Fasten Seat Belts Even Tighter - Now Enjoy the Ride
The US is not in another Great Depression (stock market at all time highs and ground breaking new technologies are changing the face of the US), Europe's banking system has not collapsed (German and UK stock markets at all time highs) and China's economy has not slumped.
The Resources Boom is not over. The super capex boom might be trending down but the revenue gains are really only starting. Gold is now starting the next upleg. Global resources stocks are responding. You need to be on board.
And despite most commentary, commodity prices are not falling but are stabilising and many are rising. I note, too, a growing sense of underlying excitement developing in the whole sector.
But the conventional wisdom has it otherwise. How often have you heard that these falling commodity prices will send resources stock prices lower along with the A$ in a long term downtrend that has no end in sight and that resources stocks are a most unattractive asset class. And they don’t pay dividends, always are diluting shareholders by wanting more money and the management is rubbish. Just lifestyle companies.
How could this particular groupthink have eventuated? Where have all the thinkers gone today? Is Australia made up of a new generation of wowsers and bureaucrats? Regulators and bean counters who need the structures of ASIC and APRA and FoFA and FWA to tell people what to do and how to do it? And then asset allocators with no real world experience dictating asset portfolio structures that are fixed by looking in the rear vision mirror. And we are talking real money here. A$1550bn in super fund assets.
You all know the comment about generals still fighting the last war (particularly if they were the victors!) with a vested interest in maintaining their empires and structures so that strategies and tactics will be played out in a reasoned and rational manner.
All applaudable reasoning. Yes, the generals can show the politicians their crack polished troops and noisy toys so the politicians can tell their electorates that all their taxes are being spent on the right stuff so that if any of those XYZs get up to mischief as they did in `98, we will be ready.
The Maginot Line of fixed fortifications was built at great financial cost by France in the 1920s and 30s to prevent an expected resurgent Germany, likely to be unhappy after the lop-sided Treaty of Versailles, invading across their long border. A brilliant piece of engineering and long term planning over almost 20 years. But the Germans with theirBlitzkreig (lightning war) simply skirted around through the mountainous forested Ardennes region of France and Belgium and outflanked the French and captured Paris within a six week campaign. Fixed structures, mobile attackers.
And more recently, the England cricket team arrived on our shores to continue the dominance shown in the three previous Ashes series over the seemingly rabble team and to maintain its high ICC ranking. Mitchell Johnson has so far `outflanked’ them and their current thinking is scrambled over consideration of attack (with exactly what?) or defend (and admit defeat?). Of course, in the end, what will be will be.
So let’s come back to the main game. Investing and making money. Investing is all about increasing wealth through balancing return against risk. A compound 3%pa gain over inflation (real return) gives 34% pretax over 10 years. Capital is maintained and Samuel Clements’ (Mark Twain) quip of the return of his money being more important than the return on his money, is respected. And we are all painfully aware of the past 32 months giving the ASX Gold Index a 79% fall (and worse for smaller stocks) and making the return of our money only just a flicker of hope in a nightmare of despair.
So this is all wonderful as asset allocators check the MSCI rankings and weightings and take into account JP Morgan/Goldman Sachs/Morgan Stanley/UBS/Deutsche Bank/etc views on interest rates and currencies. The eternal US$ up, Euro down, A$ down, commodities down (gold definitely DOWN), interest rates low and a large dollop of bonds (especially US Treasuries) required for safety and income in a very difficult world. And avoid small caps and anything illiquid and just say NO to any investment that requires any additional pre-cashflow capital. Yes. Everyone is set for the great extension to the US Great Recession and as China falls over and those Euro-sclerotic European banks and economies just roll over and die. Everyone is set for the next ten years at that 3.0% pa pretax return. And don’t alter that spreadsheet.
But then there is Murphy’s Law, or as the great everyman’s economist Don Stammer would say, the X factor, to come into play. Don probably isn’t following Mitchell Johnson at the moment.
So the first graphic in this edition refers to the world’s second largest asset market (currency is first). The global bond market is around US$80trillion with about 50% being US with US T bonds being about US$17trillion with municipal government, mortgage debt and corporate bonds making up the rest. The numbers are difficult to precisely define as some double counting seems to apply but I am sure you get the drift.
Anyway the first graphic refers to yield on long dated US Treasury bonds from an earlier major cycle low in 1942 and the 39 years of rising bond yields (and falling prices). After the peak in yields in Dec Qtr 1981 there has been over 30 years of declining bond yields (and rising bond prices). You have seen this graphic before but it is just as relevant as ever.
Graphic 1 US long Term Treasuries Yields 1940-2013
The wowsers have had a great time. (In another world this might have been Revenge of the Nerds). And they obviously think there is more to come. No inflation and the Fed will bail us out so let’s just keep it going. And this is one big slow moving ship of state type market that will take a while to turn. It has been on this course for over 30 years so it has its own momentum.
Looking at the past thirty years in price, however, it seems some ominous signs might be developing in the long term trend. The uptrend line is being approached with a certain precariousness. The absolute high in 30 Year T-Bonds occurred in July 2012, well over a year ago. The bonds might bounce from here but if we check again with the yield perspective these rises in yield make the probability that the precarious is indeed precarious.
Graphic 2 US 30 Year Treasuries Price Index 1980-2013
Yields in more recent times are rising here and the trend line break, support and `goodbye kiss’ on the trend line and subsequent rise, suggest higher yields are coming.
Graphic 3 US 30 Year Treasuries Yields 2009-2013
Is that Mitchell Johnson out there or is it that a Panzer I hear?
Apologies if this T-Bond stuff is repetitive in Dawes Points but this is history unfolding right before your very eyes as they say. Stuff you can tell your grandkids. `I was there when it happened’.
So anyway we were talking about the renewal of the Resources Boom.
Two new graphics. Resources Sector capex and total exploration. The Resources Industry in Australia has spent a cumulative A$418bn in new capital expenditure since 2000 and A$94bn in FY2013 alone. Mostly on iron ore, coal and LNG projects.
