover, data from the Commitment of Traders (COT) has shown a 25% increase in new short positions over the past month or so.  Demand for delivery of gold could be a very important issue here and could lead to some real shortcovering.


Source: Mark Lundeen

The latest weakness in gold in October has coincided with a recovery in the US$ Index against an especially weak Japanese Yen and lower Euro.   These currencies make up around 13% and 57% of the USDX and both seem to be ready to retrace at least some of the recent falls so USDX might pull back here.  I am sure you are aware of the UNIVERSAL bullishness on the US$. 

The technical position on gold still seems reasonable even though it has been quite difficult in recent months.  Down but not out and today’s sharp rally may be suggesting lot more to come!

Market cross currents continue to make forecasting anything more than an uneducated guess but for gold stocks the `wedging’ of gold indices and many stocks makes for a greatly improved technical position despite that sharp fall on Friday 28 November and on Monday 1 December after the negative Swiss referendum result. The XGD here in Australia suggests a strong upmove is coming.

ASX  XGD Gold Index

Two key stocks are Newcrest and Kingsgate with strong wedging patterns and very high volumes.

However, overall trading volumes on ASX have been low compared to the MASSIVE volume in the GDX ETF in Nth America.

 

Of perhaps greater interest is this graphic of the Philadelphia Gold Index (XAU) which has an Elliot Wave interpretation that finished Wave 1 at the beginning of 2008 then fell into its GFC hole for wave A only to rally to new highs in 2011 to an irregular B wave.  The C wave exhibited a perfect 5 wave down process that should soon see the end of Wave 2 in this horrendous 44 month bear market.

 

Note that C waves into Wave 2 occur at the period of greatest pessimism and Pessimism ONLY exists at the end of Wave 2.   Every reason for gold to fall is out now on the front pages and gold shares are absolutely unloved.  The extraordinary build up of cash in Australia and globally is clearly Wave 2 Pessimism writ large and it can only go one way from here!

And after Wave 2 comes Wave 3!  The Optimism upleg.

Hopefully the improvement for gold and gold stocks will play out over other sectors so it should also mean better times eventually for all commodities and resources equities in particular.

Indeed the short cover rally in gold suggested in the last Dawes Points will probably follow through to all markets led by the strong US equity markets, Europe, India and China.  Australia, if it wakes from its torpor, just might follow.

But stepping back for while the observation is made that over the past several years of these volatile resources markets I have been very intrigued by market sentiment.  Markets are simply the meeting of buyers and sellers of goods and services and changes in price are all about the simple emotions of fear and greed.

I have previously quoted the words of the legendary investor Sir John Templeton (1912- 2008) who famously described fear and greed in markets by saying:-

`Bull-markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.’

For the resources sector we have had a lot of Pessimism for a long time and we have had no Euphoria let alone Optimism.

I attempted an embellishment of Sir John’s assessment by involving some Elliot Wave analysis and labelling the first leg (Wave 1) in the new bull market `Disbelief’, the first major correction `Pessimism’ (Wave 2), the second leg `Optimism’ (Wave 3), the next correction `Opportunity’ (Wave 4) then the final upleg being `Euphoria’ (Wave 5).

This then gave us this roadmap diagram which was first presented exactly six years ago on 1 December 2008 at Australia Day at Mines and Money in London.

It worked OK for quite a while and has worked wonderfully well for US and many other equity markets but certainly not for resources since April 2011.

So where are we now?

As we are all aware,  the Resource Sector here in Australia has had thumping after thumping for the 44 months as the industry is demoralised and investors have been savaged. Demand for most commodities have been robust over this time despite the calls for downturns in all the US, Eurozone, Chinese and Emerging Markets.  Most have had good GDP numbers and the PMI for China yesterday showed yet again a still expanding economy. It is notable that the commentariat has recently switched from claims of declining demand to claims of excess new supply from producers as the reason for the perceived weakness in commodity prices.    

The falls in oil and iron ore are very real and not perceived but many other commodities the supply/demand positions appear robust.

It would be easy to accept the conventional wisdom and take the bearish course but six major issues need to be considered and resolved.

  • the major global stock markets have achieved record highs
  • the world is awash with cash
  • the world’s bond markets have had over 30 years of falling yields
  • the current oversupply in some resources could still turn to shortages very quickly
  • the general public is typically out of the stock market worldwide
  • the resources sector is already priced for a global depression  

Taking a very strong US equity market and economic data that is very encouraging with very robust physical demand for gold certainly suggests a positive outcome is possible.

The bond markets continue to suggest `end of 30 year bull market’ characteristics and could  soon reverse sharply. 

So if the above analysis of gold stocks is correct (in today’s volatility who would ever know) then my roadmap becomes a little bit different but indicates basically the same outlook.

The market upleg began in Dec Qtr 1998 at the bottoming of the commodity market and peaked in 2007/08 and the GFC correction has extended over seven years.  The first leg and the correction have taken 16 years.  Note the long time frame.

The Optimism upleg if it does indeed occur could last at least 10 years and not just to 2020.  China has not fallen over and India will be there over the next few years to add to demand for bulk raw materials.  The Euphoria was expected to coincide with the peaking of aging demographics in China in about 2030.  

Coming back to gold.

We all know gold is a topic of hot debate with the protagonists of both the bull and the bear cases having a remarkably broad range of bases for discussion.  Inflation, currency debasement, hostilities, debt, interest income (or lack of it!), inverse US$, interest rates, jewellery demand, whatever. 

The arguments are fascinating and would keep us all engaged forever if we had the time.  In these notes I do try to keep the issues simple and with gold, complex as it is, it is a matter of fear and greed and thereby supply and demand.  Gold, with about 177,000 tonnes or about 50 years mine production available, is unlike any other market in that supply can’t be affected by weather, floods or  strikes and a few local hiccups in mine production here and there doesn’t have much effect  so it is mostly about fear and greed.

Gold stocks in the US and in Australia have declined sharply over the past 44 months and are trading at very low levels as shown in the graphics above.  Sentiment is clearly poor for holders of these shares and any potential buyer is gun shy and particularly very wary of risks associated with clear market manipulation. Short positions in some stocks are considerable.

When measured against gold itself these gold stocks are at massive discounts to the long term averages.  Some higher input costs, inadequate accounting for total costs, lower long term ore grades (as new mines have high volume low grade ore throughput) and bad management decisions have undermined relative values but however we look at them the positions are extreme.

Here in Australia the ASX Gold Index is still down 80% from its April 2011 highs and made a new low below that of Dec 2013 which I previously thought had to be the real low.

The shorter term market is best seen in this wedging pattern shown again for the XGD.  Technical patterns like this can be resolved with sharp upmoves and a two year view could put XGD at about 5000 again, up about 150%.

