Key Points

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

Gold has been in a broad uptrend since is its lows in 1999 at US$246/oz and the combination of strong physical demand from China and India, with the usual financial and monetary profligacy of the Western World's banking system, suggests this 15 year bull market still has a very long way to go. The 650% rise to US$1923/oz over 12 years and the subsequent 37% decline over two years to the June 2013 low of US$1198/oz is a reasonable correction to such an upmove.  However, the 65% decline in the US gold indices and the 80.0% decline in the ASX Gold index don't really stack up as corrections that are reasonable. The result though is an extraordinary opportunity to NOW buy highly valuable assets at a fraction of their current true worth and at an obscene pricing against their longer term values.   TALK TO ME NOW! In 2009 I made a very public price forecast that we would see US$5,000/oz over the next few years and now consider that this will come to pass before 2017 as the next leg of the bull market takes hold. So what are the key drivers to make these sorts of claims? Yes, you say I am always optimistic.  Well yes.  I am bullish because of what the markets are telling me.  Gold rallied from the US$248/oz low in 1999 and in 2002 I forecast US$1500/oz would be achieved in the coming bull market.  The price target was exceeded.  Was that being bullish or optimistic?  The US, German and Indian markets are at strong all time highs as I have been highlighting over the past couple of years. Is that bullish or optimistic?  Well, who cares really?  As long as it is a correct forecast it doesn't matter.  Have a look at the performance of most markets from cyclical lows (that are always accompanied by never ending pessimism) and you will be amazed at the percentage gains the subsequent rallies achieve.  Getting the direction right is 80% of the outcome. Chinese steel production reaches new record levels as was forecast despite all the wails of it’s imminent collapse.  Was that Paradigm forecast of strong production growth optimistic or bullish? When the Chinese steel mills finally sort out their inventory policies and the world recognises that record imports of iron ore into China and record exports by Australia against a backdrop of uneconomic Chinese domestic magnetite concentrate production result in a much stronger seaborne iron ore market into 2015, will that be bullish or optimistic? The markets have been telling us very clearly that the claims of US Depression, banking collapse in Europe and China falling over were just wrong. Was that being bullish or optimistic?  Or was it really reflecting the `facts’ that the markets were telling us weren't the same as the `facts' that the Wall Street economists and their ilk were (and continue to do) forcing down our throats. So being negative, optimistic, bullish or bearish is not so very important but what IS important is recognising what REALLY are the major issues as shown by the messages of the markets. The daily evidence of far better than expected economic data from almost all countries puts paid to the bears and their stories of financial Armageddon.  And the bears have much to answer for. But coming back to gold. Well, what are the drivers for the renewal of the gold bull market.  Demand, Supply, Inflation, Wars, Bonds, US$?  All of the above? I much prefer to think about supply and demand because the other issues are more guess work or just market sentiments that can wax and wane. The Goldfields Minerals Services (`GFMS’) and the World Gold Council give some useful data on this supply and demand for gold and I have done some navel gazing and added my forecasts.  Forecasting is always difficult, especially forecasting the future as Samuel Clements (Mark Twain – one of the world’s true geniuses) would say.  Have a look at these numbers from GFMS with Paradigm forecasts. These figures suggest a net change in demand of 1000-1200tpa to be drawn down from inventory is likely to occur over the next few years. These are very large and possibly very important numbers for the future of gold prices. But first let’s look at these numbers now and review what has happened over the past decade. First, look at Mine Production. From 2,504t in 2004 to 3,022t in 2013.  Long term compound growth rate is 2.1% pa.  Several big +5%pa growth years but many as declines or just modest gains.  Sth African gold production has collapsed as the goldfields on the Witswatersrand run out of easy ore and totally out of friendly high risk capital. Major players USA and Australia have also declined with Australia less so.  Peru is rising but it has been China that has surged to become global #1 at over 420tpa. It is quite sobering to review the high level of global exploration expenditure for gold and the low gross discovery results to date. Mine production has only achieved 2.1%pa despite the 12 years of rising gold prices.  However, don’t be fooled by the gross numbers because focussed gold explorers are still doing well in Australia and also in other parts of the world such as Africa, SE Asia and Sth America.  Just watch for the key players mentioned below!  Some explorers are better positioned than others. The net conclusion is that gold mine production growth is unlikely to be able to exceed 3%pa for the next five years from my assessment and primarily because the big players such as US, Russia and RSA are likely to decline and offset strong growth in Africa and Sth America. Unit production costs have been rising due higher input costs, overall declines in mill head grades and increasing operating depth of mines.  Some established mines have suffered from these rising costs but most new mines have been engineered on much lower head grades so will be pushing unit mining costs higher.   The GFMS latest figures for all-in costs have been at over US$1600/oz. Cost pressures are definitely reducing and everyone in the gold mining industry is now extremely cost conscious.  Expect to see significant drops in some operations. Nothing as volatile as gold will allow gold production to grow at a steady 3%pa.  Try up 10% or down 15%.  But let’s use some 3%pa numbers to guess what we think the gold industry might achieve.  3,082t in 2014 and 3,271t for 2017. The next issue in Scrap Supply. High prices bring out a lot of scrap and high prices into 2009-2011 brought about a 100% increase in supply to a peak of over 1,725t in 2011. Gold is a strange beast given that almost all the estimated 170,000t mined in history is theoretically still available as supply yet as gold is shifted into strong hands and as weak sellers are probably exhausted it may be that scrap supply does not increase greatly from here. So total physical new supply is plateauing around 4,400tpa with a modest annual increase expected. Part of new `supply’ was reduction in hedging and eventual netting out of gold sold forward.  Mines had `borrowed’ and sold gold from bullion banks in their hedging and so as they delivered gold into these hedges they were `repaying’ bullion banks and not adding to new supply to the market. Miners are likely to add to short term hedging positions but as these are likely to be `current’ items of less than 12 months it should not significantly add to annual figures. Central Banks used be a part of the `supply-side’ equation but as they are now on the `demand’ side they don’t figure here anymore. So total gold supply, whatever that means, is around 4400tpa and has been growing at about 4.2%pa over the past decade. The demand side is now very interesting. Jewellery demand (mostly high carat (20-24ct) investment chain) is driven mostly by Indian Diwali requirements from rural villages in weddings and dowry gifts. Western jewellery in 18ct rings, watches and the occasional pendant don’t add up to much compared to Indian demand.  India’s love of gold is underpinned by a traditional drive to improve family wealth and as the rising middle classes in India increase their affluence, so the demand for gold can only increase. Indians save about 30% of their incomes and about one third goes into gold with about 75% into jewellery. Quotes from The World Gold Council’s 2010 survey of India include `Gold is an integral part of daily life where purchases of gold jewellery are considered as a form of liquid and tradable investment for the accumulation of wealth.  It is important to highlight that in analysing the gold market in India, traditional perceptions between jewellery and investment demand and demand drivers do not apply.’  And also that the allure of gold is its hedge against a depreciating currency and preservation of wealth.  Jewellery demand is really investment. Primary gold demand in the domestic market in India is almost all in the form of 3.75oz `TT’ bars (10 tolas) and in chain for jewellery. India in 2013 introduced an import tax on gold that eventually reached 10% to try to offset a balance of payments crisis and also required importers to re-export 20% of imports.  The new Modi Government, elected in May 2014, is likely to reduce the tax in stages and allow substantial pent up demand to flow through.  Substantial smuggling of gold to avoid the import tax appears to have been underway through China and Myanmar so the immediate impact may be muted but longer term demand following rising living standards in India is likely to remain firm. The brilliant work from Koos Jensen (www.Ingoldwetrust.ch ) in tracking down Indian and Chinese gold data is truly illuminating and this graph below shows that monthly demand into the Indian market in 2013 exceeded 110t/month. In China where the economy is far more advanced, the demand for gold is also for jewellery but more is for bars.  The character of the Chinese market is fascinating in that government decrees require ALL gold brought into China or sold to the market must go through the Shanghai Gold Exchange.  In 2013 China produced 428t of gold and imported 1,540t to give a demand of about 2000t.  As at the end of May 2014 850 tonnes of gold had passed through the exchange into the Chinese domestic market.  Bars are usually 1kg and 100g bars that have been produced from reconfiguring 400oz London Bullion Market inventory via Switzerland, London and Hong Kong.  Interestingly, gold market participants are not reporting ANY Chinese refined bars in the export markets! Koos Jensen’s numbers on Chinese imports and jewellery are higher than the GFMS data presented above but it is notable that there have been months when Chinese gold demand ( in RED)  has exceeded annualised global mine production (in YELLOW). It is clear that most Indian and Chinese gold demand is primarily for investment so when we add it all up (jewellery, bars and coins) total investment demand it looks something like this:- Jewellery demand is expected to grow by 6% in 2014 as the Indian tax is reduced and then removed and forecast to grow by 4%pa out to 2017. The demand for gold bars for investment and for coins has been extraordinary over the past decade.  215t in 2004 to an estimated 1500t in 2014.  Very strong demand from China and India. Coins have increased from 125t to over 400t and climbing.  Robust demand from all over the world should keep growing for years to come. The EFT phenomenon from 2004 to 2012 saw a massive 2300t directed to these funds and then a substantial 880t drop in 2013.  The numbers appear to have stabilised at about 1800t and may be resuming an upward trajectory.  But EFT demand of 200tpa for gold is tiny compared to that from China and India. In 2014 total investment demand of over 4800t should well exceed mine production of 3100t plus scrap of 1300 tonnes totalling 4400t. If EFTs and Central Bank demand are added then a significant deficit of over 500tpa will be developing from 2014 onwards. This is in great contrast to the substantial `surplusses’ of the decade prior to 2013. *(central banks and ETFs excluded prior to 2010 as were small or negative) These numbers also clearly suggest that gold demand is ignoring `Fed policies’ and Wall Street arm waving about US-centric values and is just getting on with life. Who cares about Fed interest rate policies if the Monsoon harvest is going to be good this year! So what does this mean? Essentially the graphic says that gold is moving from Western inventory to Asia.  The tonnages involved are so large that you have to ask just where is all the gold coming from? It is unlikely that it is coming from retail scrap or from local US `investors’.  Oil prices are high and rising again so Middle Eastern players probably don’t have to sell their gold right now.  Indeed, you can ask, just who are the suppliers of gold now? The gold market is also very suspicious of US activity in the gold markets through intervention by the US investment banks.  The outstanding contracts to COMEX gold inventories ratio recently exceeded 100:1 and it is clear that heavy selling has kept gold prices subdued. The high market shares in the gold market held by China and India have led to concerns over the role of COMEX on price discovery so the establishment of active cash gold exchanges at Shanghai and Singapore may soon leave COMEX as a price follower and not a leader.  We all have seen the lack of connection between physical gold demand and the action in the future markets. Let us just say that it hasn’t made any sense. Looking behind these numbers also strongly indicate the sale of gold from someone’s inventory but the question is whose inventory? And can there be much left? And where would the gold come from if there was no-one left to be selling? Well, let’s ask the markets. The long term uptend is still intact and the indicators are still oversold.  A rally is due now. In A$, gold is not so clear but I consider the supply/demand pressure will soon clarify the matter. Note that the A$ gold price today is A$1,400/oz.  About the same as in April 2011. I can’t discuss the gold outlook without reviewing the US T Bond market.  Rising bond yields can indicate many things but the most important indication to me is the end of disinflationary times that have accompanied the 30 year bull market in bonds.  This bull market is ending in a drawn out saga since the bond prices peak in July 2012 and the rearguard action to hold prices up against the evidence. Rising yields indicate a growing global economy, rising commodity prices and a recognition that far better returns can be made in equities than sitting in low interest rate bonds and face capital losses. And the US$80 trillion global bond market is going to provide a lot of cash to drive up other markets, like gold, commodities, resources stocks and general stocks. The 10 year T Bond just looks ready for a major surge in yields.  Don’t jump to a false conclusion that rising bond yields is bad for the stock market.  Think of it as a flow of funds out of bonds into stocks! Inflationary pressures appear to be building in many areas (other than labour!) and the Middle East issues are exacerbating the passing of Peak Conventional Oil.  I expect higher oil prices to come through and new highs before 2016. Now coming to gold stocks. It is worth starting with the major US gold index, the Philadelphia Gold Index (XAU). Still very oversold but suggesting a bottoming out and a rally starting. And a very long way to go! Even better is looking at the SPDR GOLD ETF GDX which parallels the XAU.  This is an ETF and it shows trading volume. Note the very large volume in Dec Qtr 2013!  This is a classic high octane reversal pattern that supports a major rally from here.  And it is underway NOW!  Up 17.5% from the low. Its junior cousin GDXJ is looking even better!  Note the big volume in 2014 and not 2013.  Early investors went into the large caps first and now into the smaller caps which are up over 20% from the low! Short term moves are classic market-direction changing reversals in both ETFs.  Expect some back and filling in both GDX and GDXJ but NOW IS THE TIME TO BUY FOR A MAJOR RERATING. What was that I heard about someone saying an equities explosion was underway? First in gold stocks.  Then watch oil stocks get another move on up. Then Copper, Zinc and Lead. Here in Australia the ASX Gold Index XGD also had a magnificent 12 year run that took it up 750% to the April 2011 and post GFC highs of 8499 to then retreat 80.0% to just 1703 in Dec 13. As was noted above, the A$ gold price of about A$1,400/oz today is almost identical to the level when the XGD peaked in 2011. And the XGD is now >70% lower. The Index is a proxy for gold sector companies but many non-Index companies have done far worse than the 80.0% decline in the XGD since those highs in April 2011. But overall, the Australian Gold Stock Market presents a fascinating grouping of companies that offer some exciting opportunities to join in on the ride. Focussing initially on the ASX Gold Index which is currently made up of 25 stocks you can find that like any good index it has its performers, also rans, laggards and duds. Of the 25, 5 are in good recovery uptrends, 15 are basing readying for an upmove and 5 are still looking at downtrends. The diabolical performance of gold stocks around the world since April 2011 has never made much sense to me at all and hence the continuing bullishness based simply on value. Extraordinary value exists in ASX gold stocks. The table below looks at the current ASX Gold Index  XGD. I have reviewed these 25 stocks in the Gold Index in a very simple and superficial analysis that that has more to do with price than value.  In my opinion the valuations are so low that the Index could be up 200% before we would need to sort out the best relative value. Most stocks are BUYs because they are so cheap and the current run in gold prices makes them even cheaper. So let’s look at them Note that many stocks have their assets overseas and for most country risk is in the eye of the beholder. With MRRT, Carbon Taxes and restrictive workplace practices many consider Australia a country risk but the rising Middle Classes around the world are making most jurisdictions more secure so country risk is declining everywhere.  Obviously some places in the Middle East and the former Soviet Union are still very risky but most of Africa, Sth America and Asia seem reasonable risks today. A = BUY stocks in uptrend B = BUY stocks needing a pull back before entry   C = Stocks that need time No stock in the XGD is considered a fundamental SELL at present. The strong moves of some stocks against the XGD Index’s 9% since 30 June 2013 are very encouraging and shows the market does appreciate good operating performances, particularly if it is corporate buyers paying a fair value rather than the low participation rate markets just looking at price not value.  Some stocks such as SAR, are up 2-3x from their lows and are well outperforming the Index.  It is indeed a matter of a rerating of the gold stock market.  Fears of a major fall in the US$ gold price are just part of the drivel from Wall Street hustlers trying to cover their large short positions. From these stocks in the XGD and a few more I have put together a portfolio with biggest weightings to large stocks and a collection of mid cap growth opportunities and a selection of more speculative plays.  The stocks highlighted in YELLOW are my SUPER STOCKS that I expect to do very well indeed.