Graphic 4 Resource Sector Capital Expenditure 2000-2013
Exploration has been at an average rate of over A$2000m pa for minerals in the past six years (over A$13bn in this period) and A$4,000m pa for petroleum (over A$25bn). Looking at the markets you would consider nothing has been discovered or developed. Who is fooling whom?
Graphic 5 Resource Sector Exploration Expenditure 2000-2013
Cumulative A$418bn in resources sector capex on new capacity. Which the wowsers say won’t make any return. Lifestyle companies. Rubbish management. No dividends. Oversupply at the market top.
And these are the resulting production forecasts.
Iron ore and coal. The results of this will be some impressive production and export numbers for iron ore and coal. Over 500mt iron ore in FY13 and on its way to over 800mtps by FY2018.
Graphic 6 Australian Iron Ore Exports 1965-2013 – BREE forecast to 2018
And 300mt of coal and more than 400mt in FY2018.
Graphic 7 Australian Coal Exports 1968-2013 – BREE forecast to 2018
And LNG.
Graphic 8 Australian LNG Exports 2000-2013 – BREE forecast to 2018
Prices for iron ore have been well above most commentators' expectations in FY2014 and coal is also better. LNG exports should also rise by about 200% by FY2017.
The net result in export revenue could be like this.
Graphic 9 Australian Resources Sector Export Revenues 2000-2013 – Paradigm forecast to 2018
And these revenues are at roughly today’s prices and US$0.95 on the currency. If commodity prices are higher, and not lower as almost every commentator has incorrectly suggested, the numbers could be much higher.
You know the story, A$54bn resources sector exports in FY2004 and ten years later A$220bn. And the big three iron ore, coal and LNG alone will provide an increase of A$80bn by FY2017 to take it over A$300bn. Quick check on operating margins for iron ore and LNG gives at least 50%, coal less but others OK. 40% EBITDA margin is A$120bn. Some rubbish management. Some lifestyle company. About A$60bn after tax.
Traditionally resources companies paid out over 60% of their NPAT as dividends. A$36bn in fully franked dividends. >A$700bn grossed up at 5% yield. Market cap of A$600bn on PER of 10. Assuming prices don’t rise and some other smart alec starts talking about it being a long term growth sector and should have PERs expanding. And higher commodity prices would bring growth in dividends. Come on all you Warren Buffets disciples. Do the maths. Of course, not all the investment is by ASX-listed companies but BHP, RIO, WPL, STO, FMG have contributed mightily.
And have a look at this. Over 200 more projects identified by BREE as feasibility studies or better. Needing your money to develop them. Hundreds of companies with projects. Most trading at a few per cent of the project NPVs. Just waiting for capital.
Graphic 10 Australian Resource Development Projects 2003-2013
And it is your capital that is needed. Not huge swags of foreign equity and debt.
The A$1,537bn in bank deposits including A$547bn in term deposits, and A$595n in savings and building society accounts. And around A$1550bn in superannuation (some double counting here of course). And here I am sitting in Shenzhen, China, seeking a few million for some ultra cheap mining project that should achieve minimum IRRs of 30% while the wowsers are jumping for joy over bank dividends that are paying 5%.
These are true alternatives to having ALL of your money in the banks and Telstra. These opportunities are just begging for attention and funding.
The A$1550bn tied up in Australia’s superannuation funds has mandated inflow of over A$100bn and an investment time horizon of at least 20 years. Yet it is seemingly exceptionally `risk averse’ and seeking 3 month returns. A major rethink is needed here. Some recent ABS stats indicated that A$1.8bn in superannuation taxes (sorry, `contributions’) were paid by the mining industry in FY2012. How much came back to it in investment over FY2013? A$1.8bn out, not much back in.
Some Australians might feel that they have missed out on the benefits of the boom but they haven’t really, because corporate earnings prior to 2008 provided substantial boosts to government tax revenues and allowed repayment of debt and gave reductions in tax rates. And the best benefit any government can deliver is economic policy that produces a strong currency. At US$1.00 the A$ makes you 25% wealthier than at US$0.80. Cheaper food, cheaper energy, cheaper cars and cheaper TVs etc. And cheaper holidays.
A 25% stronger currency is far better than a 25% pay rise. Think about it.
But a stronger A$ should also mean that interest rates should have a downward trend. A strong currency should force governments to cut their public expenditures, firstly to reduce any borrowings and force cuts in interest rates. Secondly to reduce the size of the least productive sector of the economy.
A strong currency makes everyone wealthier.
And this is the latest update on the long term trend for the A$. Just pulling back to test support on the long term downtrend of the 90 year variety. A powerful message here. If the A$ gets above parity to confirm this thesis we will be in for decades of strong currency.
Graphic 11 Long term US$/A$ Exchange rate 1913-2013 
Now having had a look at this data and I think you might agree that the best for Australia is yet to come!
And resources stocks are unloved, despised, underowned, down 80% from their highs, back to the levels of a decade ago, cheap and just rearing to go!.
I will close with this busy graphic that just might be confirming that gold is now getting serious about renewing its bull market. The low was back in late June 2013. The rally could be very sharp now but the high will be many years away in this extraordinary bull market.
Graphic 12 Gold bull market about to surge 
11 December 20013
Shenzhen China
Barry Dawes
B Sc F AusIMM (CP) MSEG MSAA
Source: ASPO
This means these fields need to produce 6% more each year to offset the declines before seeing production growth. Costs are also rising per recovered barrel and many of the sweet spots seem to have been already discovered. No panacea here for long term US oil supply from these fields. The US will remain a net importer of oil.
No drama on the oil price itself, just coming back to support on both the downtrend and uptrend lines. This is often a very typical technical feature pullback to support and should be the base for another advance. Recall that US Exploration and Production stocks recently made new all-time highs and did so with little fanfare.