The same `wedging’ can be seen for so many gold stocks and with all the November AGMs out of the way now we have a good collection of presentations that give up to date data on output and costs forecasts.

In noting the 24 stocks in the XGD and a chosen few from outside it is possible to ascertain the market leaders with best relative strength.

NST and TBR have excellent operators and have made new highs in recent months so are clear market leaders with BDR, TRY,MLX and ABU also having relative strength.

OGC, GOR, DRM and SAR have good market character and are also BUYs.

Many stocks are just oversold and are wedging to give strong rebounds.      NCM, KCN, EVN, RSG, MML and RRL are BUYs.

I have given some notional price targets based simply on technical character and backed up by reviews of the latest AGM presentations.  The issues for individual stocks are far more complex of course but we are talking about stocks down 80% and at the start of a new bull market in gold.

Risk is low, reward is high!  

Gold Sector Dec 2014

 

Last high

Downtrend months

Price decline

Current price

2 Year target

Gain %

Rank Technical

Comment
   

 

 

 

 

  

 

  

XGD

Apr-11

44

80%

1701

5100

200%

9

Strong

ALK

Apr-11

48

93%

20

100

400%

9

Strong

AQG

Dec-11

42

82%

205

350

71%

9

Strong

BDR

Mar-13

18

83%

19

70

268%

9

Rebound

DRM

Nov-10

50

84%

27

100

270%

9

Rebound

EVN

Nov-10

50

81%

43

130

202%

9

Strong

FML

Apr-11

44

85%

1.6

3

88%

6

Avoid

IAU

Apr-11

44

94%

15.5

?

  

6

Wait

KCN

Apr-11

44

95%

62

400

545%

9

Strong

KRM

Apr-11

44

87%

25.5

60

135%

5

Rebound

MML

Apr-11

44

93%

57

250

339%

9

Rebound

NCM

Apr-11

44

78%

918

2400

161%

9

Strong

NGF

Dec-09

50

60%

14

25

79%

5

Avoid

NST

Sep-14

2

50%

96

300

213%

9

Strong

OGC

Dec-10

50

50%

207

400

93%

9

Strong

PRU

Sep-11

38

94%

24

200

733%

9

Rebound

RED

Sep-11

38

96%

8.7

?

    

Wait

RRL

Dec-11

38

78%

129

250

94%

8

Strong

RSG

Dec-11

38

89%

23

60

161%

9

Rebound

SAR

Dec-11

38

78%

21

90

329%

9

Strong

SBM

Dec-10

50

97%

8

?

    

Wait

SLR

Dec-11

38

94%

22.5

85

278%

6

Rebound

TBR

Aug-14

3

33%

265

500

89%

9

Strong

TRY

Dec-12

23

91%

46

200

335%

9

Rebound


Non XGD stocks I like

GOR

Apr-11

44

76%

20.5

150

632%

9

Strong

CGN

Sep-09

62

97%

12.5

50

300%

9

Strong

ABU

Nov-11

36

82%

22

90

309%

9

Strong

MLX

Dec-10

50

56%

70

300

329%

8

Strong

I own NCM, NST, TBR, BLK, ABU, CGN, GOR, DRM, MLX.

What if … a rising gold price forces a short cover rally ???

by Barry Dawes
Housing starts

What if ... a rising gold price forces a short cover rally ???

Key Points

  • US equity markets at all time highs again
  • Asian markets still surging
  • Gold price jumps from recent 54 month lows
  • Gold stocks surging from 10 year lows
  • Coal market turning?
The US equity markets have continued to make new highs on strong earnings and economic data and on improving employment sentiment measures.  The stocks performances in the US are encouraging their counterparts in Europe and Asia along, as the various market indices also hit all time or new rally highs. Economic data in the US, Europe and Asia are encouraging but are generally at odds with what has happened with the out of favour basic industries and commodities.  Growing GDP and Industrial Production usually is good for commodities and the supply/demand pictures for most commodities are generally in balance, but there has been obvious new supply in commodities such as iron ore, coal and oil that has coincided with a short term slowing in demand from some quarters and the recent surge in the US$ has encouraged some market players to conclude that commodities must fall more.  But if the recovery is now quite clear should there be further falls? Market action is now suggesting that the 44 month decline (basis CRB CCI) in commodity prices may now be bottoming out with agricultural commodities generally making lows in September, industrial commodities (LME metals, nat gas) in October and oil, coal and precious metals in November. # gains from November lows Interesting to see that agricultural commodities fell about 15% to make their lows in September while the USDX rose 4% and subsequently recouped all their losses while the USDX rose.  Industrial commodities made their 6-12% lows in Oct and then rose with the USDX.  Precious metals and oil made lows in November and sharp gains have been made since those lows. The markets have had at least 44 months to play the bear side and now the world is fully convinced that war, plague and debt will continue to cut demand, China will slow down sharply and Europe will be in recession for ever.  And of course that the silly mining industry will continue to increase supply. But what if?   What if the Dawes Points view that the US is doing very well as indicated by a strong stock market and GDP data and that positive attention might now be paid to commodities as demand is seen to no longer be falling? Short cover rally anyone?  Note the very positive action in the US equity markets this week. What is a Short Cover Rally?   Well, some traders have sold assets that they hope to buy lower and make a profit.   If you are `short’ in futures or securities markets you have to buy them back or face unlimited losses.   Other have sold and gone to cash.  Others have just not bought so are underweight or underrepresented.  To cover `shorts’,  stock needs to  be bought back.  Underweight investors need to add to positions and then new money comes in.  Can be explosive.

What could this short cover rally actually mean?

First, there should be a bottoming in gold which is a proxy for all things commodity.  Did we get that last week when, as the last Dawes Points suggested, that gold was being `hammered into an important low’?  Demand is so strong and physical metal is hard to find.  Coins have been sold out from the mints. The extreme low valuation positions of gold equities give a lot of credibility to that possibility of an important low.  Platinum also made a key daily 'reversal' of making a new low then closing above the previous day's high on Friday. Higher gold might solve a lot of problems. Then other commodities should start to improve.  As shown above, sugar, wheat, corn and soy beans have already jumped well off their lows.   The LME metals and natural gas are higher today than in their October lows. Oil may have also made a very important low last week after a 32% fall since July, and note that the oil majors Exxon, Conoco and Chevron made their lows in mid October, a month before this low in oil.  US Lumber made its 2014 low in June and now could be very strong as housing starts continue to pick up. Iron ore looks to be still weakening through oversupply. I was amazed at this graphic.  Housing starts have fallen so much that it will take years to catch up to the need for another 1.5 million new units per year. The Philadelphia Housing Sector Index made an 11 month low in October but has bounced back to almost make a new all time high. Housing starts The industrial sensitive stocks and mining stocks should start to rally as short positions are unwound and bought back. Alcoa, Boeing, US Steel  and Caterpillar are all bouncing.  BHP, RIO and Freeport have improved from recent lows. Then the bond market needs to reassess itself.  Those holding low yielding bonds will be asking questions about how they will be able to sell them.  And where will the money go? And where will all the cash sitting on corporate balance sheets go?   Where will the bank deposits go?  Probably chasing real assets.   These numbers were discussed in the last Dawes Points. The amounts of cash and bond holdings are way bigger than equities today.  A short cover rally could ignite a much stronger market response.  What will the remainder of the year bring us? I understand many `value investors’ have reduced equity holdings in the US.  These may be forced to change their views, especially since the Dow Theory is now bullish. Where will the US$ sit in all this?  Where will the A$ go? You know my views.  Now, let the markets do the talking.