Stock	Holding	Price (A$)	Location	Comments
Large caps
NCM	10.0%		Australasia	Big cap market leader
NST*	10.0%		WA Yilgarn	Major rerating
OGC	10.0%		Philippines	Growing production
Mid caps
SAR	7.5%		WA Yilgarn	Low cost growing output
SLR	7.5%		WA Yilgarn	Rationalised operations
MML	7.5%		Philippines	Low cost growing output
BDR	7.5%		Brazil	Very low cost producer
SBM	7.5%		Australasia	Overcoming issues
Small caps
GCY	5.0%		WA Gascoyne	Developer
ABU	5.0%		NT	Producer/Explorer
ATV	5.0%		Canada	Developer
RMS	5.0%		WA Yilgarn	Producer
GOR*	5.0%		WA Yilgarn	Explorer
BLK*	5.0%		WA Yilgarn	Developer
TRM	2.5%		NT	Explorer
Total	100.0%

*Super stocks Let’s monitor this portfolio over the next six months or so.  I am not a trader so the portfolio won’t change.  WYSIWYG The implications of a strong gold price and strong gold stock market come back to the A$.  This graphic tells me a lot. And this one even more. A$ long term from 1913. The short term is looking very good. Don’t be worried about a high and rising A$.  You will just become wealthier. For exporters, Australia’s structure of high labour and other costs is simply unsustainable.    Current work practices just have to collapse and become totally flexible.  The rising A$ will ensure big changes are going to have to be made. And finally to those who don’t think that an equities explosion is underway, try these two Paradigm SUPER STOCKS that I have been referring to over the past 9 months or so.   So much more to come! Barry Dawes Follow me on Twitter @ DawesPoints I own NST SLR MML ABU ATV GOR BLK TRM LNG LMB

Key Points

• Equity markets around the world making new record highs
• Activity in large scale mergers and acquisitions rising
• Velocity of money circulation now turning up?
• Institutional investors short and wrong
• China growth intact
• ASEAN bloc of 617m people adding to growth surge
• Commodities showing strong demand but limited supply
• Metals markets much tighter than you are being told
• A$ looking firm
• Just BUY resources stocks - see list below

New record highs in important equity indices fuelled by better earnings data and some major M&A activity provide strong evidence that the Dawes Points synchronised global economic boom is on track to flourish in 2014 and the Year of the Horse and beyond.  The sidelined cash built up in most economies around the world will now start to flow into investment and consumption and add significantly to economic growth.   Several good years are ahead of us all and the opportunities everywhere are boundless.

Would you believe the GDP growth rates of 5.9%pa for Japan in the March Qtr and forecasts of 4% pa for the US in June Qtr? Some technical reasons here of course but nine months ago you would have said I was on drugs if I had said that.  You probably did anyway!

Well it has been almost 18 months since Dawes Points made strong suggestions of a global economic recovery that would bring boom conditions back to the resources sector in 2014 and beyond.  The US equity market boom led by the small caps (the Russell 2000)  and the broader market (Wilshire 5000) has been followed by the S&P 500 and the Dow Industrials in keeping with better economic and earnings data.

The mergers have added to this but what is interesting is that the velocity of circulation of cash (GDP divided by M2 money supply) has been falling for some years and has really decelerated since the GFC in 2007/08 while everyone (individuals, corporates and banks) have built up cash levels in very defensive stances. 

Even here, RBA figures show the A$538bn in term deposits and A$572bn in savings accounts in a total ofA$1572bn.  ATO data suggest SMSFs have 31% in cash, 15% in property and only 32% in shares.  This cash buildup has contributed to weak data on retail expenditures and also on the lack of interest in general investment especially higher risk ventures such as mining stocks and junior companies in particular which have lagged here in great contrast to the performances of the major US indices.

Could it be a change is underway at last?   Most definitely YES!!

The new mergers mania may be changing this velocity of circulation. US banks have had a record 26% of net equity assets held as cash and have held back on lending.  The current M&A surge with bank lending support may get this index moving the other way at last.  Let's keep watching it.

Velocity of M2 Money Stock USA  - Federal Reserve Bank of St Louis

You have been advised of this growth outlook for quite some time at Dawes Points so why was it that Dawes Points was able to say this whilst all the massive brainpower of local and global investment banks said otherwise.  Experience, knowledge and vision I think is the catch phrase. This was the motto of MPS almost 15 years ago.

The more recent comment has been to heed the markets not the commentators.

Forty-something Western Generation Xers who have been brought up in an environment of entitlement, compliance and communication can only respond within that paradigm.    

However, the paradigm for six times their number in China, India, ASEAN, Africa and Sth America is something far different. 

A rise in domestic living standards is imperative and they know it can only come from someone being able to sell something to someone else. And by George that is occurring almost everywhere. People feeling pleased with what has been bought, sellers pleased that they have sold a quality product at an attractive price that makes a profit but importantly one that will entice a return customer and everyone wins.  It  is a pity that all socialists and bureaucrats seem to think about is a crappy product(mostly government services) and care nothing about repeat customers because they usually have a monopoly.  Just jack up prices, pay the bureaucrat more and who cares about the service, outcome or recipient.

Anyway, the US equity markets now really like what they see and the recent breakouts show the markets around the world also really like what they see.  But not everyone it would seem.

Have a look at these next two graphics.

The first shows that institutional clients of BofAML sold a cumulative net US$50bn of equities since 2007.  Assuming BofAML has a 10% market share and that its clients are no different from those of any other Wall Street broker then just maybe about US$500bn has been sold on market by institutional clients.  Hedge funds are also out/short.  Just the man in the street building up his holdings as the market surges to record highs and US corporates now on a buying spree recognising the great value there.  And a myriad of new technologies.  Who has got it right?  Who has got it very wrong?

So many professional fund managers are scared and short!  Sell shares and buy bonds for goodness sake?

And then what about this?

Record highs accompanied by rising short positions.  Not the psychology of market highs.

Think of what this means.

Market psychology should tell us that peaks in markets are accompanied by participants believing that the new plateau of prosperity will continue forever, higher Share Index targets are rolled out daily and that market shorts should be overwhelmed and ridiculed.  It's not happening that way.  Caution, caution, caution is the mantra.

I attended the annual Resources Information Unit conference in Sydney this week. Some wonderful opportunities offered and so cheap!  But almost all of the resources sector summation presentations said the same thing!  Caution, caution and caution. Commodity prices are going nowhere for at least another 18 months.  Maybe 2016.Don’t know about gold. Too hard. Sure do some stock picking by crystal ball gazing and impute resource potential from a few drill holes but don't do anything before a JORC figure is given.   Just ignore the drawdown of inventory for copper and lead/zinc and tin.  New supply is coming. Not sure about where from, but it is probably coming from Africa.  Or Sth America/China. Somewhere.  But it's not Australia just now. 

But now look at what the markets are saying.

New highs in the US equity markets.  I have been talking about this for over two years now for the US to lead the world out of misery.

And the economic boom rolls to the East.  First to Europe that obviously did not collapse.

Then further East to India, where growth and now a change of government suggest much more to come.

And the Far East. Hong Kong is a proxy for China and it is all good here.

Sth Korea is relying on Japan and China. KOSPI up 2.63% last week. Would love to buy stocks here!

UK catching up after some major changes. Almost a year of indecision but it will run well soon.

Commodities starting higher.  Agricultural commodities might be leading but watch energy.

Brent looks like it is ready to run.  I sure like oil and gas stocks in Australia! From WPL at the top to STO, OSH, BPT, SXY, DLS, BUR, AJQ, CTP and HPR. Get aboard!

Then metals to follow.

Copper looks very strong after the scam selloff.

And look at these LME copper inventories.  Down 72% in 11 months.  LME stockpile is declining at more than 15% per month now. Just 191kt. Just 3.6 days consumption. What Purchasing Manager is now going to sit tight while thinking about `oversupply'. Buy copper producers! 

What we see in copper is replicated in lead, zinc and tin to a lesser extent but all show production declines and very tight markets out a year or so.  Falling LME inventories to critical levels of under 2 weeks supply will force prices higher.  Aluminium and nickel have been in oversupply difficulty but may now be also showing demand exceeding supply so their inventories might continue to fall from current quite high levels.  It is the direction that counts and the momentum then builds.

Have at look at bauxite prices into China. Lots of alumina/aluminium capacity. Not much bauxite. There may be an analogy for bauxite and aluminium with iron ore and steel.  We saw a big jump in iron ore vs steel.  Just might get a jump in bauxite vs aluminium.   Watch this space.

As Dawes Points has said ad nauseam, the crude steel production numbers out of China say very clearly growth is continuing.  Output was a record 827mtpa in March.  I hear over 830mtpa in April. Who are the conmen here?  Take a bow US investment banks with an anti China agenda and their collapse in China steel production.  I maintain my forecast of new highs in iron ore prices within the next two years.

 

You should listen to the iron ore company executives.  They know what their clients are saying and wanting.

Funny how so much oversupply in iron ore has Chinese ships arriving at Australian ports to take every tonne they can get while prices are low. Record exports from us.  Record imports from them.

And port inventories are high but mill inventories are low.  The stocks to import ratio at about 35 days is still 40% BELOW two years ago. 

Fortescue (ANZ Research) shows these new mills being built on the coast to take imported hematite ores, not much local magnetite required here. Imports will soon make up over 80% of iron ore demand in China.

And look at Shanghai.  Trying very hard to move ahead against the bearish environment but major structural changes are afoot to help.  SOEs are now encouraged to tap massive savings in China and take equity to replace debt and to start to really free up business strategies from just providing a social service to creating earnings for shareholders.  PER of 9.8x is very attractive now.  Same price level as 2001 but about 30x PER lower. Go China!

I mentioned ASEAN which now includes Vietnam, Cambodia, Laos and Myanmar within the new ATIGA free trade agreement.

Look at this result for 617m people and 50%<35 years of age.  Better demographics than China and no One Child Policy. Almost as important as India and Sth America.  

Note, too, the energy consumption and growth rate of MENA (Middle East and North Africa)!  MENA energy consumption is one third that of the US and growing at over 4%.  US energy demand growth is negligible!

These are impressive numbers using BP data.