You should then look at Copper with the Freeport price powering on. A pullback is possible but bears don't have shares. Freeport is leading copper. Copper technicals are looking encouraging and LME inventories are 32% lower than the peaks in June and are just 462kt against 20mtpa consumption.
But the bigger picture is that many large cap basic materials stocks in the US are having strong performances from extended periods of low prices. Alcoa has been mentioned previously but have a look at US Steel and Cliffs Resources.
US Steel. What can you say? Already up 71% from its June low. Cliffs is a little less exciting but the downtrends are being broken everywhere.
Whilst we haven't got the indices moving all that much, individual stocks have done well. Have a look at these in order of size.
Certainly there was a bull market that began in about 2000 (when the Index was started) that ran well into 2008, had a sharp pullback then rallied hard to new highs in 2011. The subsequent decline into the June 2013 lows has been vicious.
So we had a good +594% run into 2008 then the 61% pullback, up 218% then down our famous 77%.
Just note the performance of the US Philadelphia Gold Index with similar volatility with essentially co incident timing on highs and lows.
It is hard imagining the combination of a major bull market with such volatility against still strong fundamentals.
But I have found something that does seem similar. Lots of volatility and has major moves over a short period. And it is an Index!
Look at the volatility in a bull market! Up 1300% in 18 months! Down 73% in 6 months then up 300% in 3 months! Wow!
And there is more. Down 79% in 15 months (see XGD down 77% in 26 months!) and then the stupendous jump of 223% in 1994 over just TWO MONTHS!!!
This was a new market with lots of speculation and volatility but look where it is now.
I actually think the Chinese might decide that they like stock market speculating again very soon. It just needs only about a 1% rise to break a four year downtrend.
So coming back to the resources sector what might we soon see?
With the very strong fundamentals for so many commodities the value for these small companies is outstanding. Given how underweight the world is in these stocks we just might get the big run as we saw for Shanghai. 200% in just two months?
Now have a look at this for the Philadelphia Gold Index (XAU).
A rubbery 12 month downtrend in the bear market since April 2011. The downtrend has been broken and the XAU has come back to support on the downtrend in a declining wedge.
Usually such price patterns are resolved in the opposite direction to the declining wedge so itshould break sharply upwards.
And something very interesting took place in the US markets on 15 October that might be indicating a major turning point.
Our favourite Bozos in New York markets thumped the gold price down US$22/oz to almost US$1250 then the market jumped up over US$30 to the current US$1285. It was almost as if the gold market said that “If that is that your best shot then you shorts are now finished!”.
The XAU countered by closing up 2.4% as well! This just might be a confirmatory price reversal.
So if it is a price reversal then the bottom of the declining wedge should be the completion of the Right Hand Shoulder of the overall reversal pattern.
The upside breakout could be very powerful indeed.
So go back to the Shanghai analogy. +200% in two months.
Let’s just watch and see if markets are strangely stronger tomorrow. If so it will be a great ride.
16 October 2013 
For the EU27 region, the SWIFT Index points to significant GDP growth moving from -0.3% in Q2 to 0.8% by the end of 2013.
Similarly, the German economy will continue to pick up with year-on-year GDP growth moving from 0.5% at the end of Q2 to 1.3% growth by the end of Q4 2013.
Continuing the SWIFT Index’s prediction in February that the US economy would reach 1.6% growth by the end of Q2, further growth is expected in Q4 2013 reaching 1.5% year-one-year GDP growth.
Underpinning the combined regional growth, the OECD region will also grow from 0.9% at the end of Q2 2013 to 1.6% year-on-year GDP growth by the end of 2013 signaling the world economy will have overcome the worst of the financial crisis.
Funds will flow from here and from the world’s overpriced and un-`risk adjusted’ bond markets.
Got that OK?
Now let’s start with the leading indices in the US which are leading everything else. The Russell 2000 and the Wilshire.
Russell 2000 (bottom 2000 of Russell 3000 Index so `smaller’ companies) Uptrend clearly powering on and breakout made last December.
Ditto for Wilshire 5000 (6400 US-based stocks).
S&P 500 has a massive base that a technical analyst might say could support a substantial rise.
Dow Jones Industrial Ave (30 stocks) May be a touch stronger than S&P in the longer term
So much for the Greater Depression in the US!
UK FTSE Getting ready to fly!
French CAC Nothing wonderful but an important short term upmove is coming.
Spanish IBEX Again nothing great but the downtrend is broken
Italy Dow Jones Italy Index Not the right one to be in but after a major decline a downtrend is broken
It would seem that the stockmarkets are agreeing with the SWIFT `Nowcast’ of a recovery in Europe!
So much for the Euro Depression too and collapse of the banking system!
And for the Euro to Zero crowd this one is for you. A break above about $1.40 would be very telling. The Euro Zone trade surplus is currently running at well over Euro200bnpa.
Now let’s do a quick trip to Asia with Japan first.
Nikkei Index has broken a 22 year downtrend thanks to Abe-nomics.
Korea’s Kospi has a very strong uptrend and is about to break higher.
Taiwan seems to want to go higher as well.
India is testing its uptrend but there is a lot of energy here. Should break higher.
Hong Kong’s Hang Seng has been basing for over four years and has weathered the China-bashing.
China Shanghai is about to break a 5 year downtrend. A strong performer in the year ahead
So that brings it to us here in Australia. Much like the rest of Asia.
Let’s just first think about it. Major markets led by the US and Germany with other Europe just a little behind. Asia in all regions just ready to fly. Economic growth in Europe and US looking sound (SWIFT `Nowcast’) and Asia is always there. Commodity prices are OK. Oil, LNG, iron ore and copper are firm. Coal is still soft but recovering and gold is good and looking better. The A$ should rise against the US$.
Yes, the All Ords is on its way! Grab your internet banking log in, send some cash and get ready for some fun!
And for the resources sector proxy we can use BHP. Almost ready to go. Strongly
.
So after that around the world tour to the major economic growth engines we have the following conclusions.
