Key Points

• Global economic activity is robust
• Equity markets making new highs
• Commodity prices remaining firm
• Global bond markets have broken down
• US Banking Sector recovering well after 14 years underperformance
• Oil price ready for further gains in 2017
• Outlook for 2017 is more of the same only better
• Best stocks are BHP RIO FMG S32 WPL NST WSA PSA CYL MLX ASP SWJ MGT CTP LNG
• Contact me to invest in these and much more bdawes@mpsecurities.com.au  +612 9222 91112016 was a remarkable and very positive year for the world as seen from here.Economic activity was reasonably robust, equity markets held gains and many indices made new all time highs. Commodities from aluminium to zinc in industrial metals had good years with consumption yet again at record levels, and supply constraints and low inventories allowing for useful price recoveries.  Iron ore hit my S$80/t, while oil and US natural gas closed the year at two-year highs. Gold had an excellent June Half and spent the Dec Half disappointing us in a dragged out but piddly 15% correction that gave up about 80% of the Dec 2015-July 2016 US$315 gain. The recoveries in copper, lead, zinc and the other metals along with iron ore provided some excellent gains for the recommended BHP, RIO, S32, WSA and FMG. The global bond market had much of its bubble bluster and arrogance rightfully squeezed out with those dopey and hysterical 'negative yields' of July 2016 marking the end of the 35 year bullmarket in these financial instruments called bonds.  The ten year US Treasuries Index lost 8% in capital value from the July highs while the longer and more volatile 30 Year Index gave up 16%.  Ouch.  With US$100tn tied up in bonds and an average maturity of say 5 years a guesstimate of about US$5tn of market value has been lost. The 40% rise in the US Banking Sector Index flagged here from the beginning of June Qtr 2016, and its strong 33% respective outperformance against the S&P 500 after around 14 years of underperformance, gave robust indications of an improving US economy.  Against rises in the Fed Funds Rate. And also allaying fears of the Pessimists of a US banking collapse etc. The extraordinary progress in technology has provided immense productivity gains in Artificial Intelligence, robotics, computers, telecommunications, office automation, fintech, agritech, meditech, railways, aircraft, automobiles, domestic appliances and so much more.  Great progress in 2016 and lots more for the next decade. All the above went well to plan although the A$ was weaker than expected and the Wave 2 Pessimism that crept into the Gold Sector in the Dec Qtr 2016 left many gold stocks quite friendless and brought some share prices back to the levels of the beginning of the year.  Bargains abound. The Dawes Points Fixed Portfolios did reasonably well to 30 Dec 2016 as follows:-

  Dec 2014 Gold Portfolio	+167%	ASX.XGD	+143%
  Jan 2016 Gold Portfolio	+67%	ASX.XGD	+55%
  July 2016 Resources Portfolio	+38%	ASX.XMM	+27%
  Dec 2016 Gold Portfolio	-0.2%	ASX.XGD	+3%

  The stage is set for another strong year in 2017 but it should be just another good year in a Decade of Prosperity to come. The Trump Presidency is offering some adventure ahead as so much of the US entrenched bureaucracy, policies and administration are turned on their respective heads. Uncertainty and unpredictability are key themes at present but the markets are positive. Note well that the year's economic and market performances reflected the underlying economic conditions driven by a relentlessly growing Asia and the recovery in the US. Long before Trump was even accepted as a candidate. Consequently the forces driving the economic expansion are wider and deeper than the impact of any US President, even someone as seemingly proactive as Trump, but Trump should accelerate this. The emphasis on infrastructure, corporate tax cuts and the long needed overhaul of bureaucratic red and green tape should be very positive for our resources sector.  The increase in US consumer confidence appears to be large and so with rising equity markets, improving commodities and mountains of defensive cash to drive it all it might just be all good and even better than previously forecast.

  The 2017 Outlook:-  More of the same only better!

  A quick trip around important equity markets which are making new all time highs should start as an appetiser. Note that stock markets are essentially barometers looking ahead at changing market conditions and not thermometers giving current readings of market health.

  Starting with the US

  S&P 500 Big Caps  - New Highs NASDAQ  - New Highs Russell 2000 Small Caps  - New Highs Wilshire 5000 Broad US Market Index – New Highs