Let’s talk commodities

Commodity prices should be all about supply and demand, and these factors are far more important than the level of the US$.  Since the beginning of 2012 the USDX has risen 10% and the CCI has fallen 20%.  Since the latest 10% rally in the USDX since 1 July, commodities, as shown by the CRB Index (basis – CCI), have fallen 12%.    Not much of longer term correlation and the relative performances of agriculturals etc as noted above doesn't give much to rely on. At the margin, lower prices increase demand for commodities and reduce supply.  This is happening now.  Individual commodities have their own market patterns and the September lows of the agriculturals may be telling us something here. The industrial production data for China was >8%pa for Sept Qtr and India is looking at a GDP number in 2015 at >8%, higher than China.  These two great nations are important keys in commodity demand. Demand for gold from China and India has most recent data running at extraordinary high levels and has kicked the gold price up an important US$50/oz. The world is generally short raw materials and despises gold.   Gold shares hit a low last week and the ASX Gold Index was down to 83% below the April 2011 highs. Australian investors, however, are significantly underweight resources shares.

What about Equity Markets

The US markets are making new highs again today in what can be called a `bull hook’ -  the left side of an inverted parabola that then just surges! Many of these US stocks are truly remarkable given their earnings and their strong performances over the past few years.  The Dow Jones 30 Industrials have done well as has the S&P 500 but don’t forget that the Wilshire 5000 shows great strength in its breadth. Looking at the breadth and gains of these stocks it is hard to see how the market place could be negative on the US economy.  It is worth reviewing the Dow 30 to see what is there now. Gains by Dow Jones 30 Stocks    Market cap US5.0 trillion  PER 15.75x
14 Nov 2014 US$ 4 years 3 Years 2 Years

2104
Communications
AT&T

35.90

22%

19%

6%

2%
Verizon

51.50

44%

28%

19%

5%
Consumer
Disney

90.80

142%

142%

82%

19%
Home Depot

98.24

180%

134%

59%

19%
Coca Cola

42.73

30%

22%

18%

3%
MacDonalds

96.21

25%

-4%

9%

-1%
Nike

95.50

124%

98%

85%

21%
Proctor & Gamble

88.11

37%

32%

30%

8%
Walmart

82.96

54%

39%

22%

5%
Financial Services
American Express

90.67

111%

92%

58%

0%
Goldman Sachs

189.98

13%

110%

49%

7%
JP Morgan

60.28

42%

81%

37%

3%
Travellers

102.43

84%

73%

43%

13%
Visa

248.84

254%

145%

64%

12%
Health
Johnson & Johnson

108.16

75%

65%

54%

18%
Merck

59.07

64%

57%

44%

18%
Pfizer

30.34

73%

40%

21%

-1%
United Health

95.11

163%

88%

75%

26%
Manufacturing

 

 

 

 

 
Boeing

128.86

97%

76%

71%

-6%
Caterpillar

101.34

8%

12%

13%

12%
Du Pont

70.80

42%

55%

57%

9%
Gen Electric

26.46

45%

48%

26%

-6%
MMM

158.85

84%

94%

71%

13%
United Technologies

107.45

36%

47%

31%

-6%
Petroleum
Chevron

116.32

27%

9%

8%

-7%
Exxon

95.09

30%

12%

10%

-6%
Technology
Cisco

26.32

30%

46%

34%

17%
IBM

164.06

12%

-11%

-14%

-13%
Intel

33.95

61%

40%

65%

31%
Microsoft

49.58

78%

91%

86%

33%

Average

  

70%

59%

41%

8%
Dow Jones 30

17634

52%

44%

35%

5%
Russell 2000

1173.81

50%

58%

41%

1%
Some of the performances of these stocks are extraordinary and it is just about only the basic industries that have done badly in 2014. (IBM is the exception with its crazy stock buy back programme!).  This table is worth spending a few moments on. As the economic numbers improve it should be these activity sensitive stocks that do better.  And resources stocks. Asian markets are continuing their surges and Australia will eventually be following.

Gold

This has been discussed in Dawes Points but the extreme low levels for gold stocks are telling us that the lows for gold are probably very close (and probably behind us). The 23% rally from the lows here is probably signalling a major change. Also, gold in other currencies looks ready to continue the long term uptrend, especially in Yen. Gold is now all about demand from India and China.  This demand is unprecedented and will change the way gold is viewed.  Much higher prices are coming.

Resources stocks in Australia

The activity and optimism obvious in recent trips to China, Singapore, Kuala Lumpur and Bangkok contrasts greatly with the deep pessimism in Australia and the holdings and activity in resources stocks are well down on long term averages.  You might say they are hated.  Certainly despised. Some fund managers no longer hold BHP. It is now only 6% of market turnover- down at least 50%. Mining and Mining is down 50% or more.  Ignored. Small Resources.  Irrelevant. Gold.  Clearly despised at just 1.5% of turnover!

 A turn coming in coal?

A final note.  If gold is despised then coal is truly hated. But just look at these.  Maybe a turn coming in coal. A coal ETF had an October low. Coal stocks in the US are looking to turn up after long declines. Walter Energy Consol Energy Let’s hope this all happens.

CBG Capital (ASX Code:CBC)

by Alison Sammes

About CBG Capital (ASX Code: CBC)

CBG Capital provides an opportunity to invest in a portfolio of Australian listed shares in companies both within and outside the S&P/ASX200, managed by Ronni Chalmers and the team at CBG Asset Management.