And look at the ASEAN economic growth rates stats from the IMF.  Not far behind China with almost 50% of its population.  Mostly English speaking peoples too so good rule of law!  I hope you are getting the full picture here.

US Bonds have peaked and yields heading higher. Dawes Points has not got this right yet but the latest rally sure suggests they are just grasping at straws. This will be a major source of funds to the equities and commodities bull markets as participants move out of an overvalued sector in a very tired 30 year bull market that has already peaked almost two years ago.

And the US$ is breaking down.  What a rear guard action over the past couple of years.  Truly grasping at straws here too.

While the US$ is fighting for relevance the A$ has finished its correction.  Next stop is US$0.95, then higher.

I mentioned attending the RIU Resources Conference last week. I saw about 40 company presentations and a few industry commentaries.  Of the 43 companies I would be happy to invest in about 20 just on the  basis of outstanding growth prospects and another 10 or so on just ridiculous valuations.

Of course there was the caution, caution, caution, commentary but I really don't think there is much time left to be cautious.  This a great bull market that is developing and there really isn't much time at all.

So I will make some suggestions.

• BUY graphite stocks - I expect them to become market leaders
• BUY gold producers.  I have a very select list.   
• BUY copper producers and explorers.
• BUY nickel producers and explorers.
• BUY lead/zinc producers and explorers
• BUY Musgrave Range copper/nickel explorers
• BUY NSW copper/gold/lead/zinc developers and explorers
• BUY Rare Earth developers/explorers

I will also make some other suggestions.

• BUY Cooper/Eromanga Basin producers/developers
• BUY unconventional oil and gas explorers in NT, Qld, Sth Aust and WA.
• BUY iron ore producers and selected hopefuls

And finally yet another plug for old favourites

• LMB  expect over A$2.00/share
• LNG expect over A$5.00/share
• BLK  expect over A$1.30/share
• FMG  expect over A$7/share
• CTP expect over A$2.00/share
• HPR expect over A$1.00/share

I have a list of about 20 Super Stocks for clients. Major outperformance expected. Contact me if you are interested.

I own BHP, FMG,CTP, BLK, HPR, LMB, LNG, DLS, AJQ, Fo.V

Sydney

18 May 2014

  DISCLAIMER  : I AM A LARGE SHAREHOLDER IN HPR THE INFORMATION HERE IS FROM PUBLIC SOURCES OR INTERNALLY GENERATED FROM PUBLIC DATA USING REASONABLE ASSUMPTIONS AND ARE CONSIDERED ACCURATE THIS IS NOT AUTHORISED BY HPR AND IS MY OWN WORK BARRY DAWES

Key Points

• New ASX-listed entity has royalty interests over 18 permits
• 7 permits in the Amadeus Basin could support 100smillion bbls oil and >50TCF gas
• Many conventional and unconventional oil and gas targets
• Possible major world class resource of helium in Amadeus Basin
• High leverage to oil, gas and LNG prices
• Cash flow current from 4 income streams in 2014
• Expect royalty income from 6 permits by 2016, 8 by 2018
• Major exposure to third party exploration programmes
• Multi decade asset and revenue growth expectations
• Risked NPV12  24 month valuation target A$1.59/share

As a former Founding Director and as a major shareholder I am delighted to see the outstanding potential unfolding at long last.  Capital raising markets have been difficult these last few years but the underlying fundamentals of a good oil price and access to export markets through the new LNG projects has transformed the hydrocarbon exploration scene and the massive stealth onshore oil and gas exploration boom in Australia is now well underway.  The activity in conventional oil and gas in the Cooper Basin is extraordinary but it is the activity in the unconventional sector seeking tight oil and gas and shale oil and gas in South Australia, Northern Territory, Queensland and Western Australia that is changing Australia’s hydrocarbon fortunes. In addition, HPR has exposure to exploration activity with potentially very large targets totalling in excess of 2.0 Bn bbls in offshore projects in the Carnarvon Basin and offshore Seychelles in the new East African oil province. Phoenix is well placed to share in some of these exciting new developments and others as well. Note the performance of the large North American royalty companies like Franco Nevada and Royal Gold that have grown into major corporations with large long term portfolios that give a pipeline of growth and exposure to commodity prices and commensurate high PE Ratios. Torrens Energy (TEY.ASX) made a scrip takeover bid for unlisted Phoenix Oil and Gas royalty company and has also raised A$6m to provide working capital.  The name has been changed to High Peak Royalties (HPR.ASX) and listing is set for Monday 5 May 2014. The HPR royalty portfolio has been accumulated over almost 6 years and includes exposure to many important hydrocarbon basins such as Surat, Amadeus, Officer, Cooper/Eromanga, Bass Strait and offshore Browse and has prominent industry players such as Conoco-Philips, BG Group, Santos, Karoon, Central Petroleum and Nexus Energy as tenement operators.  The new strong working capital position should see additional royalties acquired. Revenues have been modest to date but should increase substantially with the startup of the BG Group Gladstone LNG plant(GLNG) that will produce its first LNG in late 2014 (note that an official start date for gas production from HPR’s interests in PL 171 and ATP574 is not yet available) and as oil production in STO/DLS’s ATP299 increases under the current drilling programme.  Whilst the BG LNG royalties and ATP 299 will generate the largest near term revenue it is likely that the 1% royalties over CTP’s Amadeus Basin tenements may become by far the biggest asset.  Even just the prospective hydrocarbon gas and liquids discovery with helium at Mt Kitty may prove that to be the case in the very near term. The offshore exploration activities on large targets might also mean large values to HPR despite the modest royalty interests. The potential revenues without an operating cost base or capex obligation should grow and could potentially be very large over time.  This may become a new style of asset class with the potential of increasing earnings year after year for many years to come.  This style of revenue stream should attract a high premium in the market over time and we should all be rewarded with growing fully franked dividends. Also because HPR has interests in many projects with several tier one operators the news flow should be very strong from numerous sources. The HPR opportunity is large and complex but it should be long and exciting. The royalty portfolio covers 18 tenements and can be grouped into three major sectors

• 2.125-2.5% Qld coal seam gas royalties
• 1.0% Amadeus Basin oil, gas and helium royalties
• Minor interests in producing or potential producing tenements in Australia and overseas.

All may seem modest but in today’s world of growing demand for gas and oil and with the days of peak conventional oil behind us these royalties are valuable and even a very small exposure may bring in very large rewards. This table gives a quantified risked assessment of HPR's interests.  1 Queensland CSM Royalties The Queensland CSM royalties underpin the value of the company in the near term through strong revenue generating potential through export sales gas for LNG from the Peat and from the BG Group tenements.

%	Tenement	Name	Operator	Area km2	Reserves	Pj	FY12a	FY13a	FY14e	FY15e	FY16e	Fy17e
					3P	2P	Pj	Pj	Pj	Pj	Pj	Pj
2.125	PL 101	Peat	Conoco	n.av.	n.av.	116.8	7.89	2.79	3	6	7	7
2.500	PL 171	Pinelands	BG Gp	175	1000	136.4	0	0	0	0	0	65
2.500	ATP 574	Polaris	BG Gp	231	1500	12.1	0	0	0	0	0	95

Prices for sales gas into the new LNG plants should be related to the cif (delivered) prices of LNG into the main Asian markets. Current prices are around US$18/Gj and are linked to oil prices (the so called JCC -Japanese Crude Cocktail – less about US$3/bbl).  This is usually about 14-16% of the US$ oil price expressed in US$/Gj. Prices have been high in recent years and should stay high as the world increases its dependence on gas, and LNG in particular.  The above graphics show the LNG price into Japan(the main market) and data from BG Group in 2013 forecasting over 6%pa growth in seaborne trade in LNG out to 2025.  Gas consumption globally is around 24% of total energy consumption but is <5% in China so imports there can only increase. The royalty HPR will receive will be the same as that the Queensland Govt will receive and it should be something like a `net back’ after the cost of recovering, processing, pipelining, conversion to LNG, storage and shipping.  A conservative calculation of around US$15/Gj less US$8-9/Gj of production, transport, processing and shipping costs should give a `net back’ royalty pricing of US$5-8/Gj for gas into those export LNG markets.  Naturally Qld will seek the maximum price it can get! The Peat Tenement  (HPR 2.125% royalty) The existing Peat gas field operated by Conoco Philips and Origin Energy has become part of the 8.6mtpa APLNG Project.  The royalty income is currently quite modest and whilst the reserves are limited a higher price should apply in future years as gas is diverted to the export LNG market.  Origin has already flagged its intention to supply BG Group with ramp up gas from 2015 for 10 years.  Some portion of this may come from Peat as it is the nearest tenement to Gladstone and is already on the main pipeline. Source: Origin Energy In addition a major deep gas target lies within the tenement boundaries and may be tested in the medium term. A notional value of only about A$1m is appropriate here but this could be much larger over time. BG Group Tenements (HPR 2.50%) The BG Group permits (in JV with Senex, CNOOC and Tokyo Gas) have 3P reserves estimated at 1500Pj and 1000Pj for ATP 574 and PL 171 respectively.  The wells to date have exhibited high deliverability and should be brought into production in 2015 or 2016.  BG Group will drill 6 more wells in 2014 that should add substantially to the current combined 2P reserves of 148Pj. The exact start up of gas deliveries from these permits is not currently known but it should be in FY16.  Forecasts are from FY17. The 3P reserves are expected to provide a 60% recovery and should show high initial delivery then a sharp decline but should have a very long tail.  These figures are indicative only and need to be risk adjusted but are a useful guide. On these terms the revenues at US$5, US$6, US$7 and US$/Gj and starting in FY17 could look like this. This is pretax EPS of A$20-34m in the first full year (Pre tax EPS of A$0.12 -0.20) On the same basis the after tax NPVs at various discount rates on 165m shares would become:- 2 The Amadeus Basin Tenements  1% over something potentially really large I have had over thirty years watching the Amadeus Basin with a first visit in 1980.  The opportunity was challenging with very old rocks that might not have any more hydrocarbons, where the geology was highly fractured and where reservoirs were thought to be poor and certainly `tight’. The early wells were drilled without seismic and sited from aerial photos but the first commercial oil and gas was found in 1964 at Mereenie and more gas at Palm Valley in 1965. Gas was also found earlier at Oorammina in 1963 and another 25-30 wells were drilled with only the 29BCF Dingo gas field discovery in 1984 providing any real success.   Production began from Mereenie and Palm Valley in the mid 1980s. The geoscientists at the Northern Territory Geological Survey NTGS in recent years have done an extraordinary job in bringing so much data together through onsite mapping, aero surveys, navel gazing and picking up the work done by early explorers like Exoil (discoverers of Mereenie, Palm Valley and Oorammina), Amadeus Oil, Pancontinental Petroleum and many more. Central Petroleum has provided a wealth of information. The data is excellent and comprehensive and is serving as a very valuable base in the exploration finally now really underway with Santos’s A$150m farmin in with Central Petroleum. I had the good fortune to be the instigator of Central Petroleum with John Heugh’s Merlin Petroleum’s Pedirka and Georgina Basins combining with the Amadeus Basin companies to merge to form the new company. Martin Place Securities also underwrote the listing of Central and later on, as He Nuclear, farmed into the Magee helium/gas/condensate discovery of 1992 and the Mt Kitty prospect.  Helium is used in the high pressure gas `pebble bed’ nuclear reactors – much safer and 50% more efficient than conventional nuclear power stations, hence He Nuclear. Another MPS company, Petroleum Exploration Australia, farmed in the whole Amadeus and Pedirka shebang to earn 20% by funding seismic and a few sort of stratigraphical wells. Unfortunately the GFC limited that programme somewhat! So the 1% royalty over much of the Amadeus was a great acquisition for Phoenix and I consider it may prove to be its best asset. HPR has a 1% royalty over 7 tenements in the Amadeus.

	Targets	Operator	%
EPA 111		CTP	100
EP 112	Magee	Santos	Earning 70%
EP 115	Surprise	Santos *	Earning 70% (*part only)
EP 118		CTP	100
EPA 120		CTP	100
EPA 124		CTP	100
EP 125	Mt Kitty	Santos	Earning 70%

HPR also has two wholly owned permits EP155 and EP 156 that may have value in the future.  EP155 is very well placed geologically and has already had one well, Mt Winter, with oil shows.  Negotiations are needed with traditional owners. Four of the Central operated tenements are issued permits and three are applications awaiting issue pending future discussions with traditional owners. Amadeus Basin showing Central Petroleum’s permits.  -  HPR has a royalty over 7 of these. Source: Central Petroleum The Amadeus is very large in scope in the NT and extends another 150km into WA.  Wells are few and far between and seismic is sparse.  The age of the Amadeus extends beyond 1100m years, old in most oil terms but large oil and gas fields of similar age exist in China, Russia and Oman.  The Amadeus also has three major regional seals that have retained hydrocarbons over hundreds of millions of years. Two, the Chandler Salt and the Gillen Salt effectively cover much of the basin and make the Amadeus an extremely attractive `sub salt’ target that will bring in major oil companies over the next decade.  Mt Kitty is likely to confirm this. Note that Central Pet has now drilled four wells in the Amadeus with a 75% success rate – Surprise, Ooraminna and now Mt Kitty.  Drilling of valid 4way dip closures has had a 100% success rate in the Amadeus. An increase in drilling activity might be very exciting to watch. Geophysical work done by Central included some high definition aeromag that also highlighted many structures that will over time be followed up by regional seismic. Source: Central Petroleum This aeromag survey has been an excellent low cost alternative to the very expensive on ground seismic surveys. Over 60 new targets were identified. The Amadeus is also the target for large scale unconventional oil and gas as the concept of basin centred continuous gas or oil reservoirs is better understood along with many targets in tight gas, such as Mt Kitty. The Amadeus Basin has had very few wells and little seismic for such a large producing basin. Source: NTGS

The Amadeus is vast and complex.  Over 170,000km2  and multiple tectonic events and only about 40 exploration wells.  It has a fair claim to have the lowest drill ratio of any onshore producing basin in the world with only about 1 well per 4000km2.