  And elsewhere:-

  Germany   - DAX Leading and heading to new highs UK  FTSE  - Very powerful now! Japan Nikkei -  Rally heading to new highs again Shanghai SSEC – Quiet but powerful underlying strength  India Nifty 50 Index -  Leading the world and heading to new highs Australia All Ordinaries – Finally starting to catch up Equities are showing us where the world economy is going - and it is not going down!! I expect corporate earnings will be rising everwhere with the US adopting lower tax rates and with improving economic confidence.  The equity indices should rise, despite rising interest rates. And the Bears still don't own Shares! On the other hand the financial market cabal of bond markets, bureaucrats, central bankers, welfare lobbies, politicians and media canvassed here early in 2016 is steadily being roasted and hopefully somewhat dismantled by Mr Trump. Wouldn't it be wonderful if the US, providing 25% of UN funding, decided to drain that swamp as well. The expenditures using 'near- free money' from low coupon bonds are now over.  Bond yields have to rise much further. You are probably tired of seeing this but it is a critical component of the outlook. This 30 Year Treasury Bond Index has fallen 16% from the highs in July and, whilst oversold, might just fall another 5-8% before a bounce comes.  16-20% capital losses on 'risk-free assets'. 30 Year T Bond yields are likely to rise to ~3.7% in 2017 and much higher further out. Currencies and Sovereign Bonds have always held a fascination for me and I consider a sovereign bond is just currency with an interest coupon.  Where one goes so goes the other. The US$ and its 30 Year T Bond are the largest in the markets so need to be respected but at the end of the day they are they are just instruments that are bought and sold. But if the supply of each (Quantative Easing and Bond-financed Budget Deficits) is rising for the US then it becomes a matter of relativity against other currencies. The long term channels on the US$ Index have been heading down since 1985 but the rally over the past 2-3 years has been strong and has moved into a new top channel.  It could be very tempting to suggest that the US$ might head to 120 on this index as interest rates and bond yields head higher. Perhaps the strong positive sentiment for the US$ today represents an important high and may be providing a 'good-bye kiss' on this counter trend resistance line. Note that this current strength against a weak Euro (57% of the Index basket) and the Pound (11.9%) is not confirmed against the Japanese Yen (13.6 %), nor against the Canadian $ (9.1%). Consideration should be given to a strengthening US$18tn US economy leading to increasing imports and raising commodity prices and thereby assisting most other countries. The performance of most of the equity indices of the important other economies have certainly been heading higher and will be atractive investment opportunities for capital leaving the US bond markets. Also, China and Saudi Arabia have been reducing holdings of US T Bonds so those funds will be redeployed to other markets.  Probably to gold, commodities and equities. These countries, together with Russia, are using yuan, roubles and gold as trading settlement currencies and so the trading base of the US$ is steadily being reduced everywhere. It just may be that the surprise of 2017 is not a strong US$ but possibly quite a weak currency. Prices of Industrial Metals have been rising over 12 months and this index of LME monthly closes has had a decisive trend break into a new bull market that should last many years. Iron ore prices have exceeded my US$80 target (did anyone else make this call in the June Half of 2016?) and could quite possibly reach US$95 by mid 2017 before we see a significant pull back. The price history of oil carries great similarities to that of iron ore and an assessment of the supply/demand factors indicates the market is already in balance, stocks are now falling and the recent OPEC cuts will be helping as well. These commodities are only part of the story as the CRB Index is suggesting a sharp move higher soon for most commodities and probably led by oil. The other aspect of this is that gold is just becoming even more interesting. Gold has broken upwards against T Bonds.China and Saudi Arabia have been sellers of T Bonds and have probably been swapping from the oversupply of bonds into the ever tightening market for gold. Gold bought for the East from the West at artificially depressed Western prices using funds from sales of very risky sovereign debt paper. So the Outlook in 2017 is much more of  the same only better. These are the stocks that are considered to offer the best total returns in 2017:-

  BHP	Iron ore, coking coal, copper and oil
  RIO	Iron ore, copper, aluminium and
  FMG	Iron ore
  S32	Lead-Zinc-Silver, manganese, coal and alumina/aluminium
  WPL	Oil and LNG
  WSA	Nickel
  NST	Growing gold production base in WA
  MLX	Tin, copper and nickel
  BLK	Growing gold production profile at Wiluna in WA
  LNG	Export LNG plants in US
  CTP	Gas supplier into Australian East Coast gas
  PSA	Oil production growth
  CYL	Exploring for another Bendigo in Victoria
  SWJ	9moz gold project in Sth Africa
  MGT	Sth Australian Major Magnetite Project
  ASP	Web-based publisher of resource sector news flow and data

  Best wishes for an outstanding 2017. Barry Dawes BSc F AusIMM MSAA I own or control in portfolios all the stocks mentioned here. Contact me on bdawes@mpsecurities.com.au  or +612 9222 9111

Wow!  What a blast!

Key Points

• Equities up to new highs
• Bonds down sharply
• Commodities up
• Iron ore hits US$80/t!
• Infrastructure to further surge
• Technology to soar
• And yes, Gold, at major support, still looks brilliant in a rising wealth world.
• You have been well prepared for all of this

Thanks for joining me on this fascinating journey into what should be the greatest period of Prosperity the world has ever known!  The broad market responses over the past year have been very close to the projections made in Dawes Points.  Equities up, bonds down and commodities moving higher. This is very pleasing.  The markets seem to be pointing to a full vindication of the Great Bifurcation concept. I hope this approach has helped you survive the uncertain world of the past few years and to also make good returns on your investments. If so, let me know.  If it hasn't, then I have communicated my ideas poorly. The point is also made that while the outlook seems so challenging on so many fronts, the markets themselves are pointing to this outcome that would appear otherwise unthinkable: -  a very simple outcome of continuing Global Prosperity. Writing this newsletter has itself been a great journey as it allowed me to analyse the underlying features of a very broad resources sector and its various upstream and downstream related industries. One of the more significant observations made of global economies over the past 50 years is that recessions have generally been quite short and the declines in local GDP growth and then global GDP have typically been quite modest yet the falls in prices of equities and commodities have been savage. Much of this can be connected to inventory changes everywhere and then the re-allocation of capital.  If you can understand this then your hopes of doing better than the pack are greatly improved. The Global Boom has been steadily unfolding over the past three years and after just a short slowdown in 2015 is now picking up momentum and providing opportunities everywhere.  Changes in inventory can be seen everywhere. Here the discussion is not just on LME metals warehouse levels or China steel mills iron ore stocks, it is about the allocation of capital. Over allocation to financial instruments in bonds and cash and under allocation to the productive economy. The flow of capital to determine inventory levels from and to each sector will be the key to understanding it all. Clearly some major things are changing in this Global Boom roll.   So……..

• Where to start with all this?
• Where will it go to?
• When will we get there?
• When will it end?