Offer of shares in CBG Capital ASX-listed investment company

Paradigm Securities is focussed on the Resources Sector and whilst the sector has been very difficult for some years Paradigm still considers that an upturn is not too far away. This focus has meant that Paradigm does not usually give advice on general stocks outside the Resources Sector. Paradigm is however, pleased to be able to recommend participation in a new listed investment company that holds a balanced Australian equity portfolio. It is seeking up to A$50m in an Initial Public Offering in a proposed ASX listing. CBG Capital is run by former BT Australia investment manager Ronni Chalmers who set up his own boutique funds management company, CBG Asset Management, in 2001. The company’s two funds have consistently outperformed the ASX 200 accumulation index since inception. In the latest Mercer survey the CBG Australian Equity Fund was the fifth best performing fund out of 95 fund managers. CBG Asset Management was awarded the Sky News Business Golden Calf Award in 2013 for the Best Boutique Australian Equities Manager. CBG Capital is seeking to issue up to 50 million shares at A$1.00 each and will have a 1:1 separately listed attaching A$1.00 two year (Sept 2016) option. The minimum of 16m shares has already been achieved. The fund can have up to 25% outside the ASX 200 and so has been able to select smaller growth stocks that can give additional portfolio performance. The listed fund should replicate the stocks in CBG’s existing funds and should achieve an attractive fully franked dividend yield of 4-5%. The fund offers a stable long term (5-7 years) horizon for capital growth and income within the Australian Share market. The issue closes on 20 November. Attached are links to three documents:-
  1. Description of CBG Capital and its proposed ASX listing fund
  2. The CBG Capital Ltd LIC fund prospectus
  3. An application form to complete and send back to me at Paradigm Securities (bdawes@psec.com.au)
Application monies can be sent by cheque to Boardroom Pty Ltd GPO Box 3993 Sydney NSW 2001 Or Paradigm Securities Pty Ltd GPO Box 5263 Sydney NSW 2000 Applications can also be completed and emailed to me with funds sent electronically to the Paradigm Securities Pty Ltd Trust Account BSB 082 067 A/c 14-201-6796 Please call me if you have any query on this offer. +6 1 2 9222 9111 10 November 2014 Barry Dawes

Head of Resources BSc F AusIMM MSAA MSEG Follow me on Twitter @DawesPoints

Dawes Points Where are we now

by Alison Sammes

Where are we now?

Key Points

  • US equity markets hit new all time highs
  • Asian markets surge
  • Economic data showing robust growth in many countries
  • Global cash levels still very high
  • Commodity prices may be readying for a surge in 2015
  • Chinese steel production still over 820mtpa and 820mt YTD (+5.3%)
  • Iron ore imports into China up 15% YTD and likely to exceed 900mt
  • US$ still strong for now
  • Japanese yen breaking down
  • Global bonds have spike high then sell-off
  • Gold price hammered into an important low?
  • All these indicators say BUY RESOURCES  STOCKS!!
Interesting and volatile times we live in!  As hoped, the recent stock market decline wasn't one to be concerned about after all and now we have all time highs in the US and market surges in most places from India to Shanghai, Tokyo and even Australia.  What are these markets telling us about where we are now?  The thought of the global economic boom is still there in my mind and these actions give me more confidence that the likelihood is increasing. Don't laugh.  Look at the data. Dawes Points has continually emphasised that the markets are telling us that the outlook is far better than the commentariat would have you believe and the markets last week certainly gave some evidence that more is to come.  The Dow Theorists, mostly bears, now have to turn bullish because all three Dow Indices (Industrials, Transports and Utilities) are at all time highs and have confirmed the next leg of the Bull Market is underway.  Many other bears will be forced to change their stances. The 4.8% jump by the Nikkei, and >1% by Mumbai, Shanghai, Singapore, Hong Kong on Friday followed the lead from the US and are likely to be firmer again this week to reflect Friday's US action.  Shanghai is up 21% since June and India is up 21% since May in the latest stage of these moves. The US economic growth numbers of +3.5% for the Sept Qtr are part of a line of results that have given 4 of the past 5 qtrs at above 3.5% (5qtr ave 2.8%pa) and a general uptrend for the past two years and certainly don't suggest the end of the world. United States GDP Growth Rate Corporate earnings for many companies in the US have been good and FactSheet reports for Sept Qtr 2014 that, for the 362 companies it follows, 78% have had earnings above the mean estimate and 59% had sales above the mean estimate. EPS figures for these companies are 7.3% higher than a year ago and about 28% higher than in 2007 pre GFC. The good US economic growth data have been above expectations and many other countries are also providing this better data. More recent data and IMF forecasts* for 2015 paint a positive picture although much of the recent data in UK and Europe are better than IMF forecasts* and its very recent outlook downgrades.
% GDP growth

2014

2015*
US

3.2

3.1
Japan

0.9

0.8
UK

3.2

2.7
Germany

1.4

1.5
China

7.4

7.1
Taiwan

3.9

4.0
India

5.6

6.4
In contrast to the strength of so many markets and all these positive economic and business data it seems the world still is in love with defensive positions in cash and fixed income.  Australia has A$1,640bn in bank deposits and recent discussions in SE Asia and China suggest investors and businesses currently have 35-50% of investable assets in cash. A survey by UK firm Hogan Lovells has an interactive website that uses Bloomberg data to give corporate cash balances for the top 1000 global corporations. Data for August 2013 was US$5,623 billion, up 39% from US$4,044 billion in August 2012. Look at these numbers in US$bn and what they might be now.
Region August 2012 August 2013

+%

Now??
Nth America      1,850      2,462

33%

3,000??
Asia Pacific      1,100      1,790

63%

2,000??
Europe         837      1,033

23%

1,100??
UK         147         186

27%

200??
Latin America           71           97

37%

110??
Other           39           55

41%

60??
Total      4,044      5,623

39%

6,470???
It seems highly likely to me that the rising stock markets and quite reasonable economic growth figures will be giving a great boost to confidence in the corporate sector and this should be flowing into the consumer and SME sectors.  And the first change will be for new orders for inventory to meet anticipated or received increased demand. These large cash inventories should be very important in determining economic activity everywhere over the next few years This issue of inventory really fascinates me. In the resources sector we are all familiar with the inventory data for metals on LME, COMEX and Shanghai Metals Exchange and export and import port stockpiles.  We all currently expect mine stocks to be minimal and sometimes data is available for smelter and steel mill raw and finished inventory. But inventory in the hands of users/developers/intermediaries/resellers can be difficult to ascertain.  And all these people see the same papers, TV, blogs, trade journals and watch the daily markets as we do.  Fear affects everyone's mood. Dow down 250 points means everyone buying a little less this week to ensure cashflows are OK. It has always been clear from previous cycles that when a recovery takes hold and business and consumer confidence picks up then demand exceeds consumption as downstream inventories are rebuilt. If copper is used as an example, the International Copper Study Group is forecasting copper consumption in 2014 to grow 4.4% from 20,525 ktonnes to 21,429kt, being about 900kt.  Refined copper production is expected to rise by about 1,100kt so that a net surplus of about 200kt is expected in 2014 on top of a surplus of 400kt in 2013. At current consumption rates the world uses almost 60kt per day. 410kt per week. Current LME copper inventories are just 160kt whilst COMEX is 30kt.  Total identifiable inventories are about 1,100kt. Should the processing stream decide to increase copper inventories by three days or 180kt then the demand for metal would rise not by 4.4% in 2014 but by 5.4% and the current LME and COMEX inventory would be absorbed. The mountains of corporate cash could easily find the US$1.2bn to fund this increase. Recent reports have suggested UK hedge fund Red Kite has already acquired more than 50% of these LME copper inventories. This extra demand can often remove a sizeable chunk of LME inventory and change the market balance for the year ahead. Note that LME inventories for copper, aluminium, zinc and tin have been declining in 2014 and have to be considered to be tight.
000t