It has three prominent proven petroleum systems providing source, trap, reservoir and seal in order of increasing age:

• Stokes Siltstone -Stairway Sandstone- Horn Valley Siltstone (Mereenie, Surprise Palm Valley)
• Chandler -  Arumbera (Dingo Orange)
• Gillen Salt-Heavitree ( Mt Kitty Magee)

Because the Amadeus is recognised as a relatively shallow basin (targets <3000m) much of the strata has not been cooked up too much so still fits within the `oil window' which extends as low as 2500m in Surprise. This means that oil any may have not yet been heated too much, hydrogenated and converted into gas Geoscientists have also recognised the potential of another 7 other potential but less defined petroleum systems in increasing age in the:-

• Stairway “shale”
• Late Cambrian Goyder Formation
• Middle Cambrian Upper Shannon Fm
• Giles Creek Dolomite Basal shale
• Intra Chandler Formation shales
• Aralka Formation
• Bitter Springs Formation (Loves Creek Member)

The maps show the Amadeus to be over 600km long and the important salt seals are over much the Basin.

The two key source rocks are the Horn Valley Siltstone(`HVS’) in the northern section and the much older Gillen Member across the southern and western sections. Petroleum System  A The HVS fits within the Larapinta Group which hosts the Stokes Siltstone- HVS - Stairway Sandstone-Pacoota strata and hosts the Surprise, Mereenie and Palm Valley. The HVS is the source of oil and gas for the current production in Surprise, Mereenie and Palm Valley.  It has a high TOC and has been recorded as up to 422m thick.  It is a source rock for conventional traps and is a major target for unconventional oil and gas. NTGS has published a series of data on unconventional oil and gas potential as shale gas and as Basin Centered Gas in the Larapinta Group with a mean of 1.14bn barrels of oil and 27.8TCF of gas. Oil

	Prospective resource
	P90  (mmbbl)	Mean (mmbbl)	P10 (mmbbl)
Horn Valley Sltst	207	1,140	2,500		DSWPET (2011)

Source: NTGS Gas

	Prospective resource
	P90 Pj (BCF)	Mean Pj (BCF)	P10 Pj (BCF)
Stairway Sst	1,1167 (1,100)	5,408 (5,1000	11,135 (10,500)	Basin Centred Gas	DSWPET (2011)
Horn Valley Sltst	2,757 (2,600)	11,983 (11,360)	25,239 (23,800)	Shale gas	DSWPET (2011)
Pacoota Sst	2,545 (2,400)	10,392 (9,800)	20,891 (19,796)	Basin Centred Gas	DSWPET (2011)
Total (Larapinta Gp)	11,771 (11,100)	27,784 (26,200)	48,461 (45,700)		DSWPET (2011)

Source: NTGS

The thickest zones are in the north where the HVS is more than 140m thick.  A very rough area x thickness model puts about 45% of the HVS sediment volume in EP115, 15% in EP111, 12% in EP112 and 6% in EP124.

Isopachs (thickness) of Horn Valley Siltstone Source Rock Source: NTGS And the HVS becomes more oil prone in the west and mostly in EP115 and EPA124 with some in EP111. All very valuable tenements. Hydrocarbon types in Horn Valley Siltstone Source Rock Source: NTGS Geoscientists consider that the Larapinta Group with the HVS as source may have similarities with the Bakken Shale in the Williston Basin in the US in having basin centred continuous oil and gas reservoirs with hydrocarbons migrating up the Pacoota and Stairway Sandstones into conventional reservoirs like Mereenie and Surprise. Source: DWSPETT  NTGS Now consider that with the HVS (mostly in EP 111 EP 12 and EP115 where HPR holds 1% royalty) a very large hydrocarbon charge has been generated but only three holes have been drilled, Mereenie, Mt Winter and Surprise.  And note:-

• Surprise -1 is 140km from  Mereenie oil field yet the oil is identical
• both are tiny compared to the volumes of hydrocarbons generated.
• The Mt Winter well (1970?) with oil shows is the only well between them.

Conclusions are that much more oil is probably trapped in reservoirs in this part of the basin. Many years of exploration will be required here before the possibilities are exhausted. Note that all successful wells have been `four way dip closures' but many other types of traps are likely to be found. HPR's wholly owned EP155 Mt Winter permit has had the only well between Mereenie and Surprise and which had oil shows. Hindsight and better seismic have shown that Mt Winter was drilled off structure and the site has five targets in three petroleum systems. Surprise West Well Section Source: NTGS This is Surprise on the west side of the fault. The top green section is the reservoir but other reservoirs may exist below.   Surprise West is 0.5-2.0million barrels and is now in production at about 500bopd.  Should it be maintained for one year that would be 180,000bbl worth A$18m and A$180,000 to HPR and perhaps a net PV of A$2m to HPR. Surprise East will be drilled in this June Qtr with a target of about 15mmbbls as shown on the left hand side. 15 mmbbls could be worth A$15m to HPR. Santos has just completed 327 line km of new seismic northwest of Mereenie in EP115 and also 1587km in the south and east and is reported to be very pleased with the results.  More action here. 2013 seismic programme west of Mereenie and in Southern Part of the Amadeus Basin Source:Santos Mar 2014 Petroleum System B   The Heavitree-Gillen Salt System The Heavitree is a basal sandstone sitting on top of basement and extending over most of the Amadeus and well into WA.  This is the reservoir. The Gillen Member is both source and seal and has evaporite and salt strata that have been mobile and can get squeezed like toothpaste into voids and can act as impermeable seals.  The Gillen Salt has sealed Mt Kitty and Magee for over 800m years and given that the helium is still present and at a very high concentration it has been a very good seal. The Heavitree extends west into WA and gets to more than 600m thick to the west.  It is well represented in EP115 and EPA 124 where HPR holds its 1% royalty.  No well has been drilled in the mid to lower half of the basin west of Wallara 1. Source: NTGS The Heavitree is extensive and may support multi-TCF resources of hydrocarbons and helium. Note that:-

• Magee-1 recovered 6.2%He and 39% methane gas from 4.5m the Heavitree with 9% porosity
• Mt Kitty   recovered 5.8% He and methane gas from the 109m in the Heavitree
• Both had high nitrogen
• The wells are identical in gas make up yet are over 100km apart
• The Heavitree extends a further 400km to the west and is up to 1000m thick
• The Heavitree is a continuous system  could be a massive hydrocarbon/helium reservoir

  

The Mt Kitty well followed up the Magee well drilled in 1992 by CRA.  That was the first well to penetrate the Gillen Salt to confirm the seal and find the Heavitree beneath. The Magee well flowed about 63Mscf/d to surface with the following characteristics:

• Methane     39%
• Condensate  9% (ethane, propane butane etc)
• Helium         6.2%
• Nitrogen     43.6%

The 6.2% He at Magee, like the 5.8% at Mt Kitty, is an extreme statistical outlier amongst over 400 US gasfields in having a very high He level but with high methane and other hydrocarbons. Most higher helium deposits have lots of nitrogen (air is 78% nitrogen so nothing valuable here!) so helium with no methane can be uneconomic.  Magee and Mt Kitty have both helium and hydrocarbons to establish economic operations.   Source: MPS  & USGS Source: MPS  & USGS The NTGS gives the potential at Mt Kitty very well so here it is in its own words from March 2014: Source: NTGS So the 0.5MMCFD flow was as expected.  Separate gas flows of each 0.5MMCFD were noted from four separate zones; 2144m, 2156m, 2186m and 2252m.  The well will need fraccing and/or horizontal drilling but it should flow very well. The target was 3TCF of gas/helium.  Central was more cautious at 1TCF but I have heard that the Heavitree target thickness was 60m and came in at 109m.  So could be bigger.  Who knows?  No one just now. This was the section. Source: NTGS And this the diagrammatic representation. Source: NTGS Central recently stated that the Mt Kitty discovery ` could be the catalyst to interconnect the Northern Territory with the Eastern Seaboard gas market’.  Central also published a helium project study in 2010 that concluded that a helium project could run well based on a gas input feed of 20MMCFD into an onsite LNG plant and railing and trucking LNG and liquid helium out through Darwin. Capex of A$420m gave annual revenues at A$98-143mpa and an NPV of A$111m-556m.  LNG and helium prices have doubled since then so the NPVs must be around A$1000m now. The royalty income could be A$2-3m pa just from one project. There is so much more on the Amadeus to discuss and so much is very technical but very positive.  We can now sit back and let the operators deliver whatever is really there.  I am sure many Big Oil companies will be excited by the subsalt discovery and once the remaining EPAs (especially EPA 111 and EPA124) are converted to EPs the there will be many farmin offers to Central.  And carries for HPR. I didn't get to the third petroleum system in the Amadeus nor the other royalties but they are smaller than the CSM and the Amadeus at present and I will cover them at a later date.   Do note that even the Seychelles royalty at just 0.075% covers potential of over 3.203 billion barrels to give US$240m in ground and   and 0.2% of Karoon's WA482P with this!  Note 0.2% of 2.234bn bbls@ US$100/bbl = US$446m! The risked values are far less but global exploration is continuing and the quality of these long term targets should be  assessed within the next few years. All the smaller permits are covered here. I will just leave you with these images. The geologists out there will find them fascinating.  For laypeople, the shapes of great curves with overlying flat sediments are very exciting.  Let's hope Santos decides to beef up its efforts.    And of course, do not forget this:- Barry Dawes B Sc FAusIMM MSAA MSEG 5 May 2014

Key Points

• Global boom accelerating
• China crude steel output hits another new record
• Copper prices moving up again
• Gold prices becoming very interesting
• `White’ precious metals looking good
• The stealth onshore oil boom coming into daylight
• Resources stocks beginning to really fire

Exhilarating!  It is so nice to see the gains now coming through in the form of improved market turnover, increased market share by resources stocks, greater market breadth and of course rising stock prices. And client activity is up sharply and the early investors are very happy. So much more to come. It has been frustrating over the past few years to have experienced extraordinary and mostly irrational negativity over the resources sector, particularly since the most recent highs in April 2011, now three full years ago.  The unceasing and incorrect downgrading of the outlook for China and an equally incorrect strongly bearish commentary on gold have delivered stock prices that were down 80% for the ASX Gold Index (much more for smaller stocks) and 70% for ASX Small Resources.  The net commodity price changes that the harbingers of doom have delivered is just wonderful to see. .  Not much at all really.

	April 2011  US$	April 2014 US$	%	April 2011  A$	April 2014 A$	%
Gold	1556	1301	-16.4	1418	1402	-1.1
Copper	9370	6786	-27.6	8542	7316	-14.4
WTI Oil	114	101	-11.7	104	108	4.5
Iron Ore	182	112	-38.3	165	121	-27.0
US$/A$	1.10	0.93	-15.2	1.00	1.00
China crude steel	700	827	18.2	700	827	18.2

But stocks have fallen so much more.