Where to Start is with the reality that the world has become beholden to a bureaucracy of theoretical academics who have pontificated on matters championed by a myriad of special interest groups,  unelected NGOs and that cabal of politicians, bureaucrats, central bankers, financiers and media all tied up with keeping interest rates down to benefit borrowers.   And a special interest in issuing more debt. It may be all that simple and it certainly has tied up massive amounts of capital. Unwitting (witless?) media commentary also rails against anything that might increase interest rates and tries to deny a realistic return to the providers of capital. All seem to be concerned that rising interest rates will cause grief to owners of indebted balance sheets. But we all know that these entities are mostly sovereign governments and now generally not individuals or corporates. What also characterizes this current period is the build up of massive cash positions and defensive portfolios everywhere. It is not just investors being defensive in their portfolios. Corporates are too, showing few takeovers and little new capex, and individuals have risk averse strategies and major reserves of cash.  All made up by the mass psychology of fear over almost a decade. Think of it as inventory. Logically therefore, the equity markets are not overextended. They are not awaiting a major downward re-adjustment. They are under weighted in portfolios. Note also that the various market indices are over represented by highly priced defensive stocks and underweighted by cyclicals. Recall the earlier Dawes Points breakdown of the rear-visioned ASX Gold Index into domestic and overseas producers. Look at Caterpillar, Boeing, General Dynamics and Microsoft.  Rising earnings and re-ratings.  Look at the rerating underway of the US banks after years of underperformance and that cheeky graphic a few weeks ago in Dawes Points #55pp. US equities making new highs after 15 year bases are not saying a bear market is yet to come! But the bond markets are the ones that are grossly overpriced while commodities are severely underpriced. The actions of the markets over the past six months and particularly over the past couple of weeks or so are giving strong confirmation that the Great Bifurcation is now a reality and the performance of commodities has been a sight to behold. What is the fundamental difference between Monday 7 November when the Chicken Littles dumped stocks prior to the US election and Wednesday 9 November when the XAO was up 3.4%, iron ore above US$75/t and copper at US$2.45/lb. Nothing. Pure sentiment. And what are those investors with gargantuan holdings in T Bonds thinking now that they are sitting on major (already down 13.6 % for 30 Year T Bonds since the highs in July 2016 and 6.3 % for 10 Year), that will become gargantuan, capital losses. And those with massive cash positions of over US$70 trillion (I saw a number from a reliable source suggesting US$70tn might be better to use than my US$80tn cash estimate but what is US$10tn nowadays!)? So where do we go now? Surely now it will be straight up! The US equity market made new highs this week. In the S&P 500, where a major long term base coincides with mostly oversold momentum. NASDAQ has achieved new highs above the 2000 peak! And the Russell 2000 Small Caps making new highs. Short Term Dow Jones 30 Industrials  – Look at this action.  Another 1000 points to be added very soon? These say a massive new up leg is starting as millions of bears cover their short positions (and probably change their shorts!). Globally. So where to start. The US election gave us an excellent insight into the powerful financial intertwining amongst the political and welfare sectors and the financial market participants themselves who have all benefitted from the large bond selling programmes at the expense of the economy and most of the middle and working classes. Massive expenditures, ever higher tax burdens, entangling red and green tape and little to show for it. Margaret Thatcher expressed it well with words to the effect of `Socialism is wonderful. Until you run out of other people's money'. And the US and Europe (and Australia) are running out of other people's money. That is, the money that wouldn't be better used elsewhere. To me, this is best explained by considering the ending of the 35 year bull market in bonds. In a bubble like no other. The Trump victory was just saying `Enough'!  Call it what you will. But the markets have been indicating this all along. Consider the strategy as pointed out by the markets over the past two years.

• Gold is leading. Correcting now, but still is leading. Strong performance by ASX gold equities.
• Industrial metals are following. Commitments made to small caps and midcaps.
• China is rising steadily. Steel in China guided us through the dark days and it is guiding us through to very bright sunshine for the next decade.
• Iron ore is over US$75/t and I have hit my US$80/t target. Commitments made to BHP, RIO, FMG and also MGT. Dawes Points #52
• Bonds are peaking.  Move out of bonds and into equities and commodities.
• China with its One Belt One Road (now, `OBOR') will underpin Eurasian infrastructure and now Trump's American infrastructure promises even more.  Great for steel, iron ore, copper, zinc and nickel.

Global bond markets are now hurting and the pain is going to get a lot worse. While equity markets are soaring! I hope you didn't fall for that higher bond yields would collapse share prices waffle. Prices of most resources commodities have had good jumps recently and well ahead of the US Election so the forces were well intrain then. Table.  Price changes in June Half and Dec Half 2016 Prices have broken the 2011 downtrend as suggested in the last Dawes Points after eight years of bear market from 2007. The evidence has been so clear and the perspective has allowed confident assessment of markets and opportunities. The mix of strongly performing gold stocks coupled with the move into the large cap resources in mid year has been wonderful.

Portfolios

A general Resources Portfolio was set up for 1 July picking up recommendations on the major resources stocks BHP, RIO, FMG, S32, WSA, WPL and STO together with three small stocks, MGT, ASP and PNX, that MPS was raising capital for. Look at these. BHP RIO FMG

So where will it all go?