1-Jan-13

1-Jul-13

1-Jan-14

1-Jul-14

 current

Jul-13

Jul-14
Copper

320

665

366

155

162

-75.6%

4.8%
Zinc

1220

1061

933

668

698

-34.2%

4.5%
Lead

320

198

214

194

227

14.4%

16.9%
Tin

12

14

10

11

10

-25.8%

-8.8%
Nickel

139

187

262

305

385

106.0%

26.4%
Aluminium

5210

5435

5458

5046

4429

-18.5%

-12.2%
Price would then be set by willing buyers and sellers and not unwilling buyers and desperate sellers. Many of these commodities could benefit. Speaking of inventory, it certainly seems that investors holdings in resource stocks are very low and will need to be increased!

Commodity outlook encouraging

Commodities have been weak recently with iron ore, oil and gold as good examples. But it is notable that many commodities and other markets (especially the A$) have had declines but are bouncing off on a long term support line.  Many agricultural commodities have had typical selling exhaustion patterns (as if from liquidation of long positions) and fit along these support lines. Should these commodities bounce then the uptrend can be quickly re-instated. Much has been made of the influence of a strong US$ but individual supply demand patterns are more important than just a currency adjustment. Oil and natural gas need to be closely followed because a strong US$ won't have much of an impact on these prices.The Islamic militants in Iraq may affect oil and gas fields and also may try to intercept tankers in the major choke points such as Straits of Hormuz to give some supply problems for the West.  Also US natural gas inventories are relatively low ahead of what could be another cold winter.

Steel in China

Consumption of steel is forecast by the China Metallurgical Industry Planning and Research Institute in Beijing (Sept 2014) to peak in 2017 at 763mt and decline to about 696mt by 2025. China Crude Steel Production was 779mt in 2013 and should be 820-830mt in 2014 and 850mt in 2015.  It should peak in the mid-term of 13th Five-year Plan Period (2016-2020) in 2017 at approximately 870mt before declining to 850mt by 2020 and 800mt by 2025.  Note that RIO and BHP have a longer term growth rate that takes crude steel production above 1,000mtpa. The most recent World Steel Association data gives 821mtpa for September for China but this should slow seasonally ahead of the 2015 Spring Festival to give the 820-830mt for 2014. To achieve this crude steel production rate, iron ore imports have been surging and are up about 15% YTD and have exceeded 1,000mtpa on a monthly basis.  The full year should be about 10% higher than in 2013. Domestic magnetite concentrate production should decline by as much as 140mtpa by 2018 such that total imports should exceed 1,150mtpa basis 62%Fe and with lower grade iron ores around 58% Fe this figure should exceed 1,200mtpa. Source: China Metallurgical Industry Planning and Research Institute I continue to be amazed at the incessant calls for crude steel production in China to decline sharply and to hear that demand for raw materials into China is slowing.  15%pa growth in 2014 after 10% in import growth in 2013 is a decline? Nevertheless, the iron ore price has slipped below US$80/t causing hardship for high cost producers, especially those in China.  This graphic suggests about 85% of China magnetite concentrate production is losing cash.  Perhaps 30% is losing over US$40/t. The steel mills do not appear to have yet rebuilt depleted inventories and port inventories are now declining and are at a 7 month low.  Some of the ore accumulated for low cost financing and placed on these port stockpiles may have now been already sold off and might reduce the additional pressure on the market. The major producers from BHP, RIO, FMG to Vale have been aggressively producing and selling ore to hurt the Chinese producers and to place pressure on potential new entrants.  What is really interesting is the indications that iron ore production costs are coming down rapidly for these big players and should all be below US$60/t CFR basis 62%Fe. US$80 should be an important level but Chinese steel mills inventory actions will have the final say by the end of the year.

US$ strength

The rise in the US$ against most currencies has been seen to be the main driver behind the decline in commodity prices and that the market place sees a strong US$ as deflationary. This is all very nice but look at these numbers.  The CRB Index (basis CCI – graphic above) has been declining in US$ since highs in March Qtr 2011 but despite the strong US$ it is actually up for most currencies in 2014! CRB Index rebased to 100 for 2011 highs in each currency, with Dec 31 and current figures.
  2011 High

2011

2012

2013

2014

 From high

2014
US$

100

82

80

74

70

-30.0%

-5.1%
Euro

100

88

85

75

78

-21.8%

4.5%
Yen

100

74

82

91

93

-7.2%

1.7%
SF

100

82

79

71

72

-27.6%

2.7%
A$

100

81

78

84

81

-19.5%

-3.6%
This graph of the CRB Index in Euros says something more.  This is likely to break upwards as global demand improves.  Copper has been rising gently in Euros since the March Qtr. While the US$ has been strong the Yen has not and the Yen makes up 13.6% of the USDX.   The Euro makes up 57.6% of this US$ Index and a close look at the cross rates doesn't suggest the US$ is going a lot further from here although it might not fall back much for a while.  The Yen is certainly going to be weaker but probably not many other currencies will. A weaker Yen is also obvious from this graphic says the A$ should be very strong against the Yen. Outflows of capital from Japan must be expected.  The gold price in Yen is also looking quite strong.

US T Bonds  - Surge then selloff

The remarkable surge in bond prices in mid October seemed to be a last gasp run and the decline since then still makes these bonds very vulnerable as global economic growth improves and deflationary risks recede. These bonds will also provide much of the capital that will join with cash to move into equities and commodities. The parallel of US TBonds with the US$ still needs to be considered. The US$ must follow its bond prices.

Gold price hammered into an important low?