It is still possible to be very bullish on gold as emerging nations, particularly China and India, just absorb any physical gold and tighten the markets. A much higher gold price will act as a brake on politicians spending proclivities with other peoples' money sooner rather than later so it just might be a virtuous circle. Higher gold means less budget deficits and less debt. We hope anyway.
Gold stocks were `strangely stronger' on cue. And gold stocks are EXTREMELY oversold against gold.
So a rally in XAU to 140 (+70% from the June low) and then 180 (up 120%) is fine but a rise from 0.074 on the stocks:gold ratio towards the long term 0.25 says something bigger.
If these market moves actually come to pass in direction, if not magnitude, I will feel more inclined to comment on sectors and individual stocks.
I am itching to talk up the wonderful work of our geoscientific explorers over the past few years in copper and other base metals as well as the exotics of rare earths, technology elements like tungsten and graphite and the excitement of Australia's stealth onshore oil boom. And of the numerous developments awaiting finance in coal, gold, iron ore and hydrocarbons.
After sitting in on over 150 in-office presentations plus numerous others at conferences I consider that the many extraordinary efforts by our resources managers will result in extraordinary gains for those who participate now.
I hope you are on board.
In keeping with the New Age I have been tweeting some daily comments on markets and stocks so if you are so equipped you can follow me on Twitter 
And as it brings about this Sea Change just think of some of the implications for investments. Above all, just consider that anyone under 50 has had an entire career in an environment of only falling global interest rates!
The next stage in the Sea Change is move into equities. The All Ords is up 28% as is the S&P 500 since those lows in yields so anyone who thinks equities go down with rising bond yields has received an interesting lesson. And the CRB CCI Index is up almost a net 3% in the same time.
The Great Rotation is underway in earnest.
This source and application of global capital is now the key to investment in today’s markets.
Out of cash and bonds and into equities and commodities.
And what is the buying power side of the equation? Start with the US$17,000bn in US T-Bonds. Everyone, including massive inflows from Sth America, Asia, Middle East, Russia, has sought US T-Bonds as safe haven. Then as was mentioned there are Munis and corporate bonds. Cash deposits had also built up. About US$25,000bn built up over 30 years.
In Australia, RBA data gives total bank deposits as just over A$1,500bn with about A$540bn in term deposits, A$520bn in savings accounts and about A$220bn in current accounts. Term deposits have been steady for about 12 months and cheque accounts are up 6% but savings accounts are up almost 19%. Australians have saved over A$80bn (around 5%of GDP) in the past year and A$50bn in the year prior. This A$130bn is a lot of money hidden under the bed during the last two years of Gillard-Rudd.
So, since mid 2012 as the funds have begun to be redeployed it has been into general stocks (up 28%) but, still, the riskier resources assets have been shunned (down >50%). But what extraordinary value has been created.
So what is on offer to be bought? Well, here in Australia we have the resources sector that is valued for prices 25-40% lower than today and yet the general trend for commodities is up and is led by oil and iron ore with many other commodities about to make a strong break out.
Resources stocks have been thumped in 2013 for sentiment reasons only. Production is rising in most places and the general comment is that every tonne is already sold. Prices are reasonable and, yes, costs have been inflated but downward cost pressure is being seen everywhere. Earnings are OK without being spectacular but we have seen writedowns on many assets reflecting mostly a lower A$ gold price. Most of these writedowns are for the carrying value of investments (at the bottom of the market at end June 2013) and assets that are non–cash items and ultimately result in reduced amortisation and depreciation charges and so higher reported earnings.
So resources stocks are now very cheap indeed and should be special targets for much of that capital flow from safe havens.
The bullish view on economies, equities and commodities presented in these notes has not changed for some years so I don’t have to come up with a reason for changing my mind on the outlook. You know that. The long term economic growth rates favour developing countries and now that emerging economies (or Non-OECD if you prefer) already exceed OECD consumption for most raw materials.
Most new economies have room to move through governments that are too young to have really draconian regulations so their economies continue to grow strongly. The growth rates of most emerging countries seem to be in alignment with China and all should benefit as capital leaves its US$ haven.
The GFC was unexpected given that oil, gold and other commodities were strong into mid 2008 whilst most other equities were weakening but then they too crashed into late 2008. The recovery rally and the strong performance of gold and gold stocks (new alltime highs in 2011) showed some life and a spirit that said all was not lost. The next two years were then of course horrid for my sector of the market which has been well and truly trashed for whatever reasons and the rationale for these reasons continues to escape me.
The commodities just did not collapse. Despite commentary that they had, and would. And now they are rising again.
Recent Dawes Points have highlighted this sell off into the June 2013 lows in gold and gold stocks and the conviction that the medium term lows are in place for both gold and gold stocks.
So if lows are in then the very large cash levels should allow funds to be directed towards the sharemarket along with property and retail spending. But resources sector shares now offer the lowest prices, best value and, very importantly, lowest risk if sufficiently funded.
Also highlighted has been the underlying strength in the iron ore market as shown by the high production rates of crude steel in China and elsewhere and the resulting recent US$154/t and the current US$134/t for iron ore. I expect new highs are coming in iron ore as expressed a couple of times previously. What are all those knowledgeable iron ore analysts in the big investment banks thinking now with their sub US$90/t forecasts? Resigning, or just `upgrading their forecasts’.
Have a look at these charts. China much bigger than the US or Europe.:-
The ASX Metals and Mining Index has had a sharp fall since April 2011 and fell 57% into its June 2013 low. It has bounced 20% but is still 46% below the highs.
With the Gold Sector we still have extreme undervaluation with prices back to 2003 levels and whilst the gold index has rallied over 40% from the June lows it is still 67% below the April 2011 highs.
So as the Great Rotation continues in this Sea Change these resources stocks, especially the small cap versions, should be extra special opportunities. These are clearly unloved and underowned.