	April 2011  US$	April 2014 US$	%	April 2011  A$	April 2014 A$	%
XMM	4623	2237	-51.6	5071	2412	-52.4
XSR	5668	2165	-61.8	6217	2165	-65.2
XGD	7295	2116	-71.0	8002	2282	-71.5
BHP	41.78	35.50	-15.0	45.83	38.28	-16.5
XMM	75.50	58.41	-22.6	82.82	62.98	-24.0
FMG	5.61	4.95	-11.7	6.15	5.34	-13.2

So much carnage for so little cause.  Even earnings are so much better. We have all suffered because of this "Group think" which has pushed capital into unproductive government bonds and bank deposits and resulted in the severe mispricing of assets. But that is all history and the reverse will now be happening.  The immensity of the cash build up of A$1569bn (RBA February 2014) - greater than the A$1400bn in GDP and ASX All Ordinaries market cap of A$1550bn (just!)- relative to my Flow of Funds model says this Bull Market is going to have to run for years before the cash levels will be down to `normal'.  What level for the All Ords?  Try 10,000+. (I often wonder why Joe Hockey doesn’t just cut A$100bn off the A$410bn in Federal Budget Expenditures and somehow encourages Australians to take A$100bn out from local bank deposits and invest/spend it as offset. He could give a 5% tax deduction on the first A$100bn shifted out of a bank saving account or term deposit on a first come first served basis in the first year. Wouldn’t that be a good return on your cash and provide some fun at the same time.  The Keynesians should be delighted that the flow of funds is nicely matched and if Joe also cut A$50bn off taxes we would be running surpluses and the economy would boom. Unprecedented times of such a cash build up and unprecedented times of low velocity of circulation in the economy.) And that is just bank deposits in Australia. But the cash build up is global.  What about the misallocation of funds into overpriced government bonds worldwide that just have to have higher yields to adjust for risk? And when the world wakes up to that massive post-2007 surge in money supply that is now moving into property again and into most liquid markets like equities and commodities and probably into global PPI and CPI stats, is anathema for bond holders just where will they park their capital? Just think commodities and equities and bigger! So my global boom theme is alive and well and seeming to grow with each passing month. Also China kindly gave us all some cheer by producing another record crude steel output figure of 827mtpa, up 6% on March 2013.  So much for the slowing of China and collapse of steel production and falling iron ore prices. The inventory and output adjustments over the Chinese Spring Festival are yet to be fully understood by commentators but you will recall this very issue was raised here a month ago.  Also, it would be reasonable to conclude that the 2013 Christmas-2014 Spring Festival seasonal slowdown allowed a mill inventory rundown, a port stockpile buildup and a surge in ships to get as much iron ore at the low prices as possible.  Then of course strong steel output and rebuild of mill inventories and a fall in port inventories. There is nothing quite like going to China to see things at firsthand. Sorry, bears.  I think my idea of new highs in iron ore prices a year or two out will also come to pass. One major component in this global boom theme is this inventory issue.   It is a concept that I have mulled over for more than the past couple of decades and the more I think about it the more convinced I am that it will be a critical component in understanding the outlook of the next few years at least.  Some might recall the impact `just in time' inventory management had a over an extended period in the 1980s as pipeline inventory was run down.  Commodity prices were weaker because demand was about 1-2% lower than apparent consumption over a period.  However, when demand increased and as things became a bit tighter this inventory management was termed `just too late' ! So if we begin with the basic rational premise that markets are people and people make markets then sentiment of the market place is far more important that the PE ratio, the dividend yield or the NPV discount rate.   The volatility over the past few years have shown that these three factors have had such variation that sentiment has indeed been the key factor! So the unceasing negativity of the outlook for commodities and intermediate goods has probably encouraged most purchasing managers (ie people) to allow inventories to fall.  Without a doubt the internet has had a big influence by providing far greater transparency and allowing for a change in the mix of participants holding and delivering product. However holding costs for small operators have probably been far higher than the current global wholesale interest rate structure would suggest so it may be that the overall inventory position is even more tightly positioned. It is my view that the inventory pipeline system and the rise of the BRICs in whatever form you like has become longer and more complex.  So when consumption demand for copper rises because say China is growing at 7.5%pa (and not Wall Street's preferred 5% and falling) then each inventory manager is going to have to make a call on acquiring just a little more copper to ensure the business has enough to meet customer demand. Consider what might happen if all the participants decide to increase carrying inventory by say 5%. You probably get something like what happened in the oil market from 1998 to 2008, i.e., from US$10/bbl to US$147/bbl.  Yes a bull market.  For whatever reason. I consider that there is a real chance that this might happen in copper and this might also explain why copper prices have eluded the bearish targets of Wall Street. I hope you have been following LME copper inventories (see graph below) and the 420kt (64%) decline since July 2013. And now look at the copper price! And, as we say above, it might just happen in iron ore as Chinese steel mills decide that they have to rebuild their inventories again because demand for steel is clearly still firm. (see  Dawes Points Points 26 March 2014).  And in oil again.  And nickel.  Zinc. Lead. Gold and silver. I can also tell you that here in Australia that other inventory pipeline of stocks called shares in resources companies is also very low.   The intermediaries in this pipeline being the massive A$1500bn in superannuation funds that have shunned the resources sector and put as much as 30% of their funds offshore (on a flow of funds basis these Super fund taxes are contractionary to the local economy to the tune of about A$50bn per year or about 3.5% of GDP), the asset allocators that influence inexperienced trustees, the Financial Advisor industry that acts as another gatekeeper pushing funds into cash and of course the banks themselves whose lending policies have been risk averse and against small business.     (The mining industry could quite rightfully question how many of these bureaucratic positions are just `lifestyle' jobs?) So as this all starts to unwind in the face of continually improving local economic fundamentals, changes in Federal Government policies and un-falling commodities prices and non-collapsing China then it will be slow at first then it will be a flow then a flood. Each player in the pipeline will get a little more confident and so it will go.  For years to come. So these graphics for resources sectors of turnover and market share really do mean something.  First of all they are historically very low and that means the market is underweight.  Very underweight = SHORT! BHP is increasing market share from a low base but the Small Resources seems to have jumped about 40% from 2.5% to 3.5% so market breadth is increasing. (That must be our LMB, LNG and VXL!) The major XMM is up from 16% to 19% but Gold is better but not much yet.  It will come. And the 250 projects needing A$400bn to develop will get access to capital.    So come back to LME inventories since 30 June 2103.  Are these declines due to demand from current  consumption or for anticipated increased consumption or just more comfortable inventories.  Missing out on those last 4.2 days (240kt) of copper supply just might get embarrassing for some.   And just may be the same also for lead, zinc, iron ore, nickel aluminium, fertilisers, palladium, silver, gold, oil, .... So copper prices look good again after that little sell off skirmish and the rest of the LME metals are OK.  Even nickel when the fundamentals were getting so bad (major expansion of nickel pig iron output from Indonesia and the Philippines) and with aluminium oversupply has been remedied by closure of high cost capacity (esp here in Australia).  The best thing for low prices is low prices. Gold is always critical in the outlook and I express my continuing bullishness for  a big number on gold as this next upleg accelerates to reflect the very strong underlying physical demand from China, India and others that will have run down a lot of the loose gold inventory.  Some evidence is suggesting that there is not much inventory left because increased Chinese and the Indian demand have been well in excess of the draw downs from the ETFs.  Now that these are exhausted of easy sellers, where will the next 500t of gold come from? The technicals look constructive here and higher prices soon would be good confirmation. So gold is OK but I am also now getting very intrigued by the performances of the `white’ precious metals. Palladium is looking very strong at present and just might be leading them all higher. Platinum is following and silver is bringing up the rear. Energy prices are warming up again too with oil looking to make that long awaited breakout.  Nearly there. Over in North American the tight oil and gas (better terminology than unconventional or shale oil and gas) boom has sent stocks there into the stratosphere. Heavyweights Exxon and Conoco-Philips are well on their way.   And here in Australia the stealth onshore oil and gas boom I have been talking is now becoming very visible. It is worth noting first the character of the Nth American and in particular the US with extensive infrastructure of pipelines and services companies makes for great efficiencies and lower costs. But just for single and hopefully contiguous one square mile sections that usually have 10+% royalties and more attached. The large inland tenements in Australia allow for a totally different approach.  Having 10km of continuous and contiguous tenements gives explorers many more options. Having 50km even better.  Certainly all our costs are several times those in the US but there are likely to be significant trade offs in scale. Let’s just watch for a while.  Over to you, oil and gas industry. The tight oil and gas here in Australia is applicable to so many basins and I consider it will only increase in importance over the next two decades. The Cooper Basin is important because some infrastructure is already there and geological knowledge is broad and deep. Activity has been in conventional oil and gas and 3D seismic has provide some outstanding new oil and gas fields at a very high success rate.  The Western Flank has been very exciting and the Cooper Basin is now the largest oil producer in Australia today. But much more is happening in the Cooper. The tight gas and shale gas targets have encouraged Big Oil groups like Chevron and BG Group to farm-ins and Beach Petroleum, Drillsearch and Senex are surging along with big programmes that plan to find the gas to deliver to the ever hungry new LNG projects at Gladstone on the East Coast. Whilst concerns have been raised about CSM gas deliverability in Qld and shortages it is interesting to note Santos producing above expectations from its CSM fields and Senex highlighting its high delivery wells.  Nevertheless it will become clear that every LNG plant on the East Coast will be producing flat out and seeking to expand capacity to meet an accelerating global demand for LNG so much more gas will be needed for current capacity and wanted for expansions.  Note that a surprising number of new LNG receival stations are being built in ports all around the world as this market broadens.  LNG long term growth projections may be too low at 6%pa. So exploration for gas in other parts of onshore Australia is well underway and I continue to like what I see with the Amadeus, Georgina, Beetaloo and MacArthur Basins in their searches for tight oil and gas in Basin Centred Gas/Oil accumulations. Envision these as being similar to the coal seams in the Bowen Basin or the Sydney Basin.  Tens of kilometres of coal seam are known to be  there so it only depends on the depth and the style and quality of the coal at each site.  No exploration risk just appraisal and development risk.  And so it is with continuous tight hydrocarbon basins. It is no longer exploration but engineering.  The hydrocarbons are there but the question is how do we get them out. The Amadeus is a special target due to its large size and its three levels of regional seals that restrain all hydrocarbons as well as some very valuable helium. The recent Mt Kitty discovery by Santos with Central Petroleum could just be something very special because its continuous basin accumulation may be hundreds of km long and goodness knows how wide, up to 600m thick and covered by a massive salt blanket across the Basin. The 0.5MMCFD flow doesn't mean much just at present because it will need to be fracced to encourage fracture permeability in its 109m thick section.  Note that the Heavitree has delivered the same gas composition(including almost 6% helium) as was encountered in Magee 100km away. If it is a continuous gas accumulation rock formation and just the 2km Mt Kitty faulted structure section highlighted above is 2TCF then the number across the basin is very large.  Take note of CTPs statement that this discovery` could be the catalyst to interconnect the Northern Territory with the Eastern Seaboard gas market’.  This won’t be small. Extent of Heavitree Quartzite and strata isopachs (lines of equal thickness indicating thickening to >600m) And the Heavitree here extends over 400km to the west. Mt Kitty-1 is 100km SW of Magee-1 near the two wells Murphy and Endunde.  Watch this space. Phoenix O&G royalty shareholders should be very happy (soon to list as High Peak Royalties HPR.ASX) I own all three participants here (STO,CTP and HPR.) Other players like Santos, Beach, Drillsearch, Senex Armour Energy, Falcon Oil and Gas, Norwest Energy  and Advent have some pretty fancy targets in these tight basins and in another parts of Australia and 20014-15 should bring in some very intriguing results.  So keep watching them too. All the above is showing that resources stocks are very cheap and many stocks have already started to move.  The broad indices aren’t really showing it yet but I expect they soon will. Very soon.   The June Qtr should be quite strong. So there you have it.  Gold, oil, iron ore, copper, nickel, zinc, palladium, platinum, uranium, rare earths, technology metals, graphite and LNG.  Just about everything.  Just coal dragging the chain but it won’t be long before a change comes, particularly for coking coal. No comment here on the Fed, Ukraine, the World Bank, IMF or other distractions just watching the markets for our sector. So now talk to me at Paradigm and let us help you really benefit over the next few years. +61 2 9222 9111 Sydney 28 April 2014 Disclosure: I own BHP, DLS LMB VXL LNG HPR AJQ CTP  

Key Points

• China still growing steadily
• US$ and bonds still weakening
• Global equity markets, well, booming
• Commodity markets strong
• Oil prices ready to surge
• A$ still strong