Gold and gold stocks have been a hard road to follow but I think the fundamental arguments for a strong gold price and much higher gold shares remain. Governments destroy currencies by spending too much and racking up debts.   People who have lived through violent currency depreciation know the value of gold and the two biggest populations in India and China are showing this by buying as much gold as they can get their hands on.  Central banks are buying gold again.  Demand is stronger than mine and scrap supply so it can only be banks and hedge funds selling volume. How much do they have left? The evidence is clear that this uptrend has been broken.  A fair technical target could be US$700/oz if you wanted to be bearish. But this is also valid technical support with yet another market having three bounces along the support line. And this graphic is back to crisis levels.  Back below 2008 lows and back to 1986 levels.  Extreme long term support here for the US Gold Index! And to clutch at some other straws the sell off in the GDX ETF has been on massive volume and back to this pervasive and remarkable three point downtrend support line that we see  in so many markets this year. And when we look at gold shares against gold it suggests that this is the final selling and capitulation stage - or else gold is going to US$700 and most of the gold industry will close. This just screams that we must be near the end of the 42 month decline in gold shares. I particularly like NST, MML and DRM here as low cost producers and GOR, ABU, KGD, BLK and CGN as developers. Paradigm has opened an account with a bullion dealer which allows clients to invest directly into gold with delivery or to be held in storage.  Talk to me about it if you are interested. Stocks to BUY The major resources stocks BHP, RIO, FMG, WPL, STO, OSH are attractive opportunities and so many of the juniors are so cheap and very good value where currently funded. The Dawes Points Outlook is for this market to run for many years to the upside so there will be many opportunities coming through. For those seeking a general exposure to non resources stocks I can recommend the new A$50m IPO of CBG Capital LIC with a manager whose two funds have outperformed the ASX 200 reliably over the past 8 and 12 years respectively. Good growth and a fully franked dividend yield of 5-6%pa.   The minimum of A$16m has already been reached and the offer has a closing date of 20 November. A flyer on this will be circulated this week, but please call me on +612-9222-9111 if you'd like to discuss this. 5 November 2014  

Is this decline of concern?

by Barry Dawes

Is this decline of concern?

Key Points

  • US equity market in correction mode
  • Bond market frenzy but at levels well below the July 2012 highs
  • Many commodity prices down 15-30% since July 2014
  • Oil price down on output increases and soft demand
  • Shanghai stock market still rising and up 18% since June
  • Iron ore price showing signs of recovery
  • Major resources stocks bottomed last week!
  • Gold prices starting to stabilise and probably moving up
  • A$ bouncing back
  • Copper and zinc prices holding up well
  • Some small cap resources still looking very robust
The current sharp correction underway in the US has brought out significant pessimism on the economic outlook, the valuation of equities and the implications of the global debt position and the current tight liquidity.  The pull backs have been hardest for the sectors that had been strongest and the US `small caps’, the oil and gas and some technology sectors have taken the brunt of the selling. US T-Bonds have had a major fling over this last period.  10 year yields at <2% and 30 year <3%.  After 30 years of bull market. Scary action that is related to the US$ strength and action that strongly suggests an important turning point has now been reached.  This has been expected for some time but not with any success but it still needs to be closely watched.  When set against the background of action in other markets these bonds do look scary. Iron ore and oil have been on the front page with their declines but it is probably just as notable that almost all traded commodities from silver to soy beans have seen similar or larger declines since July.   Many may have bottomed last week. Many of these declines seem irrational against the near term fundamentals so it could be concluded that it is more a matter of liquidation by hedge funds and the like rather than a collapse in overall demand. In particular it is worthwhile to note iron ore imports for China are still strong and growing and in September exceeded 1,000mtpa again.  The last Dawes Points highlighted low steel mill inventories were and that port inventories were coming off again and at just 33-35 days imports these are 40% lower than at the time of the last peak in port inventories.  The iron ore price had all the hallmarks of a final sell off to end a 12 month decline that left about 200mtpa of Chinese magnetite concentrate production losing cash.  At least 125mtpa will soon close so imports for China can only increase. Iron ore prices are rising again now.  It will be interesting to see if they do the unthinkable and rise strongly through a squeeze. Oil is something different and has seen rising US crude production with higher output from Saudi Arabia and Russia meeting softer demand from Asia and a shortage of refining capacity in the US. The unconventional oil output from the Eagle Ford and Permian Basins is too much for US refining capacity and with the US Export Embargo from 1975 still in place the oil is banking up. Oil has the combination of new production, softer demand in some regions, a currency play, production market leadership tussles, substitution and efficiency drives and some good old Middle Eastern geopolitics that could get very ugly.  Trying to work out the fundamental drivers needs some good crystal ball gazing. Nevertheless, the US production growth from shales where technologies are improving recoveries from about 5 to +12% means fields sizes (Estimated Ultimate Recoverable – EUR – reserves) in the important Eagle Ford and Permian Basins are growing from about 350kbbl to about 550kbbl/well and with about 35-40% coming in the first year that is US$8-20m revenue per well.  The fall in oil to about US$80 will make it very hard for the marginal plays but prime Eagle Ford could work down to about US$60.   We need to note that this business is very capital intensive and new wells need to be drilled consecutively to maintain output.  A fall in net operating surplus will delay the next well.  We also need to be careful that this sector has not leveraged itself up to much.  The US E&P Sector has been a great performer as has been pointed out here several times but the sharp fall could be placing some players under great pressure. The Shanghai stock market performance (up 18% since June while Wall Street is down 10%) and the record import of iron ore by China last month doesn’t tell me China is falling over. There is the technical issue of Shanghai Exchange now synching with Hong Kong to make Chinese equities more attractive but I consider it is showing much more. The higher iron ore price last week allowed the big miners to bottom LAST WEEK and hold up well in this Wall St sell off.  Note that this was what happened in 2008 when resources stocks, commodities and China all bottomed in Dec Qtr 2008 whilst the Dow, S&P, All Ords and FTSE etc bottomed in March 2009. The big oil stocks also seemed to make their lows LAST WEEK as well.  Before the big low in oil prices.  Could be significant. Gold is showing very encouraging signs of wanting to move higher with trades at US$1250.  As noted in the last Dawes Points, gold is strong with a strong US$ so it is rising in other currencies even faster. Gold stocks are also starting to move again.  It has been painful these last few years but the ASX Gold Index XGD bottomed in Dec 2103 as did the GDXJ (small caps gold stocks ETF)  even though the major XAU (US Philadelphia Gold Index) and the GDX (its ETF) recently made new lows. Clutching at straws maybe.  But maybe not.  Just check out the performance of the two precious metals royalty companies Royal Gold and Franco-Nevada.  No new lows here.  Strong signals. Much more coming here.
The A$ recently had a sharp pull back to just under US$0.87 but it simply came back to the 100 year downtrend again.  The A$ and gold (especially gold stocks) are closely related.  High gold and gold stocks will mean a higher A$. The A$ on the cross rates tells that same story. LME metals have held up well during this crisis.  Supply/demand factors are playing here more strongly than the market action with gold and silver.  Not a lot of new capacity and LME inventories for most metals are still low or declining.  How can you not like zinc, tin, aluminium, copper and cobalt.  Supply side crunches area likely with some of these over the next year or two. And then there are the small caps resources companies here on ASX.  Many with early stage projects are in strife with not much money and limited expectations.  But many with good projects and some funding look very attractive whilst some lucky companies and their shareholders have done very well and are getting more funding.  Scores to choose from. I have stayed the course on this bullish tack because most things I see confirm what I have been saying in these notes for the past two years.   The market has not agreed on many of these points but equity markets ARE heralding better times as are commodities. So, the best way forward is to add to that portfolio of stocks with dividend paying gold stocks, some iron ore plays, some LME metals companies, high yielding oil and gas plays, onshore petroleum E&P companies, some technology metals companies and of course some explorers. Note that the major resources companies have very attractive yields of 3-6% and are at very low risk entry points (BHP 3.8%, WPL 6%, FMG 5.5%, PNA 3.1%, RIO 3.7% , NST 2.9%, OZL 5.0%, ORG3.5%).. The keys are correlated with bonds, currencies, equities and commodities (especially gold) all providing guidance for what the future holds. The right combination of market moves may soon give the signal that cash is too staid, bonds are too risky and commodity related equities are just far too cheap. All these features are telling me that it is not the end of the world, that resources are outstanding value and that resolution of this current bout of pessimism will produce a much clearer and positive outlook that was really always there.  This decline is not a concern but a real opportunity.