As noted in earlier Dawes Points many small resources stocks are priced at levels of less than 20% of the NPVs of their assets on prices set at below levels of today. At today’s prices and then at probable future prices the discount to NPV is well over 90%. So expect many 10 baggers and the occasional 50 bagger.
One other aspect of the Sea Change is the need for a US$ safe haven currency is rapidly diminishing. And the market is letting us know. This sharp little breakdown is saying something very important.
This second graph says is that the US$ is in a major long term downtrend channel from 160 in 1985.
It has been trading within the clearly defined (to me!!) middle channel for 10 years and the recent rally was unable to break up through this channel.
As it has been unable to break up it will now run out of energy and fall to touch the lower downtrend channel line which comes in at about 72. It will bounce and rally but will eventually fall with increasing momentum to the lowest trend line over the next 10 years.
The main reason for capital leaving the US is that it is no longer needed as a safe haven and better opportunities can be had in the booming economies of Asia, Sth America, Africa and Australia!!
The other reason is that the US Government has too much debt and funds will flee the bond market and buy equities and commodities.
So the A$ will be very strong!
Here the A$ has broken a downtrend a 90 year downtrend against the US$. The energy associated with a change in a very long term trend is massive and will be reflected in a very strong A$ against the US$.
I see it at US$1.50 within 10 years.
The drivers will be a big jump in export revenues from higher commodity volumes (iron ore, coal, LNG) and then higher prices for most commodities, especially gold.
Then it will be portfolio investment into Australian assets, then it will be currency diversification into A$ and then it will be speculation!
And at the same time the US$ will be bleeding because of all its debt and a declining bond market. Gold will be very strong. Simple really! It will be Australia’s Century in the Pacific Century!
Paradigm is now becoming active in the market especially in small cap resources and capital raisings for them after a couple of years of restrained activity with everyone correctly happy to stand aside while the heavens bucketed down on us all. Extraordinary value is obvious and now is the time to re-enter the resources market while prices are cheap, value is strong and risk is relatively low. The opportunity for 20 and 50 baggers is now.
If you want to participate please get in contact with through phone or email. +61 9222 9111 and 
So with the ratio now at 0.80 and hopefully moving back up to around 0.15 within the next four years would mean the XAU would be 210 or 88% higher at today’s gold price.
With a gold price at US$1600 in four years the XAU would be 240 or 114% higher.
If XAU traded at the long term ratio of 0.25 then at today’s gold price it would be 350 or 213% higher. This table gives values for XAU and gains at a range of gold and ratios.
I would suggest 0.25 will be seen again and that gold will be over US$2,000 as well. That would be XAU at 500 and a 346% gain.
These sorts of gains are well supported in the Eric de Groote long term S&P Gold Shares graphic going back to 1922 (sorry but this graphic is now a little out of date). The 2013 pull back came down to the 1922 uptrend (who would have thought of a decline of that magnitude would occur!) and XAU should now rally back to around 160, consolidate and then it should move up very strongly.
The deficits are between the lines, red above blue. In contrast to Costello’s surpluses of blue above red.
Taxation receipts have climbed, mainly through personal income tax, but company taxes have been flat since 2008.
Resumption of the resources boom will help that and economy-wide company investment and manning plans will quickly be dusted off under a government that isn’t driven by ideologues and union hacks. And expenditures will be readily cut to weed out waste.
So come 9 September there will be changes.
Overseas investors will also see the changes and with the abandonment of the MRRT and the Carbon Dioxide Tax, Australia’s Sovereign Risk ranking will recover. So watch this space!
The Think Global gold price will be looking better and the Act Local action will start to really pick up after an extended buyers strike.
Australia has over A$1,500 billion(yes billion!) in bank deposits sitting by whilst its resources industry has massively increased its capacity in iron ore, coal, petroleum and LNG. Much of this was financed by retained earnings and offshore debt and equity.
The local commentariat has universally hailed that the new supply would crash prices and that world demand would fall away. China’s Asian Century was being studied by the minute for clues whether growth would be +/- 0.1% of targets. All the history of China’s remarkably successful Five Year Plans that carefully set out directions, pathways and goals was tossed aside in trying to find that tiny issue that would prove China was about to collapse and iron ore with it.
The commentariat (most have not even been to China) ignored the inputs from the mining industry executives who repeatedly confirmed increasing demand for their products. The comment on 8 August from the ABC’s 7:30 Report is typical. In response to BHP new CEO Andrew MacKenzie's advice that the Resources Boom was still in train and that demand for commodities could possibly be 75% higher in the next 15 years, the comment was ` that is obviously a different view to what we’re hearing from the Government at the moment with them saying that the resource boom is basically over’. Entrenched ignorant Groupthink. And have you seen Rudd’s advertisements saying the boom is over!
No wonder the more thoughtful economic commentators trashed the two recent economic statements as being lazy and inconsistent. My own observation after detailed analysis of those statements was that many of the forecast numbers had just been made up. Just look at the MRRT numbers! And how much the two statements varied. No idea.
So the view that the bull market for gold and commodities was over has been well entrenched and a global hell hole was beckoning. And hence the build up into a massive mountain of bank deposits. The build up is seen in term deposits of course but look also at chequing accounts, savings deposits and building societies. Over A$1,500,000 million in total. And of this, A$723,000 million in deposits of all kinds by households!
And Australia deserted the non-Tier 1 players in its resources industry by starving it of capital. Where are our hundreds of fund managers cashing in on the resources boom and funding the projects? Those that are playing with our A$1,500bn in superannuation funds. So much money chasing so few targets. If I hear another investor say that a particular project has to be ignored because won’t be able to get funding ………
And recall the swipes taken at resources sector management for adding to capacity when the markets still needed the products. Look at the prices of most important commodities such as iron ore US$140/t, oil US107/bbl, copper US$3.35/lb and gold US$1,400/oz. These gold producers will be soon making so much money it will be embarrassing. And of course the commentariat will soon be wanting more output because of the obvious shortages. Newcrest with its vast gold resource base will become the market darling again.