Despite the sombre mood and all the end-of the worlders, the world economy seems to just get better.  Not that is any surprise to you who still read Dawes Points and, as unfashionable are the views expressed here,  the reality is on our side.   The great Contrarians of the markets of yesteryear seemed to give a little too much of the same.  Year after year.  End of Western Civilisation is nigh in a great debt spiral that would have gold at US$10,000 the DOW at 1000 and everyone on the breadline.   The Also-rans Group have decided that Cash is King and yield is better and let's just stick our head in the sand until it all goes away while we sit on A$1568bn in bank deposits, bank stocks and Telstra.  Yes, you win. Pity about your grandkids unable to  get a job.  Who is going to employ them?   Well, it isn't going to be the government. But hey, that is away from topic. And I was going to write about gold this week.  Well, maybe next week but the urgency for gold is still there.  Ignore it at your peril. The China Syndrome threat hasn't worked.  The collapsing of the Chinese economy that was going to drag us into a vortex of falling commodity prices, sinking of the A$, blowing up Australian Government finances, unemployment,  horrible this and horrible that and well, yes,  the Greater Depression just hasn’t happened.  Doug Casey and Harry Dent where are you now when we need you so much.  Or not. So, something else is happening.  7.4%pa for China in March Qtr.  Where are the Bears?  Oh, The Government said it was going to be  7.5% so you might say the economy is slowing.  Only US$630bnpa  added to GDP, not US$640bnpa.  But they still tell you its is slowing.  Maybe next quarter they will get it right.  But the shadow banking system is collapsing.  Unoccupied phantom cities. Too much debt in the SOEs.  Power consumption slowing.  China is a basket case now!   Crude steel production collapsed to a new annualised high of 809.5mtpa in February.   Iron ore stocks at ridiculously high levels that show 40% less availability than two years ago.  But Australian iron ore producers can’t put enough on the ships to sell to China at these current low prices.  Record shipments for BHP and FMG.  And so it goes on. Fine. Fine. But what are the markets saying? Well, let's start with the biggest markets first.  The currencies.  And the  US$ is the biggest . What are the markets saying about it.  I fear not much.  Same level as two years ago. And looking heavy.  I know you have seen it all before but we all need that boost to keep the faith. Now you can say  that the ending of the Petrodollar Era will mean the US can no longer print money.  Maybe.  Or that the debt is coming home to roost.  Fair point.  Or you can say that the US has lost its true entrepreneurial spirit  and that it has lost its way.  Maybe.  Or just maybe that the US is OK but other places are better.   Well, this is my view. Have a look at these.  The SWIFT Nowcasts are showing reasonable growth. First for OECD. Then for Europe Golly gosh.  Economic expansion. Here.  And actually everywhere. So no need for US$ safe haven. I will put in a plug here for the strong A$ but I will come back to it later. And  after the currencies come the bond markets.  About US$80tn worldwide.  Much bigger than the equity markets. The US 10 year T-Bond seems to be a little less happy about being at such low levels than the 30 year  but neither gives the appearance of wanting to stay at these low yields.   Supporting on a downtrend after a breakout is a great technical indicator of change.  It has been a slow process but I think it is doing the right thing and yields will be heading higher. So much for bonds.  I hope you are not too exposed here.  After all, it has been a 30 year bull market that has already peaked(July 2012). Well then let's look at the equity markets. The US is the biggest.  And again let's look at the small caps which have led the global markets.  And also the Wilshire 5000 that gives the market breadth.  Overbought on most measures but may be not over extended.  What are they telling us?  Surely not a global economic boom? Impossible!   Well, now look at the big players.  S&P 500 and the DOW 30.  Everything overbought but not over extended.  Hmm.  Couldn't be a synchronised global economic upturn. Nah.   Germany is already on its way to boom times and the UK in its own reticent way is catching up too.  Was that a surprise fall in unemployment I heard in the UK  today? And so much for the collapse in the Emerging Markets.  India surges to new highs and Korea is nearly there.  All the majors are looking OK.   Finally Shanghai.  Full of underperforming SOEs but the PER is<10x. So equity markets are not calling the end of the world.  Are commodities? Well, not here. Brent is strong.  As is WTI.  Where is the recession?   And finally BHP.  In US$ but looking good. And finally, finally, the little Aussie battler.  After being in Hong Kong and China in the past month I sure am happy the A$ is over US$0.90 and not at US$.80.  Those who wish a lower A$ simply don't understand wealth.   A higher A$ means EVERYONE  has to work better and more productively.  More technology.  More personal responsibility. Isn't this a ripper!  Supporting on the downtrend and kicking off!  Even if it has had a false start.  Supporting off a 100 year downtrend.  Now that is class. I was going to talk a little about gold too but I will leave that for another time. So I am sure now you will want me to tell how to make some money in the stock market. First of all, the broad resources market bottomed in the last week of June 2013, so we have been in an uptrend for almost 10 months. And, if you had been watching the market closely recently you would have seen that dozens of small resources stocks have  jumped in 2014. Dozens.  But there is so much more to come.  We have shared in quite a few. The majors are also building good bases and are looking good for the June Qtr upmove I have been expecting. A lot to like with BHP, WPL, STO, FMG, OSH, PNA. I will continue to recommend the usual great plays where we have played a role in recent times

• Lamboo LMB
• Valence VXL
• LNG LNG
• Blackham BLK

But also WSA, DLS,  BPT and WHC. And a very special plug for Central Petroleum which has made a MAJOR gas discovery at the Mt Kitty +1TCF target that will have a significant impact on the Australian energy scene. And our very own Phoenix Oil and Gas (now soon to be listed as High Peak Royalties HPR.ASX)  holds a 1% royalty over all of this.  Watch out for a report next week showing why you should definitely not sell and should certainly buy on the 29 April listing! So don't be caught down the hole this Easter while St Nicholas is actually flying across the sky early this year delivering  some wonderful Christmas presents. 17 April 2014

Mines and Money Hong Kong March 2014

Key points

• More sombre mood than 2013
• Many excellent presentations
• Resources  companies continuing to make operational progress
• Great thinkers talking
• The Robert Friedland factor
• The rise and rise of Africa
• Rocket scientists mining asteroids (yes in your lifetime!)
• But it all still looks very good for resources sector

This year’s Mines and Money in Hong Kong didn’t quite have the buzz nor the numbers of March 2013 but then the subsequent carnage of April –June then softness to December 2013 probably removed half of global conference marketing budgets.  But we did receive a treat in the form of an outstanding conference format and some truly brilliant speakers. This format would be extraordinary during a real bull market.  And it is coming sooner than most think. Most of you might know that from about 2004 I used to lead sponsor the Excellence on Mining and Exploration(which became Mines and Money Sydney… and also Excellence in Oil and Gas) also Mines and Money in its early days in London, Sydney and Hong Kong. Most of you would also know that year after year the numbers of investors rolling up would continue to disappoint and I think you won’t be surprised to hear that not much has changed.  So the Disbelief and Pessimism period is continuing.  That famous 10 year Bull Market from 2001 that no one came to and the one everyone thinks is all over or at best on hold. Get ready for Stage Two. So you just have to remain optimistic that one day participation will improve and market breadth will return and everyone will be happy again.  It will be soon and it is happening now. You can see it in our Dawes Points portfolio. But the key issue for me at these conferences is to see the progress that the mining industry has made in discoveries, output, technology and sophistication. The organisers had twice as many speakers and panellists this year (about 200!) and about 150 companies were represented in presentations or at booths. Interestingly the numbers showed about 68% Australian companies on ASX, 15% on TSX a couple from AIM and about 10% Private Equity types. Gold stocks still dominated with about 34% of those present but copper (17%) and iron ore(15%) were well represented.  Good to see some opportunities on my favorites of coking coal, uranium and technology metals. But the mood was a little sombre.  Bears at play abounded, with contempt for managers in mining and sneers for poor fool investors and that any recovery was a long way off.  Or, only gold shares might be interesting in the apocalypse to come.  Everyone said iron ore was the world’s most obvious short and of course it was headed for US$60/t.  Everyone. (Except Dawes Points of course!) One speaker was very optimistic – he was awaiting the final capitulation in gold stocks before getting ready to buy! I didn’t have the heart to tell him that the market for resources had bottomed back in late June 2013 or that oil and gas stocks were making all-time highs in the US markets (but they are not resources stocks are they?) or that the US XAU had fallen 65% (with quite a few down >90%) and the ASX XGD had fallen 80.0% with lots of small stocks down >95%.  Yes, waiting for the final capitulation! Most still expected to see more “slowing” in China and more of the downturn in the US and stock markets everywhere were a “SHORT”, especially “Emerging Markets”.   Funny how a PER of <10x and price level at that of 2001 despite the economy having grown 580% from US$1,199bn to US$8,227bn in 2013 makes people bearish on China.  And so many emerging markets following the US markets to all time highs. Oh to be still a bear after the bottom! The cynics also need to be aware that record current and still growing global consumption of resources (thank you China for 45-50% of the total) needs current and growing record production and that resources and reserves need to be replenished at a record rate.  But they are not. Despite the data showing more money is being spent on exploration to find less new resource and that discovery costs per unit are rising the market thinks resources prices can only fall. Red/green/black tape has now added delays and now the average mining project is 20 years from discovery to commissioning. It was only 10 years a decade ago. Despite all this, companies are still working away to discover deposits and are still developing projects because the world needs them. The conference structure provided a good sectoral streaming that allowed comparisons amongst peers and it was helpful to have the competition for the few available funds. The results show some remarkable achievements in output, exploration and some project developments but I also saw some very bold initiatives that brought infrastructure of new railways and ports to regions that would not only provide new capacity and product to growing world demand but also new domestic markets.  Particularly in Africa, Sth America and Western China/Mongolia.  Developments in new technologies are also important to improve energy efficiencies and overall operating productivities.  We need to keep watching what is coming along next. These major mining conferences such as M&M often bring together some of the world’s best thinkers, particularly those concerned about strong money and the role of mining in the financial world with issues such as currency stability, actions of central banks and inflationary trends.  Gold producers obviously think about the impact of government and geopolitical issues on the price of gold but all in the mining industry are interested in currencies, market demand and the costs of mining, processing and discovering. Great thinkers such as Jim Sinclair, Jim Rickards, Clem Sunter and Frank Holmes gave experienced views on these issues and key industry leaders such as Nev Power CEO of Fortescue and David Harquail CEO of Franco Nevada gave business perspectives and assessments.   Real brain food. Attending these conferences allows you to also see the phenomenon of Robert Friedland in action.  Friedland is the consumate showman and his presentations are there to shock you with their scope and vision.  Jaw dropping stuff.  Friedland was in the vanguard of China bulls and his grasp of key drivers a decade ago in copper and the demographics of China were truly visionary. His latest story focusses on Africa, home of 900 m people, many of whom are attaining middle class wealth courtesy of the mining industry and as the middle classes achieve this wealth it is providing a new political stability previously unknown.  Possibly the fastest growing economic region today. His Ivanhoe Mines has two new massive orebodies and another high grade Zn-Cu mine for reopening.  Not satisfied with having sponsored the discovery of one of the world’s largest nickel sulphide deposits (Voisey Bay Canada), one of the world’s largest copper deposits (Oyu Tolgoi in Mongolia),  he has uncovered one of the world’s great platinum/palladium deposits (resource so far of ~75moz 4PGE @ almost 4g/t4PGE) at Plats Reef (ore body thickness is 24m compared with the best the nearby Bushveld’s 1m thick reefs offer - Bushveldt is probably 350moz 3g/t 3PGE) and then massive new copper deposit (Kamoa 520-790mt @~2% Cu - world's largest undeveloped high grade copper deposit) in the DRC and to top it all off he has a major new zinc deposit with 25mt of 20%zinc and 2% copper at Kipushi also in DRC.  These ore bodies are extraordinary by any standard and go to show how lucky you become when you work hard over long periods. The Ivanhoe Mines share price is ignoring all this (IVN.TO) but I am sure Africa isn’t.  The activities in the DRC and Sth Africa are well away from known trouble spots and have progressed well over several years. New Infrastructure and rising export revenues makes most Africans very happy.  All isn’t perfect in Africa but so much is improving. So we can think of Africa as being more than Sth Africa and that Mugabe creep and as 900m consumers entering the markets and requiring infrastructure of ports, railways, dams, power and telecommunications.  Just the sort of things the mining industry needs! So the rise and rise of Africa is something you should not be ignoring. The finale of the show and an excellent one at that was the presentation by Planetary Resources   about mining asteroids! And what a concept.  Some of the world's most inventive entrepreneurs have backed this and there should be an IPO sometime in the next year or so. The company has Richard Branson (of course!), the two founders of Google and Ross Perot Jr amongst many other big names and successful people. The concept is not so much as matter of mining gold or nickel but rather looking for some other high value products to strong market demand.  How about water being currently supplied into space at US$30million a tonne?   How about extra oxygen? These asteroids contain hydrogen, oxygen, carbon, water and some other useful elements for rocket fuel products. Some asteroids apparently have very high water contents and these rocket scientists consider that water can also be converted to rocket fuel. Water and fuel already in space would make Solar System space travel much easier. Not all asteroids are in the Asteroid Belt.  Many small asteroids come reasonably close to Earth so access is not too difficult. Of course there would be gold and platinum in massive size from these alloys and there may be ways to just drop the stuff down to Earth in 500t lots with a parachute!   Keep an open mind! Asteroids have a furnace on one side (the Sun) for very low cost perpetual heating and a freezer (-270oC) on the other in the shade.  And there is a vacuum to boot! Great ideas for heating then cooling.  The engineering is what you would expect from rocket scientists but it certainly is interesting. Of course there is the matter of who owns the asteroids, who to pay taxes to, who gets royalties and will it cause earthly conflicts.  And of course some NGOs will be rubbing their hands with glee about a new frontier for them to get their sticky hands onto. This is not an advertorial for M&M but it is important for everyone to see that conferences like this provide mechanisms for exchanges of ideas and allow the competitive spirit in each of us to come forward. By the way, the markets are now really moving and we have seen some very strong performances from some smaller stocks.  Signs of things to come. The iron ore price has not collapsed (told you so) and copper looks great.  The Paradigm portfolio is looking chipper, especially the smaller stocks, and the next year will be very good. Keep watching China (Shanghai) and India (Mumbai Sensex) for some excitement over the next year.  China has new management( it is taking a while to flow through and with the property market taking a breather I think we might find stocks more attractive there) and India is about to have an election with a possibility of real change occurring there.  Especially for stocks, and for gold demand. Don't be left behind. I will also be looking at gold again this month and expect we will be seeing a good run very soon. Beijing 3 April 2014

Key points

• Massive commodity bull market now underway
• CRB Index up 9% in 2014 price breakout
• Inventories of raw materials at critically low levels
• Strong earnings reported by major resources companies
• Resumption of Australian Resources Boom
• ASX resources stocks are extraordinarily cheap.

