Tag: ABU

Gold Index up 60% since November – Are you on board the new Gold Bull Market?

by Barry Dawes

Key Points

  • Gold price now surging – up 15% from US$1130 low
  • Gold stocks jumping - ASX Gold Index 61% from Nov 2014 low
  • Rising dividend streams now apparent
  • 23 ASX stocks Gold sector universe FY16 PER of 4.0X and high yields
  • Did you get on board?
  • Long term gold bull market Stage II still only in infancy
  • Industry costs tumble for energy, labour and equipment
  • Opportunity in Blackham Resources (BLK.ASX) for eligible investors (see at end of note)
Further rises in US$ gold prices have given strong support for gold mining shares and these are now acting to reassert reasonable valuations after >3 years of savage underperformance against gold and general equities. A pullback is possible after such as strong rise but these stocks are so underowned that pullbacks in this bottoming and upturn process should be shallow and short-lived. The December Qtly and Half Yearly Reports are now coming through so more output and earnings surprises should be expected. This rise in US$ gold is extremely important and when put in the perspective of the BIG PICTURE so much is now becoming clear.  Gold in many currencies is now surging.  I strongly consider a US$ gold price of $5,000 is achievable in the coming cycle. First of all, do you have enough gold and gold mining shares?  A gold holding is ESSENTIAL for everyone and quality dividend paying gold stocks should be there beside your Telstra shares. If you don’t hold gold or these gold shares contact me NOW!  bdawes@psec.com.au The Australian Gold Sector over the past two years has been forced to adjust to very difficult conditions after the sharp escalation in costs for capital, equipment, labour and energy and it has recovered so very well since mid 2013.  The benefits were already being shown in 2014 but low gold prices deflected the gains.  So now the Dec 2014 Quarterlies to date are showing some excellent cost reductions and with a A$1600/oz gold price the operating margins are often over A$500/oz (for a 100,000ozpa producer this is A$50m pretax and A$35m after tax.) and PERs are low single digits for many. The Australian Gold Industry has also completed  most of its capex for the last cycle and much of its debt has been repaid. Now, A$ gold prices in the past two months have averaged about A$100/oz (~8%) higher than for the whole 2014 year average of around A$1400/oz. With capex completed and banks being repaid it is now the time for shareholders. Everyone needs to keep in mind that resources stocks in steady times (have there ever been steady times?) traditionally paid 50-65% of earnings as dividends.  This is what should happen now. And if gold prices continue to rise as I expect over the next few years then the dividends should only grow.

Strong market performance

The ASX Gold Index is now up 61% since the November 2014 low at 1642.  A strong move that I have suggested could occur and that if it came it could be violent.  Violent, yes.  Many large stocks have had +10% daily jumps.  Look what has happened in the ASX Gold Index since then.
Week Ending

Weekly Close

Weekly Change %

Cumulative % gain















































* XGD low But this index is still 70% BELOW the 2011 high which occurred at about A$1403/oz and the current price is A$1630.  Something is not adding up so the solution is gold stock prices at levels above the 2011 high again in the next few years.  Or sooner. Have a look at the performance of the 17 chosen stocks from 1 December 2014.  And look at my targets from 7 January 2015. Please note these are initial targets for end 2015 but many should be exceeded well before.


Price 1 Dec

Price 23 Jan



























































































































Has the market run too far too quickly?  Possibly.  A 60% move certainly needs some correction but consider that the market place is extremely underweight gold and gold shares so the run may be longer than expected and the pull back may come later.  Who knows? A 60% rise after a 80% fall to a very low base ( ie to the levels of 2002) is not a big move when you consider we are still 70% below the 2011 high. Looking at a collection of many companies shows some very attractive sector investment arithmetic. How is a sector average of 4.0xFY16 EPS with an average yield of 10.0% at the current A$1630/oz? That is the average so some PERs are actually very low indeed. The matrix below gives a fair view of 23 mostly producing stocks that I follow. I cannot over emphasise that there are dozens more out there but you can’t follow them all and many are too early.  However, this is a very long term bull market now and there will be time for them to catch up. The first item to focus on is annual gold production.  Then look at market cap.  Note the revenue.  Note the Revenue/Market Cap.  This is your key to leverage.  The higher the better.  If a stock has revenue equal to market cap and has average A$1100 AISC costs (All In Sustainable Costs) it will have a 30% operating margin.  Price to Operating Cash Flow ratio of 3.5x. My model takes the current A$ gold price, annual production, AISC costs, total pre tax costs and applies a 30% tax rate to give EPS and generate the PER.  A dividend of 50% is assumed unless a company has otherwise stated. Many companies have some forward sales but these are generally small and are unlikely to statistically change the received annual price averages. This universe has A$7bn revenue from 4.5moz in FY16 and a market cap of A$7.5bn. Earnings could be A$1.6bn after tax. Are these attractive enough for you now at A$1630? PER 4.0x FY16  and 4.1x FY17 this universe? And yields of 10.0% and 15.0%. And at a range of higher prices?
Gold Price PER FY16 PER FY17 Yld% FY16 Yld%FY17




