So the concept of the V- bottom is alive and well and it is likely to be matched on the upswing as it was on the down.
And finally, to those A$ bears, just have a look at this.
Taking a long term view it is clear that the A$ has broken a 90year downtrend against the US$.
The V bottom in the gold sector should bring this back into line and be pushing the A$ higher.
A strong currency forces public spending cuts, forces improved productivity, forces down inflation, forces down interest rates and makes Australians wealthier. 
To me, this says the first downtrend has been broken, gold has come back and supported on that first downtrend line, is testing the new downtrend and today has surged upward to US$1345.
Targets are US$1350, US$1400, US$1420, US$1470 and then US$1600. After that it will be new highs.
These chart targets are useful and help piece together the puzzle of whatever the outlook is for resources markets around the world. It is all connected, we just need to work out how.
Fundamental analysis rarely seems to work nowadays and it seems that there is too much loose capital sloshing around that has provided volatile market actions that defy logic and therefore unsettle investors and cause their withdrawal from markets.
Fundamental analysis of supply and demand (record physical demand, large obvious short positions, record sovereign debt etc, little growth in mine supply, concerns over who actually has the gold etc) and the reasons for buying or selling gold (household hoarding, central bank buying etc) seem to have had little impact over the past couple of years since the Sept 2011 highs so it is necessary to just view the market performance. And the market performance says Bull Market!
In Japanese Yen terms Gold made new highs in April 2013, almost 18 months after the highs in US$ gold in Sept 2011. That is a Bull Market in the world’s third largest economy.
Coming back to the issue of strong demand for physical gold, recent data has confirmed earlier indications that China has overtaken India as the largest demand bloc for gold and together their combined absorption has been over 3000tpa in 2013. Shanghai gold deliveries of 708t in June Half 2013 were 54% higher than in 2012. Mine production is just 2700 tonnes.
It would not be irresponsible to suggest that the physical market for gold is now really tightening up and the shenanigans being played by hedge funds and bullion and investment banks may just be coming to an end.
These graphs of total and registered gold in warehouses at COMEX tell one story.
but there might be more to it than that as this next graphic shows.
COMEX inventories certainly rise and fall with the gold price but it is where the gold is going now that matters. Falling COMEX inventories at a time of lower gold prices suggests to me that investors are taking delivery here and limiting access to players in the futures markets.
If it is being shipped off to Asia for sale at a US$20/oz premium or minted into coin and bar also at a premium then it is saying that freely available gold is likely to be drying up. Gold has also had recent periods of backwardation when future month prices are below spot. As gold is currency, it almost HAS to be in contango to reflect its interest-rate related carrying costs. This means gold supply is very tight.
170,000t of gold is sitting above ground and is of course always available for sale at any time but the character of the gold market is strongly suggesting that apart from the Roladex market manipulation of last April (that appears to have been aimed at spooking late entry holders of the gold ETFs to sell their gold back to the shorts) no one really wants to sell their physical gold anymore.
The matter of fiat currencies with their bonds at grossly inflated values will be coming home to roost over the next decade so expect higher interest rates (although still probably negative real rates) to run for decades from the recent lows. And it will be the capital flows from bonds that will drive funds into equities and hard assets like property, art and antiques and also into commodities as people strive to keep up purchasing power of accumulated wealth. This is certainly happening.
The rise in gold and bond yields does not need to be negative for the economy overall but there will certainly be winners and losers. As pointed out earlier, bond yields (interest rates) rose for 39 years after the last cyclical low in 1942 and it was only 1974/75 and 1982 that experienced major dislocations.
There is much more debt of course but floating currencies since 1971 have a wonderful way of easing some of the imbalances. Indications of just how currencies will perform over the next decade might become much clearer by end 2013.
In recent presentations I have discussed my fascination in Google and Facebook as major business platforms in the revolutionary new global economy. Not Social Media for teens and twenty somethings to exchange photos and idle chit-chat but as platforms that will deliver dramatic improvements in productivity and global enterprise especially in marketing of services and products. Ignore these major platforms at your peril.
Back here in Australia, the 27 June 2013 low took the XGD back to the levels of 2003 and undid a decade of exploration, discovery, resource estimation, reserve proving, establishment of mines and building of plants. Many A$ billions spent and then discounted and ignored. Who would have thought it possible?
So the June 2013 low is a very important low.
The issue of participation comes back yet again. If Australia had a more effective capital market with more participants active in the resources stocks then the volatility would not have been so great. A hundred money managers with a hundred different views would be enough to stabilise the resource market. Not just a dozen or so playing in the bigger stocks. The concentration of shareholdings in small and midcaps by directors, executives, workers and suppliers (mostly in WA) was probably the most unfortunate issue. Cutbacks to non essential capex, exploration, operations and mining and engineering services would have affected many so the rush for liquidity by mining sector participants would have been substantial but was not matched by a largely cashed up market eager to seek the bargains. At least until after July 1.
The mining industry had certainly experienced a boom as shown by capex, exploration data and wages growth. The Australian mining industry has had great cost increases as it pushed on with developments and dragged in tens of thousands of new workers. ABS data shows that over 200,000 people were employed in the mining and oil and gas industries at June 2012. Average weekly earnings in the Mining Sector were A$2426 as of Nov 2012, 66% high than the average for all workers.
Coming back to Australian gold stocks it could be argued that great expectations had been built into gold stocks prices into 2011 after the GFC sell off and gold's subsequent strong rise. A sense of discovery, resource upgrades and new plants was dominant and a renaissance in the role of independent producers was developing beyond the North American giants who now dominate the Australian Gold Production scene after the great asset sell off in the 1990s. Heady days. Many new entrants who hadn't built or run a mine previously or players from big companies that didn't quite get the small company imperatives of cash and survival meant that many things were not done quite right. And of course the suppliers to the mining industry had a field day with gouging everywhere.