In my experience, breaks in long term downtrends in markets, commodities and stocks typically lead to eventual new highs. Typically. Downtrends of recent years have been long and often ugly. But typically the longer the trend the longer the period for underlying human spirit to absorb the stress and adapt to the new environment. The response then can be a powerful break of the downtrend and can run for years as a new uptrend. So starting with the bond market we have some useful time scales.  From 15% highs 1981, bond yields have declined for 35 years. But note that they rose from 2.25% in 1942 for 39 years until 1981. So now with all the QE and global debt it is probable that bond yields will rise for the next 30 years and make new highs above 15%. And all those negative yields are now positive. Note that during the 1940-1980s period there was good economic growth and many happy times so don't despair. With gold, we have its own history. Gold peaked in Jan 1980 at US$875 then had a 20 year bear market to US$248 in 2000. The current gold market took 11 years to get to US$1923 and declined for five years to US$1080. Another five years should see gold above my US$5,000/oz. In the very short term, gold has rapidly declined from a pre US Election US$1340 spike, down US$160 (12%) to major long term support at $US1180. Note gold is oversold and MASSIVE volume passed through as some big players covered short positions. A reasonable possibility of a major low is being formed here after a five month decline.  Don't get despondent about gold. Note, too, bullish sentiment is very low indeed and ready for a surprise upside surge. The industrial metals bottomed in 1998 then rallied for 9 years and the last downtrend of eight years has bottomed at a much higher level.  Expect at least ten years of uptrend to much higher prices. Relentlessly rising Asian consumption, high capacity utilisation, no inventory and exploration expenditure cutbacks make this an easy projection. This graphic on copper looks magnificent.  The 4 year downtrend from 2011 has also been broken. What will be the effect of renewed infrastructure spending in the US? The US economy that everyone dismisses has a mind of its own.  How's this for housing starts as at 1 October 2016!  Highest level since mid-2007. There must be ten more years yet in this upcycle. Wonderful for copper. Iron ore has had an interesting journey as seaborne trade expanded to meet Chinese demand that just keeps growing.  Steel output is still strong and high cost domestic Chinese magnetite output has been declining.  India, ASEAN and the US are depend on Chinese steel exports and increased US infrastructure spending can only increase demand.  US steel production at 80mtpa (and about 60% steel scrap-fed Electric Arc Furnaces(EAF)) and consumption at 120mtpa means more imports.  From China. Not a lot of serviceable unused steel making capacity in the US so I think high tariffs on Chinese imports will be just another thought bubble. The now-achieved US$80/t end 2016 target for iron ore wasn't just starry eyed optimism.  This is developing into a long term tight market and, if it does, the technical pattern referred to in an earlier just might give the eventual and currently inconceivable new highs in iron ore several years out.   Note the long lead times for most new mines (not too many FMGs around) and the declines in Pilbara reserve and ore grades as well as the closure of 170mt pa of Pilbara Yandi ore capacity over the next few years. Could we get US$95/t next year? Note too, the rise of magnetite ores and concentrates and MGT.ASX is the preferred play here.

Energy is fascinating. 

Total energy demand is still rising and with Non-OECD consumers making up almost 60% of demand and growing strongly it is unlikely to slow soon.  The keep this graphic mind. Energy demand share by fuel type. Coal is the dominant fuel. Gas is the fastest growing and nuclear has the greatest potential.  Renewables are just another thought bubble. The most interesting is oil. Opec, Non-Opec and NGLs give us 94mbblpa and growing at 1.5%pa.  Non OPEC oil is fascinating.  Keep in mind Peak Oil for conventional reservoirs.  Tight oil should now be considered petroleum mining.  Conventional oil and gas fields have large capital upfront and low operating costs. Tight oil has short life rapid decline fields so capital costs now current operating costs. The crosswinds within the oil market are enormous and often unfathomable.  OPEC is almost a spent force with each player driving its own agenda.  The national budgets of most OPEC members are irretrievably linked to oil revenues so the post 2013 oil price has reduced budgets severely   Bonds are now being issued and state assets being sold. It is of interest that most of the monthly OPEC bulletins report higher demand levels and lower output levels than immediately previously given.  This market is now in balance so expect higher prices. So we know now this will all last a long time. How will it end? Don't quite know just now. But whenever it is and in whatever way it happens you can be sure it isn't soon. Of course something else happened a week or so ago. Donald Trump won the US Presidential Election. It is interesting how Donald Trump with his 'draining the swamp' to describe the cabal was so similar to the Great Bifurcation although his other fork in the road, whilst expressed and emphasized differently, will give impetus to commodities and world growth through promised major infrastructure. The Trump victory was strongly hinted at in the statistics and analytics within social media Face Book, Twitter and Instagram where Trump was followed and `liked' by far more than Clinton and the overflowing halls were in great contrast to the tame Clinton gatherings. Take non compulsory voting and you have a very interesting range of dynamics which the `cabal' had ignored. You also saw the difference between Trump rallies and the Clinton gatherings. The biggest question is whether then the US$ will rise because capital will be attracted to the booming stock market and active economy or will capital see that US imports will rise giving greater leverage to the economies of Asia, Europe, Sth America ... and Africa? The stock markets of most of these we follow have done well. Barry Dawes BSc F AusIMM MSAA 27 November 2016 London I own or control in portfolios BHP, RIO, FMG, MGT, STO, PNX, S32 and ASP mentioned here. Contact me now - bdawes@mpsecurities.com.au or +61 2 9222 9111

Key Points

• Global growth continuing
• Global bond market has peaked
• China and India activity picking up
• Metals consumption hitting further new records
• Inventories still very low
• Metals prices breaking higher as long term downtrends breached
• Iron ore heading for US$80/t
• It is not just about gold
• Want to invest and outperform a strongly rising resources market?