And so it has all come to pass. The views expressed in Dawes Points over the past 18 months are now firmly on course. The efforts of Wall St and local investment banks to talk everything commodities and Australia down has failed and they will fail spectacularly further as 2014 unfolds. The world economy is growing and commodity demand continues to rise. A financial world focussing on `the Fed' and `tapering' and believing that pulling the monetary levers in just one country will determine economic outcomes elsewhere in the world is failing to watch the fundamental human aspirations and the laws of supply and demand.  And the most recent wailing about `failing emerging markets’ is yet more wailing from those just looking for troubles. Dawes Points has continually focussed on the markets and data that can be monitored, measured and assessed.  The markets have consistently indicated a global economy very different from the views of most of the economic commentators.  Market reality is coming to the fore. Certainly a broken clock is right twice a day but the evidence has been as clear as day that no depression in the US was happening, no collapse in the European banking system has occurred, no collapse of China has taken place and the concerns about Turkey do not make for a system crisis in emerging markets. The key points above are very clear.  Commodity prices are moving up again after about three years of consolidation.  The move up is from a much higher base than many previous declines and the structures of supply and demand are unlike any other in modern economic history. The ASX Gold Index had fallen 80% from its April 2011 high into a December 2013 low while the A$ gold price fell just 5% from A$1408 to A$1339/oz.  Today it is A$1490.   To say that again just note that at the time of the high in the ASX Gold Index at 8499 it was A$1408 and now XGD is 70% lower.   Go figure.  But then again just remember the BS from the DS at GS with their sub US$1000/oz forecasts last September. How can consensus thinking be so wrong.  Why did the ASX Small Resources fall 70% from April 2011 to last June’s low?  Where is the collapse in commodity demand/prices? It is just sentiment and the prolific opinions of financial media and its bed fellows in financial institutions.  How can it be otherwise?   Now just look what the markets are saying. The Dawes Points three ``Fasten Seat Belts'' calls of 15 Oct (ASX Metals and Minerals 3184 +3.6%),  11 December (3181 +3.6%)  and 17 Jan ( 3346 +6.7%) seem to be on track with that index rising to recent highs of 26.7% from the 2653 27 June 13 low.  And the ASX Gold Index at 2618 is up 54% since that Dec low. China now consumes more than 45% of most resource sector commodities. The US is now less than 10% in most commodities except for energy. Other countries are showing marginal rises in consumption so the pressure continues to be on supply. The pontifications of almost all things Wall Street is for lower commodity prices, lower gold and weaker currencies against the US$.  Pontifications and propaganda to protect the US bond market where these banks have large long positions and to defend the US$. As has been said before:- Defending the indefensible and protecting the unprotectable. These terrible twins of the US$ and the Treasury Bonds are suggesting a serious change in the flow of investment funds from safe refuges and paper assets to the real economy and inflation hedges.  Yes, inflation.  Is anybody here old enough to remember the bad old days?  The Moses Principle is applying here. After 40 years wandering in the Wilderness by the Israelites with nothing, the Promised Land of `flowing with milk and honey' in  er..er ..Palestine was found.  Forty years was enough to squeeze out memories of a better life in Egypt or anywhere else for that matter and to bring the Israelites to expect very little to be given from life.  Small gains seemed miraculous because the then collective wisdom knew no different. So many of the current investment communities have known only three decades of falling interest rates and bond yields to reflect their experience.  Too many erstwhile mini Warren Buffets looking for `sustainable cashflows from well run businesses' to notice that the landscape may be changing. The `Moses Principle’ applies here.  Outside of common wisdom.  Outside of common expectations. The 30 year bond uptrend is broken. The world is `long’ bonds as True Believers to the tune of US$80 trillion. But the fundamentals are rancid. Who, apart from `the Fed' will be buying this paper junk in the next few years. The US$ Index has just had a Friday close under 80.  It failed to make it into the upper channel and now has closed below both 50 and 200 month moving averages. Expect a move down in 2014 to about 3-5%. Maybe more. The weaker US$ will stimulate capital outflows to everywhere else.  Expect higher equity markets and commodities and gold.  And also a stronger A$. Mitchell Johnson was the Panzer and the Maginot Line is being outflanked. The bond market is de facto currency with a coupon. Strains appearing in bonds and with the US$ breaking bad below 80 last week all isn't looking good for the `strong dollar' thesis. And whilst all this is happening note this extraordinary pessimism at the exact bottom of the market! Just review some recent commentary from these Wall Street gurus and their sycophants here in Australia:- In a recent AFR article :-UBS spokesman... `But he warns it’s going to be another tough year for resources. “Our expectation is commodity prices will probably track sideways, pretty much, but they’re still healthy commodity prices, But companies that will be able to generate strong free cash, reduce their debt and know where the market perceives they will be able to return cash to shareholders will be the ones that do better this year.” he says. A recent review on Bloomberg 11 Feb 2014:- `Commodity prices rose almost fourfold in the decade through 2011 on Chinese demand. The Standard & Poor’s GSCI Index of 24 raw materials posted the first drop since 2008 last year as bear markets extended from corn to gold to copper. Citigroup Inc. says the so-called super-cycle of rising demand has ended and Goldman Sachs Group Inc. said last month a reversing cycle will eventually drive raw materials into a structural bear market.’ Morgan Stanley’s chief metals economist recently left the bank after almost five years in the role to start his own research and advisory group. He understands, but possibly not the bank. He said `The collective memory of the financial industry, particularly in relation to commodity cycles, appears to me to be shrinking if not disappearing altogether..' Pontifications because the banks think they know better.  They of course have big trading arms and balance sheets that allow active participation (we wouldn’t say manipulation would we!) in some small and illiquid markets but pontifications are no substitute for knowledge at the coal face. So despite the talking down of gold, oil, LNG, copper and natural gas the markets themselves are talking a different language. And the language is almost from a different planet and is about shortages.  Have a look at these LME inventories that were mentioned last month.  Sure, Shanghai inventories are rising but the real evidence is that there is little spare metal now. Rapid declines in inventories but prices are still being held back with copper and tin being in backwardation where future prices are lower than current spot prices.  The markets are still pessimistic. LME Metals Inventories

LME Metals 000t	Jan 2013	June 2013	Feb 2014	% change On Jan 13	% change On June 13	% of Jan inventory drawn down in Feb 2014
Copper	320	665	276	-14	-58	-12.2
Zinc	1220	1061	761	-38	-28	-10.9
Lead	320	198	202	-37	+2	-3.0
Tin	12	14	8.06	-33	-42	-9.3
Nickel	139	187	271	+95	+45	+1.5
Aluminium	5210	5435	5311	-2	-2	-2.1

Copper, zinc, lead and tin show very low inventories and reflect lack of new capacity.  Can you name two ASX stocks outside of BHP and RIO that produce each of these `old fashioned’ metals.  Not as racy as gold or iron ore so mostly forgotten.   Aluminium and nickel have high stocks but as always the best thing for low prices is low prices that cut output. So maybe a change could come through for these two as well. Now have a look at gold. The COMEX has access to about 7moz of eligible gold sitting in vaults around the world. This gold is known to COMEX but only gold that is `registered’, is in 100 oz bar form of high standard purity and ready for prompt delivery can be used for meeting delivery notices for the 100oz contract.  Much of the gold is on kilo, 10 kilo or other bar form and is not suitable for delivery without remelting. Recent open interest in the futures showed over 100 contract oz for each oz of gold registered for delivery on COMEX.  With Asian demand now greater than global mine production the potential is there for a short squeeze. The change in trend for gold looks very constructive.  Downtrends of gold prices in a number of currencies are now broken and price are turning up. With iron ore, the big build up in iron ore stocks in China might just be a furphy.  86mt at 20 coastal ports in China against 850mtpa of imports is still only 33 days and is 35% fewer days than two years ago.  The new large coastal steel mills get almost 90% of their iron ore feed from imports.  The old small scale inland steel mills get less than half from imports.  The current low iron ore price is closing down environmentally unfriendly old inland steel capacity along with their high cost low grade magnetite mines.  Potentially over 400 million tonnes of domestic iron ore production is in danger of progressively closing down should prices fall further.   The mining, crushing and grinding of magnetite is energy intensive and in a competitive market for energy, power bills must be paid or the power goes elsewhere.  At US$120/t probably 30% (120mt) is currently cashflow negative. The most commonly used number is for 20 ports and is 86mt.  The larger number for 40 ports adds about 14mt but this is only 750kt per additional port and probably just a tiny 200kt for many.  The 20 ports figure is more significant. So this graphic of port stocks doesn't suggest oversupply, but rather tight inventory here in the commodity the market loves to hate. Let’s see what iron ore does over the next month or so to see a clearer direction.  I still am sticking to my forecast of new highs in iron ore in the next few years.  Today, about 130m tonnes of Chinese iron ore concentrate production is underwater. The oil market is saying the same story.  Peak oil has been with us since about 2006.  Where is the new oil coming from?  The idea that the US will provide vast new production is considered to be delusional.  That has been stated here previously. What does the market say?  Brent is a global price and seems ready to jump higher. Higher oil prices in the US are likely now after the breakout last week. West Texas is enduring an increased supply from shale oil (tight oil) but it’s market is still building up and anticipating a sharp upside move. What does the US oil and gas industry say?  Gearing up for new highs in E&P stocks. And drilling activity is saying US$5/mmbtu is not enough to boost gas production.  A tight market is expected for another few years.  Gas rig activity continues to drop. Gas rigs are getting better productivity and more efficient with horizontal drilling so fewer rigs are needed but gas prices are saying something more.  Recent prices above US$6/mmBtu suggests this figure is not enough to make money in dry gas in the US. Don't worry about Asian LNG prices. Oil-indexed prices will probably be here for a while yet and US exports might not be so great after the first few new export LNG projects. This doesn't look to me like a market about to collapse. And US natural gas prices look suspiciously as if they might run much higher yet.  The sharp run up has invited profit taking but this shows strength to me. The big ASX resources stocks have reported strong results from iron ore and oil and gas in particular. Strong results, undergeared or better balance sheets and lots of free cash for dividends.  After the recent five year Resources Sector investment binge of A$400bn, capex is tapering off and balance sheets are being rebuilt and cashflows are being redirected towards shareholders.  In the 1970s and 1980s it was usual to expect 50-65% of earnings paid out as dividends.   We should see it again.  (How long will it be before the commentators start pushing companies to go on the acquisition trail or expand output again?  Two years max?). So the next stage of the boom is underway, ASX resources stocks are rising and capital raisings are picking up nicely. The Dawes Points Portfolio is up 7% (pre dividends) against the XMM which is 2% higher (before recent dividends). Whilst the heavy weighting in the large caps slowed the portfolio (pre dividends) some of the smaller stocks have done very well. Stock picks AQA, IGO, ERA, DLS, WSA, NST, ORE, MAU and BLK have done well whilst LMB has been and continues to be spectacular! The next stage of the Resources Boom will be focussing on the 230 undeveloped projects that are in the hands of mostly junior companies. The story is the same.  The stock prices are far more advantageous and the opportunities are almost boundless.  Has there ever been a time in Australian stock market history that Resource Sector stock prices were so divorced from reality? Disclosure: I own LMB, BHP, DLS, BLK, MAU, NST. Barry Dawes 3 March 2014 BSc FAusIMM MSAA MSEG Follow me on Twitter @DawesPoints