The past couple of years in a bear market may have provided the wringing out of expectations but in doing so has re-established value. Reports from the miners express the view that pricing on so much from drilling, mining contracting, geotechnicians and mining wages have been brought back sharply and often by more than 20%. Many recent graduates have been put off after the mad scrambling of the 2010-2012 rush and more sober expectations have been re established. But while the demand for inputs to new projects will continue to rise the project managers will be more experienced and will overlay reality on expectations. We hope.
Rises in operating and capital costs had gone too far but lower grades and rising diesel costs can only mean a higher cost base has been established and that gold mining globally needs much higher gold prices. And I think they are coming. US$2000/oz is now needed for marginal and frontier new mines. Financiers will probably demand it for major new projects.
Back to the stocks and I am very impressed with the drive for new discoveries in Australia and particularly beyond the immediate Yilgarn Achaean Greenstone Belts in WA centred on Kalgoorlie. This region is by far Australia's biggest gold producer but its highly fractured and altered rocks aren't always readily mineable and so it can be a high cost region. The infrastructure, workforce and mining services bring about ease of operations that makes overall costs lower and very competitive.
Discovery and development have brought Independence Group in its Anglo JV at Tropicana, Regis with its 10moz at Duketon, Gold Road with Central Bore, Breaker Resources has some early results at Dexter some others are looking in the outer reaches of the Yilgarn.
Other important developments in WA provinces are Gascoyne in the Gascoyne, Northern Star in the Ashburton, Mutiny Gold's Deflector project around Gullewa and a few companies are sniffing around Telfer and the Musgraves and there is ABM Mining in the Tanami. Signature Gold is looking for Intrusion Related Gold Systems(IRGS), a relatively new exploration target concept, in Qld.
New South Wales is stealthfully creeping up and efforts returning to the alluvial goldfields of the 1850-70s has come up with some major resources and mines. Newcrest's Cadia Valley with 24moz reserves from a resource base of over 130moz produces over 400kozpa rising to as much as 800kozpa for 2017. The Peak Gold mine at Cobar produces 100kozpa with a resource of 800koz. Lake Cowal is still looking good for a few more years yet.
Special mention needs to be made of the remarkable Mt Adrah discovery by Sovereign since its acquisition of Gossan Hill Gold. 1000m of continuous mineralisation could indicating something a lot more than the current 3-4 moz targets. This is another IRGS deposit and I think we will be hearing a lot more about this deposit style.
The performance of the XGD falling 77% from its high would ordinarily expect devastation to have fallen over the sector. Lower gold prices and mine closures etc etc.
Well what actually did happen?
Of the 38 stocks in the XGD only a few companies had real problems while another handful had to make adjustments. Focus Minerals being a high cost producer has suspended some operations, Tanami Gold suspended Coyote to reappraise operating procedures, Newcrest had a few minor issues with Gosowong temporary low grades and with Telfer being a difficult and high cost mine, Silverlake had some acquisition teething issues and Alacer was having problems with its WA high cost mines. Perseus had mill problems at its Sissingue mine but Edikan was OK. Kingsgate restructured ops at Challenger.
The lower gold price caused many boards to play it safe and write down values of recent acquisition or the market values of listed stock held at 30 June. The Newcrest A$5.8bn was most obvious but the net effect for it would be to have no impact on cashflow, tax or debt positions but would reduce amortisation charges and increase net earnings. Alacer made writedowns on its Australian operations and has put them on the market. Oceanagold and Kingsgate made operations write downs whilst NST, RSG and ALK wrote down carrying values of investment in listed companies.
Many companies have prudently cut costs and deferred capital in the manner described above as reality is allowed back into input pricing. The issues relating to industry wide acceptance of total all up costs is certainly forcing the reality and the market should expect a more determined industry to do things better.
The bottom line though is, as the table below shows, almost all companies produced in line with expectations, and other than the obvious of reducing revenues and operating cashflows the impact was minimal. A$ gold prices averaged around A$1600 for about 18 months to end 2012 and probably A$1440 so far in 2013. The 10% reduction in A$ gold prices should not have had the overall impact of a 77% fall in the XGD.
Most of these companies should therefore recover and many look very good.
The leaders will lead (NCM, RRL, BDR, KCN, NST, PIR, SBM and SLR) and the rest will follow. Some will do very well. The smaller stocks will also have their turn and should provide exceptional performances.
The US$ gold price is moving up and the End of Financial Year Sale prices are quickly receding!
Get aboard
13 August 2013 
The bull run in bond prices is clearly very mature and the Euphoria period may have been in mid 2012 and has just passed by. This market is probably in the final `buy the dip’ period for one last rally before the market begins to unwind that 30 year uptrend and provides perhaps another 30 or so years of rising bond yields. But note that now commentators in the US are talking about the Great Rotation out of bonds and into equities.
It is obvious that central banks and governments have intervened in these markets and have brought short term interest rates down which have forced longer term yields down as well. Purchases of bonds out along the yield curve has helped to bring down rates.
The concentration of so much capital into this asset class is now probably quite dangerous.
The other aspect of the bond market is that of the underlying currency because government bonds are essentially currency with an interest rate coupon. With the peaking of bond prices and rising of yields some might consider that higher interest rates will attract more capital and so will push up the currency. Unfortunately history does not have much confidence in such considerations. The US$ Index here might lure some into thinking that a dollar rally is underway but it just might not turn out that way. These long term channels typically have strong long term technical influence.
So this brings the discussion to resources.
If the interest rate cycle is turning as the evidence suggests, the likelihood is that gold is still in a bull market is very strong.
Previous Dawes Points have highlighted the strong demand for physical gold from China and India (subject to recent import duties legislation that attempts to halt the inflow of gold that is upsetting India’s current account) alone in the June Half of 2013 has been greater than global mine production. This is no big deal given that total gold stocks of about 170,000tonnes dwarf 2700tpa mine supply but physical demand of 1400t from Asia more than offset 500t sales from gold ETFs.