The latest economic data coming from China and India is indicating a pickup in growth in GDP and Industrial Production and the US seems to be doing OK as well. It may be the belated impact of QE from US, Europe and Japan and it just might be that global sentiment is improving and that the influence of the doomsayers is now waning.  No Brexit Crash, no October Seasonal Crash and no End of the World so far. The build up of cash has continued and the search for income remains but it is clear that the extreme lows in bond yields have now passed and we are now heading into a very different era that will see many changes.    The evidence from the resources sector is that prices are now rising after almost eight years of decline and will now add to inflationary pressures rather than subtracting from them.The last three Dawes Points have discussed many major new developing trends in the drivers of the flows of capital between sectors but the Bifurcation is clearly established and inflation is picking up.The growing flow of positive data from China and India is reinforcing what the commodity and equity markets have been saying for some time and the price responses are now as expected.Recent economic data from China shows pick up in PMI figures:- Source: Capital Economics and India too:- These are both showing improving economic conditions.Note that China takes ~50% of all metals and India is finally beginning to hits its straps with >8% GDP growth.   Aggregate figures continue to show consumption is growing in the major metals and the Composite Index shows LME metals are up 29% since the 2008 lows and steel is 41% higher. Sources: ILZSG, Copper Study Group, Tin Institute Keep in mind this graphic for steel and think of it as a proxy for all metals. Don't just focus on US or European activity or consumption data! The average underlying 16 year CAGR for demand for LME industrial metals is 3.24%pa but in more recent times the individual metals are showing very different paths and the underlying trend is still firm. Some of the growth numbers are quite robust so the increase in net new capacity required is extraordinary.  Old mines underperform and even run out of ore so the new additions need to be even higher.Metals consumption is still at record levels and should accelerate after the last two years of slower growth.The expectations here are that deficits will apply to most metals for the next few years.To match the consumption growth rates metals mining and processing output will need to be higher.  Higher prices will always bring about increased output but new capacity is needing ever-longer lead times so the pressure will be on prices to the upside. Copper needs another Escondida each year for the next three years.  It is the world's largest copper mine with 1.2mtpa contained copper.How many times have you been underwhelmed by the performance of that new project or disappointed by blue chip Rock of Ages Ltd quarterly production?   Gaining that new supply of metal is never easy whilst maintaining existing capacity isn't either.The net result is of course that markets will remain tight and any supply interruption will rely on the inventory buffer.   The LME inventory buffer is not very large at present so, again, the pricing pressure will be to the upside. So coming to prices, we have seen a very active 2016 with good improvements for LME prices for aluminium, lead, tin and zinc as they have followed gold and silver but each of these metals has its own supply/demand character that needs to emerge beyond just sentiment.This Composite US$ Price Index of the six major LME metals is in the process of breaking a five year downtrend and should it do so would provide a very good year for LME metals in 2017. But the composite is disguising the performance of the individual metals. With each of these metals it is important to note these points:-

Metal	Commentary
Aluminium	3 year reduction of LME inventories from 5.5mt to just 2.2mt
Copper	Supply/demand deficits looming
Lead	Primary mine production
Nickel	Unwinding of nickel pig iron issue reducing LME inventories
Tin	Strong price performance in 2016 – No LME inventory
Zinc	Strong price performance in 2016 – Big supply shortfall in train

These all suggest supply problems in 2017 and higher prices.The shorter term price histories below suggest tin and lead have already broken downtrends and are ready to rally strongly over the next few years.  Zinc, aluminium and copper are close to breaking out as well and nickel seems to need a little more time but it should be very strong later in 2017. Aluminium Ready to break downtrend and head much higher.   RIO will be a great beneficiary. Copper Ready to break downtrend.  Great for the leaders BHP and RIO. Lead Lead is not a very glamorous metal but it has held up better than the other metals for almost a decade.  Primary lead is only about 40% of total refined lead production and depends on recycled secondary scrap.   This metal could become very tight.  S32 will benefit.

Nickel

The nickel pig iron issue is close to resolution and LME inventories are declining after the big build up.  Indonesian and Philippine iron-rich nickel laterites were very attractive to stainless steel mills and far cheaper than nickel metal.  Export restrictions have now cut the supply of nickel pig iron feed so LME metal levels are declining at last.  2017 should be much better to nickel producers and many of those idled mines may reopen next year. Tin Downtrend broken and much higher price targets generated.  Small companies and MetalsEx to benefit.

Zinc

Zinc looks very good for a strong run in 2017.  Closure of several mines over 2015-2017 will leave a significant supply gap.  Smaller zinc players will have some very good years ahead.

Iron Ore

The resilience of iron ore matches that of steel and reinforces the views expressed here over the past year or two about China and the global economy.Steel over the past decade has been stronger than most of the LME metals and it is doing well.China is still pumping out steel to local and international markets and the steel mills are making money again at last. The net effect of stronger consumption demand and also steel mill inventory restocking has been to increase demand for iron ore.  And as domestic production has declined due to low prices so has import demand risen.A recent visit to Fortescue's brilliant 170mtpa iron ore operations reinforced the positive outlook for iron ore.  The demand position is robust, inventories are at low levels at ports and mills and steel mills are profitable again.  FMG expects higher iron ore prices into 2017. And iron ore prices have been rallying.  I am still looking at close to US$80/t by year end.  Will I get there? Other steelmaking raw materials have been good with coking coal surging further and is now above US$240/t.  Manganese has been better and cobalt is turning up again.