Short term selloff creating value

by Barry Dawes

Key Points

  • Pessimism calls very strong again
  • US markets recently made new highs
  • Asian equity markets breaking out upwards
  • Shanghai stock market up 17% since July
  • Chinese steel production running above 810mtpa
  • Activity in the smaller caps continues to improve
  • Sharp falls in commodities now overdone?
  • Could be an important low developing and creating value
The past few weeks has provided a salutary lesson in the volatility in the market place and early calls for the market upturn in all things resources.  The fundamentals of economic growth still look very good and recent market gains for many small cap resources appeared quite constructive.  Stock markets around the world are still signalling much better days ahead. But pessimism is again strong globally and the short term trading trends continue to spook these thin markets where traditional investors are still holding onto defensive positions and lots of cash. A surging US$ has recorded a 7% rise in the USDX since mid July and sent the world looking for deflation/catastrophe havens again due to ISIS and also the tensions in the Ukraine. And whatever else. Most commodities came off more than the rise in the US$ and the continuing chants of Down with China and China Down reached another crescendo despite the Shanghai stock market surging 17% since July and the PMI remaining a good 51.1! The iron ore price and the A$ sank together. So is it all over now for resources? Let’s just review the evidence and consider with the graphics from the last Dawes Points. First
  • The world’s largest securities market, US T Bonds, peaked in July 2012, over two years ago. Higher bond yields are now surely coming because the deflation is over and the US economy is expanding. Cash levels are still high.
  • China’s economy continues to grow at >7%pa with crude steel production likely to be up >6.5% in 2014 with 8mth YTD figures up 7.6% and iron ore imports at new records approaching 1,000mtpa and up >16% YTD.
  • China steel industry data also show a 35% increase in steel exports. The rise in port iron ore inventories gets a lot of attention (note these may have peaked and are now falling) but inventories of iron ore and finished product at steel mills are very low indeed
  • Many commodities have fallen 15-20% since July in a market that reeks of hedge fund forced selling.  Some much more. Interestingly, Sugar has experienced a sharp fall but it has reversed and is now heading higher.  Is it a leader?
  • The current high volatility into lows for in the US equity markets could be suggesting a trend change – to up!
  • Gold in US$ is still doing OK but during this time of dollar strength we have gold prices in most currencies breaking 3 year downtrends and turning up.  Encouraging but there is very bearish sentiment.
  • Most metals have low or declining inventories and several like tin, zinc and nickel have medium term structural deficits that MUST result in squeezes. Many other metals are just tight.
  • The A$ in most of 2014 had been consolidating after its last selloffs in 2013 and then in January.  This last pullback of 7% matches the US$ rise and very interestingly is just back to the support on the 100 year downtrend line of A$ vs US$.
  • So many markets have broken the 2011 downtrends with good rallies only to fall back to support on these important downtrends.
My travels in the past few months have taken me to site visits in some exotic locations but also Singapore and just now Melbourne for IMARC. I delivered a paper at IMARC on an outlook for the A$ with key conclusions being
  • Resources exports having risen from A$50bn in 2014 to almost A$200bn in 2014 will get another big kick from the new LNG plants that will increase this to A$280bn or more by 2020.
  • The LNG exports will stimulate a major surge in activity in onshore oil and gas.
  • The A$ looks very good on the cross rates against Yen, Pound and Euro.
IMARC also brought out the extraordinary productivity gains in mining technologies such as Orica’s amazing new blasting techniques that can separate overburden from ore and also cleverly use chemical energy to fracture rock to smaller pieces rather than using slower and more expensive mechanical energy. RIO, too,  is well on the way to higher productivity in iron ore mining with driverless blast drilling, driverless excavators, driverless truck and of course driverless trains. The productivity benefits are only now being felt but you can be assured that the blow out in costs is being rapidly wound back and that Australian mining companies will again be very competitive. All these market actions seem to me to be suggesting a short term panic that has just about run its course and is leaving outstanding value on the table.

Barry Dawes

Head of Resources

BSc F AusIMM(CP) MSAA MSEG

Follow me on Twitter @DawesPointsBarry Dawes’ expertise in the Australian resources sector is based on his knowledge as a geologist combined with over 30 years’ experience in the resources investment sector. Prior to founding Boutique Investment Firm “Martin Place Securities” in 2000, Barry had worked in senior executive roles of investment management with BT Australia, equities research for Bain Deutsche Bank and equities research and corporate finance for Macquarie Bank. He is currently a Director of a number of unlisted public operating companies. Barry has a substantial depth of knowledge and experience in the international resources industry and is well known for his views on the sector. 

 

   

The Forrest Review

by Barry Dawes
I had the honour of hearing an inspired presentation yesterday in Melbourne by Andrew Forrest on his proposals to "create parity" for indigenous people in Australia. The proposals aim to improve the health and education of indigenous people through hands on programmes that restore personal self esteem and offer employment prospects. Andrew Forrest's Fortescue Metals already spends well over A$1,000m on services from companies owned and run by indigenous people, and has seen first hand the major reductions in alcoholism, other drug problems, and  in domestic violence as indigenous Australians gain employment and even run their own businesses.  He has also seen improvements in health, well being, education and overall employment prospects of indigenous Australians.