Now this is all very nice but look at some other things.
Like oil. Downtrend from 2008 highs broken.
The WTI price has climbed to remove the discount it had against Brent prices. The discount had reflected transport bottlenecks in the US around the new tight oil fields. Unblocking of the bottlenecks together with more oil being sent into the North Atlantic resulted in the removal of both the discount for WTI and the premium for Brent.
What has been also remarkable has been the performance of the US oil majors, Exxon Mobil (XOM), Chevron (CVX) and Conoco-Philips (COP) over this period. Year after year new rally highs and for XOM and CVX, new all-time highs. No recession/deflation/China falling over here. The GFC was a yawn.
And also just look at the performance of the Exploration and Production (E&P) companies through the XOP Index. These E&P companies had their own April 2011 moment and the obligatory rapid 40% sell off but are now within 4% of that high and probably about to move sharply higher.
So coming back to the remarkable stuff, most will recall my ad nauseumrepetition of Non-OECD energy demand being now greater than that for the OECD and that must mean a strong growth rate in the >50% sector will result in an acceleration of total energy demand. And that is what we have.
The details of the energy mix can be debated but with oil still making up around 33% of the world's primary energy sources and, being the largest single fuel, it is very important. Particularly for transportation. And China will have more transportation requirements as its car and truck fleet grows, as its mining sector still grows and as agriculture still grows. So more oil is required. Catching up to the US will still take some time.
The Peak Oil concept is still with us and most traditional oil producers in the Middle East, Indonesia, Russia, UK, Norway and Mexico are well down on their peaks. The US is well down too but it is having a renaissance with tight oil but it is unlikely to get back to the previous highs. The new oilfields in Africa and Sth America are helping and China is increasing output too but overall the trend is a decline for traditional conventional oil despite the growing global reserve base. Maintaining 90 million bbls per day from current fields is hard and growing it is even harder.
Natural Gas Liquids from LNG production is helping meet the 90MMbopd and LNG itself has become a very big business with around 230mtpa being shipped and expectations of about 40% higher at 340mtpa by 2020. Australia will become the biggest exporter from a current 24mtpa from three WA operations to 60mtpa from seven WA operations (and possibly another 20mtpa from four more) and 13mtpa from the first train in each of three Gladstone plants and double that with each running a second train. So it could be 90-100mtpa by 2020.
Here in Australia these major LNG capacity expansions are probably most famous for their rising capital costs and on the East Coast for their land use conflicts but they will be important generators of export revenue and will deliver versatile gas to mostly Asian buyers.
Whilst the West Coast offshore fields will feed specific LNG plants, over on the East Coast it is a matter of new LNG plants being fed initially from the dedicated coal seam methane and then from wherever it can be sourced.
This development of an export market for much of the Australia’s underutilised or stranded gas reserves in Central and Eastern Australia is changing the focus upon oil and gas producers away from just the large players.
Oil and gas exploration onshore Australia has been difficult for all but the major players as the exploration risk has been high (although it is reasonable in global terms), infrastructure limited and markets for gas even more limited.
This opportunity for a larger export markets for gas has totally changed the field economics by justifying new pipelines and thereby offering stranded gas more attractive terms for development.
At the same time the onshore hydrocarbon boom is moving strongly with Australia’s own form of unconventional gas and liquids.
The Oil and Gas Sector on the ASX has well underperformed its US counterpart so that the local rush-for- liquidity disease overwhelmed the oil price and operating fundamentals. And the fundamentals should reassert themselves over the next twelve months.
It is clear that market leaders Woodside (WPL), Santos (STO) and OilSearch (OSH) are looking good and are well into the LNG business in Australia and PNG but these significant second liners, being Beach (BPT), Drillsearch (DLS) and Senex (SXY), are developing oil and gas businesses from the Cooper Basin that should also include expansion of gas production from unconventional shale gas and tight sandstone gas. Buru (BRU) with a market cap of over A$450m from its Canning Basin operations is a good fourth member of this second liner group.
All seven of these look well placed to be given good reratings with higher oil prices.
This graphic gives a good breakdown of the activity underway in eastern Australia with major resource potential identified across several basins with the Cooper Basin well positioned to supply local and international markets..
Amongst the second liners the real action is here in the Cooper Basin where principally Beach, Drillsearch and Senex are re evaluating the hydrocarbon potential. Several newly recognised reservoirs have been identified as exploration has moved beyond conventional structural traps (caused by folding and other tectonic action) that previously had provided about 95% of all discoveries in the Cooper to stratigraphic (trapped by the sediments) and unconventional targets of Basin Centred Gas Accumulations and tight sandstone gas reservoirs. New nomenclature of oil fields in the Western Flank and tight and other unconventional gas in the Gas Fairways has been adopted.
Senex Energy
SXY has a diversified asset base with a major asset portfolio in the Cooper Basin (14 operating fields) and CSG tenements in Qld. The company has been very active with resource upgrades, extensive 3D seismic surveys and a Cooper Basin exploration/development programme of 30 wells. Oil production exceeded 1.2MMbblo in FY13.
SXY has major tenement interests along the under-explored Western Flank and in the deeper unconventional gas fairway in the Permian sediments.
The Ungani field discovery in dolomite reservoirs is part of a trend that has high quality conventional reservoirs and prolific source rocks providing over 150 prospects. The underlying Fitzroy Graben hosts the Laurel Formation which has extensive and continuous tight gas accumulations. Additional shale oil and wet gas potential is recognised at Goldwyer and Acacia.
Ungani expects to be in production at 5,000bopd in June Half 2014 from around 10-20MMbbl recoverable but potential for is recognised as drilling along trend has confirmed thick 40m oil columns and additional contingent resources.
The Laurel Formation has been independently assessed at around 100TCF in a Basin Centred Gas System with 2 billion bbls liquids (47TCF and 1 billion bbls net to BRU) whilst the Goldwyer Shale has 7.2TCF and 4 billion bbls net to BRU.