Cobalt LME

All these improvements in metals prices will be good for the major mining companies and the hundreds of explorer/developers listed on ASX.Existing producers will have strong cashflows and the emerging producers will have market conditions that will allow the raising and application of capital in a far more cost competitive environment than existed in the 2008-2013 Resources Boom in iron ore, LNG and coal that literally crowded everything else out.   The evidence just keeps building up to the Dawes Points Global Boom that will bring an outstanding period for resources. Hope you are on board. Contact me to benefit from all this. bdawes@mpsecurities.com.au   +61 2 9222 9111 I own MLX, BHP, RIO, S32 and FMG. Barry Dawes BSc FAusImm MSAA 7 November 2016

Key Points

• Gold market bottoming after a 15 week consolidation
• Dawes Points ASX Gold Sector Universe at PER 9.0x FY17
• Gold in other currencies looking strong
• Global gold sector running short of reserves
• Inflation indicators turning up
• Oil has bottomed and is heading higher
• Global bond market 35 year party now over
• US banking sector looking up
• Gold sector looking good now for next upleg
• Buy the ASX gold sector stocks
• Buy emerging oil and gas stocks

  The powerful bull market in gold appears to be remaining powerful with the recent correction lasting 15 weeks and pulling back only 9% in US$ terms.  Gold stocks (XGD.ASX) in Australia pulled back 26% after a 10% fall in A$ gold prices. Only shallow pullbacks but they have had heavy influences on sentiment with volumes drying up on XGD. Gold price uptrends in other major currencies are looking powerful too. Questions on the direction of gold are continually asked but the answer must simply be the same. More buyers than sellers and the demand is stronger than supply. The demand from Asia with the Diwali season from India in full swing this week after some reported better harvests matching with continuing firm jewellery demand from China to help absorb all the mined gold means that the tightness in the gold market remains. Gold mine supply is still constrained and expectations of declining output from largest producer China must start to take hold soon.  How long can China maintain 450tpa from a fragmented industry of small mines?  Looking at global mine production overall, the decline in most major gold producing countries should also continue.  The continuingly impressive gold industry leader Randgold CEO Mark Bristow (US$2 to US$130 in 14 years) has highlighted that the global gold industry needs to find the current 90 million ozpa mine output each year to just replenish reserves without expanding output further to meet the rising demand. This Mark Bristow graphic shows the industry has found next to nothing since 2009 despite record recent exploration budgets. This also says hold onto your gold.  It is becoming rarer and even more valuable each year. Source: Randgold Even EFT holdings of gold remain firm and even rising while the US$ gold price has had its consolidation pullback.  The current position is around 2060t or about 65moz, well above this green line. The outlook is further bolstered by some key indicators that are now suggesting that the massive QE stimulus packages from US, Japan and Europe are now beginning to flow into inflation. As suggested previously, US Fed stimulus was primarily into US banks to shore up bank balance sheets and to ignore the mainstream economy.  Zero Fed interest rates allowed banks to borrow at zero interest and lend back to the Fed for a fee. The 0.25% new Fed interest rate is higher than the Fed borrowing fee so lending now has to be to the real economy at much higher lending margins. US banks would be delighted at sourcing funds from the Fed at 0.25%, and from other parts of the market, to onlend to businesses at 6% and personal loans at 12%.  Nice margins to be had again. US banks have underperformed the general equity market horribly since the Lehman Bros Crisis but it may be time for this to reverse and see outperformance.  This graphic is a powerful decade-long technical pattern of a US Banks Index vs S&P500 that could provide a multiyear 200% outperformance if resolved to the upside. The higher lending margins would be the catalyst. The short term seems quite constructive and we should see resolution here quite soon. A stronger banking sector doesn't quite fit the concept of equity market declines against rising bond yields. In fact, the opposite is probably very nearly the case.  Isn't `conventional wisdom' grand! The inflation picture is also now very interesting. In the US, the total cumulative inflation from 2006 is over 40% and rising.  You have been told by the politicians and bureaucrats that there has been no inflation and a deflation is the problem. In the UK the picture is no different even though the chart is.  A weaker Sterling may accentuate this. The direction is up for inflation. The bond market peaking story has been a key plank in Dawes Points so I probably won't labour it but you must remember this:- US 30 Year Treasury Bonds at hysterical highs and miniscule yields. And you would be delighted again to see this as 10 Year T-Bonds roll over. Gold is just getting stronger. Look at gold against US 30 Year T Bonds.  We know who is going to win here. And commodities (CRB Index - read OIL), are also breaking upwards again against T bonds. Take a look at oil again.  Its correction is over.  Demand is continuing strongly and market balance is already here.  Natural gas is having its own little run and has recently been as high as US$3.40 /mmbtu. (By the way, I am buying oil stocks again. Ask me what I am doing.) Look at the performance of gold in the various currencies.  It is not just a US$ : Gold relationship:- Gold in US$ has broken its downtrend, has come back for a `goodbye kiss' and should now move higher. The Euro is also providing a suggestion by pressuring a resistance line that a sharp rise is now due. Gold in Sterling is, well, just on a tear on its way to test previous highs. Gold in Japanese Yen just looks to be a base that will support a strong move sometime.  Maybe soon. And gold in A$ has pulled back to the uptrend line and should also head higher. The outlook is just strong and we haven't had to pull back on the big picture at all, even though Dawes Points did just fall short on the 6000 for XGD.ASX in July.  It will come soon enough. This pullback in the XGD might just be enough. US gold stocks hit precisely the 116 resistance level and now after a 25% pullback may just be ready to go again. The shorter term for the XAU matches the XGD.ASX so we should be seeing action again very soon. Gold itself in the longer term, just looks robust with momentum indicators turning up again and the 50 week MA is crossing the 200 week MA. Hold on to your gold, buy more great value dividend paying gold stocks, search out some gold mine developers and watch for some more excellent discoveries. Barry Dawes BSc FAusIMM MSAA 24 October 2016 I own and control portfolios with ASX Gold Stocks and ASX Oil and Gas stocks