Self help is the best help

It is clear that Andrew Forrest has very wide support amongst indigenous Australians for his recommendations to be accepted.  One such person here in Melbourne gave an impassioned plea for support for the recommendations.  He said that his broad family of just over 200 had experienced the, mostly premature, deaths of 38 family members in the past decade.  Alcoholism, drugs and domestic violence and near perpetual unemployment were standard in his family. I consider that this is a worthy issue deserving widespread support. The Forrest Report on Indigenous Jobs and Training Review provides 27 recommendations for consideration and adoption. Public comments on this Review are invited but the closing date is today Friday 26 September. I invite you to participate in this debate by visiting the website and making a submission. I suggest you do three things:-
  1. Read the PowerPoint Presentation summary
  2. Review (if you have the time) the full report.
  3. Visit the "how to get involved" section of the website and complete the “Have your say" form:
If any of the links are not working, please visit:https://indigenousjobsandtrainingreview.dpmc.gov.au  

Gold Market

by Barry Dawes
  • Gold bull market set to resume uptrend
  • Sovereign markets for gold, currencies and bonds confirming a positive resources outlook
  • Gold demand still robust
  • Islamic State issues concerns increasing
  • Gold bullion account established for investing or trading
  • Australian gold equities still very cheap
Gold prices have just travelled sideways in US$ for almost 15 months since bottoming after the April-June 2013 sell off despite strong physical demand from China and India and continuing takeup of gold coins. US$ gold has generally held its price since then but is down 34% from its high of US$1923/oz in Sept 2011 but well off the Dec 2013 sub US$1200 lows. The picture for gold itself also is far more encouraging when viewing it in other currencies and when the sovereign bond markets are brought in we can see some fascinating trends developing. Gold in the major currencies appears strongest in Yen terms with gold in Euros and Pounds not far behind.  The Yen looks curiously very weak against most currencies. A$ gold is steady. The US T Bond market peaked in July 2012 and the recent falls in yields are interesting, particularly in European bonds, but it all suggest a major generational low in yields is coming soon and then everything looks dangerous to be in bonds for at least the next decade.  How will these bonds ever be repaid? A new issue for having the security of gold is arising with the actions in Iraq and Syria that could have a major positive impact on gold prices in the very near future. Risks of the Islamic brotherhood revolts spreading into Muslim countries around the world are high and the oilfields in the Middle East and, more importantly the oil States themselves, are vulnerable.  The risks go further.  Nigeria, Libya and Pakistan are all vulnerable. Gold shares suffered a more severe battering in their 32 month bear market from the April 2011 record highs but they too made their lows in December 2013 and many have since rallied nicely. Bringing these all together still provides a positive trend for gold and the extreme lows in prices and cross-asset relativities for gold are considered to be well behind us now. Gold and shares in Australian gold producers are good insurance and the markets seem to be agreeing with this.  Paradigm can help you here. Paradigm has set up a dealing account with Capital Bullion to allow you to buy and sell gold and bullion gold coins and have somewhere safe to store them. Please call me to discuss. As noted above, gold in US$ has been trading in a relatively narrow band between US$1200 and US$1400 for over a year while holding a 13 year long-term uptrend of sorts and still oversold.

 

In the shorter term the action can be seen as within a relatively narrow band but has shown some violent action within it. It should be expected than the violent action will continue when the next market direction is confirmed.   Nevertheless the action seems to me to be very constructive and should soon be resolved with an upside break out. Gold in other currencies is also encouraging with Euro Gold close to E1000/oz. Gold in GBP has broken a downtrend. Gold in Yen seems to be leading.    Something is odd with Yen just now, could it be energy dependency? Or something else? I will come back to this later. Gold in A$ is steady but a break to the upside is due soon. And just as an aside, it is worth noting silver.  A moment of truth coming up here.  A big break seems likely here.  Up or down? The supply and demand says break upwards.  But let’s just see. Some very interesting graphics here to consider with the macro picture . First.  Gold  has some long term seasonal influences .  This graphic courtesy of Dmitri Speck suggests that from September until December an average seasonal move of about 3% could be expected.  So after this seasonably sharp early September decline we could see US$30-50 rise by Christmas.    On average.  Pity this graphic didn’t include the 2013-2014 volatility. But it is what it is and it is helpful. On other interesting points to consider are the US$’s recent rapid move into the Top Channel after 8 years of trying.   Is this of significance?  Should be, with improving global economic outlooks and the US leading.  The shale gas revolution is certainly helping with US energy costs and competitiveness but I still think the emerging global recovery is better for other countries than just the US. The short term for the US$ is very much overbought with it surging 4% in two months and all momentum indicators signalling overbought. It is also noteworthy that this US$ index is rising whilst the US$ is actually weakening against the Chinese Yuan and the A$. And with the various European bond markets rallying into parabolas it must be now saying that it is very close to the end of the global bullmarkets in bonds. US 30 year T-Bonds had a fall in yields but it is very hard to see lower rates here. Note the low in yields here in the 30 year was two years ago in July 2012. Especially when the recent lows in yield were not confirmed by similar strength in the 10 year bonds.   From the commodities and resources viewpoint it will be the flows OUT of these bonds that push up equity markets and commodities.  The data shows about US$80,000bn in bonds global bonds. The local Australian resources market would be a very happy recipient of just 0.1% (US$80bn) thank you.   In the gold shares the US Philadelphia Gold Index (XAU) has bottomed and turned up after basing along a major longer uptrend. The market action can be seen better through the two ETFs GDX (the XAU) and also through GDXJ which is the smaller cap stock ETF. Gold stocks in North America are still at only 30% of their long term relative value against gold itself but recent action suggests a turn is underway after bottoming and moving up. The fall in gold stocks against the general market has been even more horrendous but that fall is over now and should start to move up again to give significant outperformance. Here in Australia the gold sector is recovering and some excellent gains were recently made by some of the Paradigm favourites but the index has again drifted back to levels equal to the 2004 and 2005 lows. Looking at the performance of the ASX XGD it is still more than 70% below the April 2011 highs. I still like NST, GOR, ABU, SAR and SAR with BLK and ATV very cheap. The bottoming process is still underway as can be seen from the ASX  Small Resources but the character of the market is showing strong performances by many small resources stocks (that may not yet be in the  XSR) and a considerably stronger market that is taking capital raisings again.   This is clearly the time to be bullish. And to leave you with a few other things to be positive about:
  • The Chinese stock market, along with the rest of those in Asia, is gaining real strength.  It is hard to reconcile the continuing negativity about China with performance of Shanghai and almost all the other Asian stock markets.
  • The TSX-Venture Index is now showing some life and its direction will support the ASX Small Resources.  A break above about 1100 on this index would be very positive.
  • And finally this one really intrigues me.   What is happening with the Yen?  The A$ looks to be about to make a strong upmove against the Yen over the next year or so.  The Yen is also showing (see above) a much stronger gold price than in US$.  Keep watching this.
Barry Dawes 8 September 2014 Disclosure: Barry Dawes holds GOR, NST, ATV, BLK. 

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