Key Points A prosperous 2014 and Year of the Horse to all US Bond market breaking down Leading Equity markets still making new highs into  2014 Laggard markets catching up Resource Sector low made in late June 2013 Major Nth American Resources stocks powering on ASX Metals and Mines Index has broken 30 month downtrend Iron ore export volumes robust and growing Gold sector and small resources showing increases in turnover Resource Sector capex to resume with A$400bn in new projects 2014 is now with us and it is appropriate to do some crystal ball gazing for the year ahead and beyond.  The markets are providing us all with some now very clear indications of the near term and what is in store for medium and longer terms.  The Resources Market low came in late June 2013, over 6 months ago.  It does look very encouraging now and the Year of the Horse will start early this year and is rearing to go! The short term reality is however, strongly coloured by the historic poor performances of most stocks in our resources sector over the past 30 months despite the low occurring in June 2013.  Poor market action of volume and breadth say loud and clear that participation rates have been and are still low.  That means the general market place does not believe and few players from local and foreign institutional investors to even fewer punters have been playing.  But the signs are already there for a major change. Turnover volumes are rising as investors realise that all is not gloom and doom.  Production data is strong and product prices are good and firming. But before we go forward it is worth reviewing the past year, that most horrible of years, 2013. Dawes Points of 28 January 2013 started with: The foundation for the year ahead was pointed out in a positive Paradigm Outlook from October 2012 which suggested that investors should "Heed the markets, not the commentators''.  So many market indices (Germany, India and several in the US) were then pushing all-time highs and others (Shanghai, Hong Kong, FTSE, Nikkei and the All Ords) had broken downtrends from the 2007-08 highs and were clearly looking over the horizon to some sort of better times.  Commodities were holding up OK whilst PE ratios for many stocks and markets were at the lower end of the ranges of recent times and dividend yields were looking very attractive. Yes that was what the view was then.  And it all came to pass.  That view of the all time highs in many of the major US equity market indices leading the world, with Europe following and Asia and other emerging economies bringing up the rear, has been completely vindicated.  Also the US T Bond market continued its poor performance and the US$ Index gave back most of its 5% rally.  Oil was higher and copper has rallied back after a soggy mid year period. Unfortunately the Resources Sector was savaged.  You may well ask why. The performance of the markets in 2013 was definitely a tale of two halves with the low occurring for most indices in the last week of June.  This was the very notable 27 June that should stand as the cycle low in gold and most major indices outside of the gold share themselves (see Dawes Points 5 July 2013   - End of EOFY Sale). The North American Indices clearly led with the Small Caps (S&P 600 +Russell 2000) as the stars but NASDAQ also did well with 38.3%.  Dow Transports did 39.5% whilst the Dow Industrials was a real laggard – only 26.5%. Where is the Recession!!!    (Note that the far right column gives the % of the gain that was achieved in the Dec Half.) Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half S&P 600 Smallcaps 343 396 485 41.4% 26.1% 63% Russell 2000 849 977 1164 37.0% 21.9% 59% Wilshire 14995 16992 19706 31.4% 18.1% 58% S&P 500 1426 1606 1848 29.6% 17.0% 57% Nasdaq 3019 2935 4177 38.3% 41.1% 107% Dow Industrials 13104 12880 16576 26.5% 28.2% 106% Dow Transports 5307 6174 7401 39.5% 23.1% 59% Russell 2000 849 977 1164 37.0% 21.9% 58% Interesting that about 60% of the performance came in the Dec Half, but NASDAQ and the DOW had all their performance and more in the Dec Half after a negative June Half. These stock market performances were very robust against a weak bond market and a US$ that gave back almost all its June Half rally.  Note rising bond yields and rising stock markets.  Never believe that junk about stock markets falling with rising interest rates!   See more below. Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half US 10 Yr Bond 132 126 122 -7.8% -3.1% 39% US 30 Yr Bond 147 135 127 -13.2% -5.1% 39% US $ Index 79.8 83.4 80.2 0.5% -4.0% -735% European Markets had a very week June Half but roared in the Dec Half to give results good but weaker than the Dow Industrials.  But Europe is following on well.  Where is the banking sector collapse! Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half Germany DAX 7612 6416 9552 25.5% 41.2% 162% UK FTSE 5898 6215 6749 14.4% 9.0% 63% France CAC 3641 3739 4296 18.0% 15.3% 85% Spain IBE 8167 7763 9916 21.4% 26.4% 123% Italy Milan 16273 15239 18968 16.6% 22.9% 138% Asia is following Europe with Japan on steroids via Abenomics up 56.7% and everyone but China just managing to stay positive.  Everyone outside of Japan had a very strong Dec Half. Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half Japan 10395 13677 16291 56.7% 25.1% 44% India 19427 19396 21170 9.0% 9.1% 102% Hong Kong 22657 20803 23306 2.9% 11.0% 385% Shanghai 2261 1979 2116 -6.4% 6.0% -94% SFT 25 39 32 38 -2.1% 15.3% -714% Taiwan 183 192 205 11.9% 7.1% 60%  Kopsi 1985 1863 2011 1.3% 7.5% 559% Here in Australia we were with the true laggards with the All Ords managing 14.8%, whilst really bringing up the rear were most things resources or gold.  The June Half was really ugly but all except gold shares were up in the Dec Half. Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half All Ordinaries 4664 4775 5353 14.8% 12.4% 84% Mines +Metals 3643 2747 3339 -8.3% 16.3% -195% ASX Small Resource 3781 1931 2172 -42.6% 6.4% -15% ASX Gold Index 4898 2064 1898 -61.2% -3.4% 6% XAU 165.6 90.15 84.147 -49.2% -3.6% 7% The well publicised concerns over Europe, China and the US have simply failed to materialise and global economic activity has continued to expand and the SWIFT Code Index NOWCAST is indicating accelerating growth into 2014.  Production of crude steel globally held up very well and is up 4.2% to 1.447mt for the 11 months to Nov 2013.  China maintained a rate of almost 800mtpa throughout the year although November was about 6% lower that the year to date average. So let’s look at the key driver again that was mentioned in the last Dawes Points in December.  The US Treasury Bond market.  It is breaking down.  The Maginot Line has been left behind.  Mitchell Johnson was the Panzer and he destroyed the defenders by outflanking them.  Twenty years of Conventional Wisdom is about to come unstuck as this long term uptrend in bond prices is broken and the short term is showing rising bond yields. The table earlier in this note shows a 13.2% fall in the 30 year Bond Price and 7.8% in 10 year Bonds.  These are capital losses in `risk free’ assets.  A lot more to come but keep in mind that this is a BIG market with natural long term buyers so a sharp drop is probably not going to happen. But then again it might. The US$ itself is the next part of the puzzle and we are in for a sharp move soon because it has held a fairly steady level for over 2 years .  It could be up and would correspond with a bond rally and possibly lower gold but it might be just the opposite.  I think it will weaken and fail to lift into the Top Channel. Through most of the last decade equity markets rose as the US$ weakened and it was fascinating to watch how highs and lows in the S&P 500 seemed to exactly match lows and highs in the US$. The strength in so many equity indices around the world particularly in the US is confirming firm economic growth in the US and that is giving confidence to other countries, starting in Europe and Sth America and spreading to Africa MENA and finally Asia.  Faster growing economies should attract funds from the US and certainly out from the safe haven of US T Bonds. So lower US$ and higher equities. The positioning of these big markets (currencies, bonds and equities) will be determining the FLOW of FUNDS for future market performances.  So if these equity market surges to new highs, uptrend breaks in bonds and downtrend breaks in major cyclicals are genuine then the FLOW of FUNDS from bonds and also cash will be to equities and commodities. I consider that the current build ups in bank deposits world-wide are something quite unprecedented and should then result in something quite unprecedented in equity markets.  Here in Australia we have this extraordinary A$1,544bn in bank deposits including A$808bn in Household deposits.  What do you think will happen when the herd starts to really flow in to equities again?  Yes, big bull market! And it is global. Coming to the resources side we can revisit the performances of our major indices and also some commodities.  The resources indices were down sharply for the year before recovering but the metals themselves fared much better, apart from the structural problems for nickel and aluminium, and finished the year well, especially zinc. Index Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec % Dec Half Mines +Metals 3643 2747 3339 -8.3% 16.3% -195% ASX Small Resources 3781 1931 2172 -42.6% 6.4% -15% ASX Gold Index 4898 2064 1898 -61.2% -3.4% 6% Metals (US$/t) Copper 7915 6750 7394 -6.6% 8.1% -124% Zinc 2034 1823 2085 2.5% 12.9% 514% Lead 2340 2058 2206 -5.7% 6.3% -110% Tin 23500 19800 22550 -4.0% 11.7% -289% Nickel 17085 13680 13970 -18.2% 1.7% -9% Aluminium 2040 1731 1764 -13.5% 1.6% -12% LME inventories are also in very good shape to support higher prices, except for nickel and aluminium. Note copper inventories have almost halved since end June and at the current 336kt are less than a week’s consumption at 20mtpa. And lead and zinc are each under two weeks. Inventory (000t) Dec 2012 June 2013 Dec 2013 Dec-Dec June-Dec Copper 320 666 366 14.4% -45.0% Zinc 1220 1061 933 -23.5% -12.1% Lead 320 198 214 -33.1% 8.1% Tin 12 14 10 -24.5% -32.4% Nickel 139 187 261 87.0% 39.5% Aluminium 5210 5435 5458 4.8% 0.4% The important industrial metals copper, lead and zinc should have a strong decade due to a lack of available new capacity.  And tin now should be regarded as a technology metal given that its key use is in solder for electronics. Other commodities are doing OK with the trends suggesting a major move quite soon within the March Qtr 2014. Iron ore, as has been stated so often, still looks strong and I expect new highs in the next couple of years.  Coal is bottoming and beginning its upturn.  Oil is behaving well and should resume uptrend. So let’s get back to the Metals and Mining Index.  Down 25% in the June Half and up 22% in the Dec Half, and now having broken its downtrend from April 2011 is looking to move sharply higher.  The most recent surges following the strong iron ore production and export figures are probably indicating that the next stage of `fasten your seat belts’  (Stage I Dawes Points 16 Oct +8.6% , Stage II Dawes Points 11 December +9.2%)  is about to get underway in earnest. The downtrend was broken, the break out returned to the downtrend and break line and then bounced off nicely.  If all goes well this should really accelerate before the end of the March Quarter. ASX XMM Metals and Mining Index 2009-2014 The data in last month’s Dawes Points on projections on iron ore, coal and LNG exports should be sufficient to get the major stocks BHP. RIO, FMG, WPL and STO moving but it will be the price moves on the metals such as copper, zinc, lead and tin that will really drive the OZL and PNA type stocks and of course the hundreds of juniors. I also want to stress the importance of uranium and all the technology metals like antimony, lithium, graphite, palladium, platinum, tungsten and tantalum that should be strong performers over this new and exciting stage of the cycle. Evidence is everywhere for the disdain the market has for resources and I even saw yesterday that an economist from a major foreign `Investment Bank’ was still talking about the end of the Resources Boom.  Well it certainly is still the Conventional Wisdom but the markets are telling me something very different. Even the new Australian Federal Government has given the go ahead for another A$400bn in resources projects yet commentators are still skeptical. The latest market share graphics shows that XMM share of All Ords ASX turnover value had dropped almost in half from the 28-33% of 2010-12 to well under 20% for most of 2013 but the early 2014 figures show that market share is now just over 20%.  Encouraging news!  Even more important is the data for Small Resources (XSR) after collapsing from ~5% to ~2.5% is now over 3.5% in 2014.  A very healthy sign!  The data for these charts is limited and is only available from 2006 for the XMM and 2000 for the XSR. The much abused gold sector is improving its share of turnover and a strong end of year/start of year week gave a 3.5% surge to show gold stocks are coming back into favour. Gold shares around the world have been beaten up and are now well down but are also well down against gold and also against stocks.  When the market decides that the incredibly strong demand for physical gold out of Asia, the buying of gold by central banks and general still firm demand for coins is enough to absorb the last of the ETF sales and the shenanigans of the hedge funds, then the net effect on gold should be very strong. It is also notable that the gold bars registered on COMEX are now just 370,000oz.  Just enough for 3,700  100oz contracts to take delivery. Not much.  The figure was 638koz two months ago and 3.0moz in March 2013. This is not the only metric to watch here but it is a useful indicator. The extremes in the values for the XAU in the two charts above are suggesting very firmly to me that gold did in fact bottom on 27 June 2013 and that we will get a sharp shortcover rally and then a lot more.  My view and I am sticking to it. The ASX Gold Index is back over 2100 which is almost 25% up from the December low at 1703 but is still down 75% from the April 2011 high. Importantly while the Gold Index made a new demoralizing low in December most other indices did not and so the Small Resources (XSR) is now looking very attractive. Within the Small Resources there are dozens of stocks that offer extraordinary value and some I mentioned a few issues ago. The opportunities are just extraordinary.  So many and hard to choose which are best for short, medium and long term! I do like the graphite sector as a new growth area and particularly recommend LMB and VXL but I think we might be hearing a lot more about these stocks and similar stocks in the technology metals this year. Finally the A$ is getting beaten around too but you should all be familiar with this correlation graphic of monthly closes where the co-efficient is 0.73.  It was well over 80 until early 2013 but I think it will catch up again.  What it says is that where the gold stocks go, so will the A$.  And rather than it suggesting that the US$/A$ has to fall back to US$0.70 I consider it to be saying when the gold stocks turn up, the A$ will be following them up. And finally this weekly graphic suggest the US$/A$ is only correcting and consolidating against a very high level of negative sentiment.  The next few weeks should just do it. The markets are turning our way, the misery of the past few years should be lifted from our eyes and we should all be looking to making some money again.  LMB and VXL have been very kind to us in this regards but I can see many more coming. Barry Dawes BSc F Aus IMM MSAA MSEG 17 January 2014