Key Points

• Bond market tumble continuing
• Equity markets still robust
• Commodity price rally underway
• Oil prices heading higher
• Bifurcation Revolution picking up momentum
• Transportation and technology revolutions majestic in process
• Small resources stocks flying
• BHP RIO and larger miners up strongly
• Oil stocks excellent value and moving up
• Gold Sector correction providing base for heading higher

Last week in the Bifurcation Revolution the topic was the rolling over of the global bond market and the robust nature of the moves in the Resources Sector.  Commodities seem to be steadying after seven years of declines and a wide range of resources commodities from zinc to coking coal have already made strong moves in 2016.  Oil prices have been firmer after the OPEC agreement on production but demand has been rising and a balanced market and WTIC prices near US$60 are likely for end 2016. The big miners BHP and RIO have done well and are chasing that superb company Fortescue and the ASX oil majors are recovering.  Big US oil companies are also doing well. US Bonds are weakening and yields are rising at the margin. The 10 Year T Bond price is leading the pack lower.  This trend looks ominous but the price needs to be below about 125 to really break down and that could still take some time yet. The 30 Year T Bond is about to say more and even a 1% fall from here would be doing important technical damage. Although it would be the conventional wisdom that weaker bonds mean higher yields, and thus the discount rate on stocks’ income streams must rise and bring equity prices down, the market reality might just well be something very different. It is something of an understatement to say that US$100tn tied up in bonds is at a record level.  A record level against global GDP, global equities and global assets. I can’t imagine world history ever having so much tied up in one market and as they say - if you owe the bank $10,000 you have a problem but if it is $10m then the bank has a problem. Governments of the world have a US$80tn and mostly short-dated bond problem.  Other borrowers have their own US$20tn problem but they may have very long maturities so may be that is not such a problem. Now bonds have another quirky feature in that almost all have a finite life (British Consuls were perpetual bonds that were first issued in 1751 and the last of them were finally redeemed in 2015) meaning that they need to be repaid at maturity and probably rolled over to the next issue.  As interest rates fall the new interest rate coupon is most likely to be lower and as interest rates rise the annual coupon needs to be higher.  The issue price of the bond can of course be set higher (or lower) than the par price of say $100 to keep the coupon the same as the last issue and give a lower (or higher) yield to maturity.  A $99.50 priced bond gives a higher yield at a 2% coupon than a $100 priced new issue bond at the same coupon. As noted last week, the US Government Treasury Bond Portfolio has 70% of its issuance with less than five years’ maturity and the US Treasury is issuing 90 and 180 day bills at very small interest yields so the overall portfolio interest cost is relatively low at about US$400bn pa on its US$13.5tn outstanding debt.  There are another US$6tn of debt somewhere. But keep in mind that US$400bn in annual interest could very quickly get to US$1,000bn if rates rose 2% points from here. US pension funds generally have a far higher proportion of bonds than equities in their portfolios as they try to match the portfolio maturities with their pensioner obligations, and while the US economy continues to grow it would be expected that these pension funds will maintain or increase their demand for bonds. Central Banks are also likely to be continuing buyers of US T Bonds. But again as noted last week it has been domestic investors who have been buying bonds in the past year.  Part of the Fear Trade and the Flight to Safety. If yields rise and bond prices weaken, it could be expected that these domestic investors might just abandon the Fear Trade and join the Bifurcation Revolution and start chasing equities that are now pushing very hard at very long term resistance. The major equity markets around the world are looking just brilliant! The Bifurcation Revolution Party is now just starting! These are my favourite indices at present:  Nasdaq and the FTSE. Then the DAX, the Wilshire (very broad US domestics stock index, Kospi (Sth Korea) and the Nifty (India). Most have made recent new all time highs and yet the momentum indicators are still oversold. NEW HIGHS IN NASDAQ.  Disruptive Technologies.  Creators and destroyers of wealth. Get on the right side. MASSIVE BREAK THROUGH 7000 for the FTSE!!!!  7100!!   YOU WERE TOLD ABOUT THIS!!! Looks like Brexit is going to be very successful for the UK. The DAX in Germany has been leading and is now ready to resume its upside thrust. The broad 6500 US domestic listings Wilshire Index is making new all time highs again.  Small caps are also doing well again. Is Sth Korea is about to have a strong run very soon? India looks good and its domestic interest rates are heading lower. These markets appear robust and about to move substantially higher. Even commodities are looking up and as we saw last week, metals and coking coal have been heading higher. Crude oil is looking good here. As is Natural Gas So all commodities seem to be moving higher. So get this right.  Bonds weakening and equities and commodities rising! So commodities are rising against T Bonds. So all the above is simply a cyclical response to an extended period of low interest rates and it sounds like Economic Boom to me! Could all the above be the manifestation of inflationary pressures building up within the economy after so much quantitative easing? Or could it be the 3300 m people in Asia that are driving all this as these graphics from last week pointed out? We don’t know yet but the overall picture is still compelling. But there is so much more to the Bifurcation Revolution.

Take Transportation.

Then start with the significance of the One Belt, One Road (`Belt/Road’) infrastructure developments (graphic from HKTDC). Consider also that China is actually looking west, not east, for its markets and political influence.  Those 3300m people are to the west of Shanghai and another 1500m people make up the markets in Eurasia and Europe.  Think BIG. Source:HKTDC And also consider the oil and gas pipelines along with the railways and highways. "Infrastructure Development and China and Central Asia" is republished with permission of Stratfor. A bold initiative that may or may not be realised, but if it is it will change the world. China could be seeking to link markets in all of Asia and into Europe to give it rapid access to imports and exports by land and to play down its reliance on seaborne trade. The outcome could be fascinating with China outflanking the Islamists in the Middle East and the `Stans and maybe also the US’s (very expensive) global naval presence.  Who knows? Anyway, let’s just start with China and its internal railways. The growth of the high speed rail network in China has been amazing as is the actual experience of travelling on trains at >200kph running from Beijing to Shanghai. Much of the network is already installed but much more to come. The entire network is growing substantially and we watching the integration of all of Asia.  From Siberia to Singapore.  Shanghai to Kazakhstan. Burma to Turkey. Connections everywhere. The benefits to international commerce are major and unprecedented.  Internet and rail travel.  Freedom and mobility to even the smallest player. Even Saudi Arabia with its 2030 Vision wants to further encourage Chinese investment in Saudi Arabia and to join in the One Belt One Road revolution. The Asian activity is high but so is that in Europe.  Major new high speed trains, lines and linkages. And maybe also in the US. Seems everyone is building even faster trains. The technology advances associated with VFT networks are extraordinary. From rails themselves and ballast electric motors, high speed bogies, fuel efficiencies, super strength lightweight carriages, power gantries, pantographs, power receptors, braking systems, communications and all manner of new safety devices. All use raw materials of steel, copper and cement and many utilise high performance materials from alloys and composites to ceramics. And this transportation revolution is just not with trains.  Aircraft demand and technologies are equally breathtaking. Boeing’s view of the world says 100% growth in the world aircraft fleet by 2035 and current aircraft will make up less than 15% of that fleet. QANTAS plans a nonstop London Perth 14,000km and 19 hour direct flight in new Boeing 787-9 for 2017. Richard Bransons’ Boom Supersonic Airliner will fly faster than Concorde and is planned to be flying by end 2017. And we haven’t even got to motor vehicles with electric cars and all sorts of hybrids. Or power generation, energy storage and water. All these transportation gains are likely to significantly boost person to person contact which is true commerce.  It may not be GNP related but it will certainly boost commerce and trade.

And then there is the Virtual Reality and Augmented Reality revolutions.

Do you know what these new technologies might mean? It is starting with games and entertainment but it will soon envelope business communications and open up vast new marketing, service and advertising avenues. You may think it is not for you but in time will probably soon include you. Have you caught up with what Microsoft, Facebook and Google are already doing here? Look at these new means of communication. Key internet and communications companies are progressing rapidly with VR:- Microsoft already has VR developer capability with the development of its “Mixed Reality” HoloLens platform - https://www.microsoft.com/microsoft-hololens/enus/why-hololens Facebook wants to connect the world -https://www.facebook.com/zuck/posts/10101319050523971 Sony Headset launch for PlayStation - http://www.mirror.co.uk/tech/playstation-vr-price-release-games-7562323 There will be extraordinary applications of VR in entertainment and sports - Would you pay a large sum to sit in the front seats in a 3D VR performance by your favourite artists from the comfort of your own home?   You probably would. Real Estate and tourism will have major marketing revolutions with this system. No waiting for opening hours for that new apartment or actually staying clear of real lions on your VR safari.   No breathlessness on top of Mt Everest. And Social Media and business conferencing will also be revolutionized. Watch this video!! https://www.youtube.com/watch?v=xMgoypPBEgw Can you imagine meetings with friends or family in lounge of a famous hotel or the dining room of a great restaurant with each person engaged as a person or his avatar. Example VR World: avatars meeting in the VR environment VR has become the fastest growing new media platform for the world of tomorrow and starting today. China’s Central Government has also introduced aggressive policies to support high technologies with a strong emphasis on Virtual Reality technology and content developments. By 2020 China is expected to capture 1/3 of a global VR market generating US$30 billion in revenue. The current pace of development in China VR businesses would suggest that China alone will exceed most of the Western industry forecasts and may end up dominating the world VR industry. You might not yet be part of it but it is coming now very quickly.

What does all this new technology mean and how can we play it?

The best place to start is with the big mining companies that are experiencing record demand for their products as iron ore, coking coal, copper, aluminium, zinc and nickel and are running a near full capacity in most operations. XMM.ASX  - The Metals and Mining Index has broken its 2011-2016 downtrend and seems heading for much higher levels. The turnover share has also kicked up nicely to say that Resources Shares are back! BHP, RIO, FMG, S32 and OZL and for the oil stocks WPL and STO are good for a start. There are a plethora of smaller players in copper, zinc, lead and tin as well as rare earths, technology metals and mineral sands.  And oil and gas. Ask me for details. Gold still looks very good to me for all my earlier reasons and a market update will come out soon. Many small resources stocks have had stellar runs in recent weeks.   We have been on board quite a few lately but there will be many more.  So many stocks with valuable assets have been trading at ridiculously low prices so these runs are to be expected. All this is having an effect on the A$. In US$ we seem to be ready for a upmove:- And we have already been strong against Sterling and the Euro. The markets appear to be bringing together the strong themes of this fork in the road away from bonds and the Fear Trade and towards growth and better times. So it now becomes a matter of flow of capital. As a post script I also have two technology related opportunities:- Aspermont (ASP.ASX)  - digital publisher with global resource sector dominance GoConnect (GCN.ASX) – early mover in VR commercialisation. Barry Dawes BSc FAusIMM MSAA I own all the ASX listed stocks mentioned here.