These figures are very attractive but these next few figures put them in perspective. The ASX Gold Index fell 80% from the April 2011 high at 8499 to the low in November 2014 at 1642. It is still 71% below that high.  Cheap here. And gold stocks have fallen against the A$ gold price.  About 73% from the April 2011 highs and 78% from the 2008 relative value.    Very cheap here. And with XGD market share so low at about 1.5% of ASX All Ordinaries turnover (it was down to just 1% in August 2014!) compared with 4.5% in 2011-12 and over 6% in 2010, NO-ONE owns these stocks.  A downtrend break has occurred. Huge pent up demand coming here.  Remember the A$1,660bn in bank deposits. And just remember the ASX Gold Index history. Well, did you get aboard?  And do you have in your portfolio these producing stocks that will be big dividend payers in 2015 and beyond now that most sector capex is complete and debts are being paid down? If not, contact me.  bdawes@psec.com.au Here is another perspective from Avi Gulbert, an Elliot Wave aficionado, who thinks we might get another sell off to new lows before his BIG PICTURE comes into play. He is open to the turn having occurred already but his interpretations are useful. The concept of the `irregular B wave’ for the rally into 2011 for gold and gold shares gives a powerful underlying force that reflects all the previously raised concerns about public sector debt and the debasement of currencies.  This wave model projects the US HUI (Gold Bugs Unhedged Index) out to a level 20 times higher by the mid 2030s.   You might need to enlarge this diagram to see the targets. https://www.elliottwavetrader.net/images/charts/full-dshel4r7qDCriXl8CP5xP.png Those large dividend blue chip gold companies should be making shareholders very wealthy over a very long time.  Have you enough gold and gold shares? I am going to come back to this concept in another Dawes Points very soon.  The implications are extraordinary.

Gold Outlook

Rising gold and rising gold stocks are a welcome and long overdue experience. Nice to be making money again. But why is gold now rising? The price history of US$ Gold since 2000 shows a long term uptrend with a 38 month decline. The 10 year bull market was saying something and something big was afoot.  Many reasons.   Currency, debt, inflation, wars and deficits.  All contributed.  Many more reasons out there too. For me, the build up in public sector debts and the gyrations in currencies are my preferred reasons. Who can really trust politicians or their government bureaucracies and their welfare recipient supporters to protect a currency and the population’s wealth? But then we had the extension of the 30 –year rally in the US T-Bond market that brought yields down even lower and bond prices into the sky.   And a US$ that rallied hard. Do keep in mind that the US$ Index is made up as follows:- Not a good index because weightings make it Euro dominant and the US$ has fallen against the Swiss franc and also the Indian rupee and the Chinese Yuan is not included.  Nor the A$.

I don't buy the US$ strength argument but then I have not got it right on either the US$ or the Tbonds. Gold in Yen, Euros, Pounds and A$ has broken 3 year downtrends and is heading up sharply.

These suggest the rally is real and, even with some technical pull back, gold in these currencies will be heading higher. This `market breadth’ says buyers everywhere are buying gold not just arbitraging currencies. The big buyers throughout 2014 have been India, China and, surprisingly, Turkey. Here we have gold in Indian rupees, Chinese yuan and Russian roubles. http://www.24hgold.com/graphiques/picturedata.aspx?graphParam=Gold%2bUSD-INR%2boz%2byy%2b1&format=172 Source:24hGold.com Demand from China has continued to explode with recent figures indicating 70 tonnes of gold withdrawn (i.e., acquired by Chinese citizens) from the Shanghai Gold Exchange in Week 2 of 2015 and have brought the year to date figures to 131 tonnes ahead of the Chinese 2015 Spring Festival starting on 19 February. Source: Koos Jansen Bullionstar This is 3400 tonnes annualised from China alone and EXCEEDS annual global gold mine production of 3100 tonnes! The numbers from India are reported to be even more after the new Modi government made major changes to import restrictions.  More market liberalisation could take place and further increase demand for gold from India. Note that the Shanghai and Mumbai equity markets have been on a strong tear in the Dec Half of 2014.  Shareholder wealth has increased and demand for jewellery has been boosted. I have adjusted my Supply/Demand graphic to show this increased demand from China and India. Demand for gold from Europe in recent months has also increased sharply to reflect fears of Islamic State terrorism, QE threats by the European Central Bank and the continuing general European malaise. I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections. I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections. The `Deficit’ may also in fact be exacerbated by a decline in the 1400t annual availability of scrap.  The GFMS numbers indicate that high prices in 2008-2012 drew out an extra 3000 tonnes of scrap gold.  Aunt Audrey probably doesn’t have any scrap jewellery left now. Where will the gold come from? These numbers do show that there is a real game in play for physical gold and the market manipulators in gold futures markets do not have much more time to cover before the final whistle is blown.  If large short positions do in fact exist it will be very difficult to buy back any such gold. The playground is also being tested by the emergence of the new gold exchanges in Dubai (for Indian demand), Shanghai and Singapore.  New gold only contracts are now being used so unless traders have the gold, they can’t sell.  In addition a new 24 hour COMEX 1 kilo physically-delivered contract is planned to accommodate Asian buyers who will now be able to have a real pricing presence in the US time zone with physical delivery in Hong Kong.  It will be interesting to see if the gold price manipulators try to attack the futures market while the physical market stays aloof.  No gold to sell, no play. The retreat by Switzerland from its peg to the Euro has added another dimension to the declining trust in central banks and fiat currencies.   I understand it has been an important game changing event in Europe. The demand for gold keeps rising, the supply is inflexible and so the gold price must rise. A major turning point was probably seen in the Dec Qtr of 2014 and the outlook for gold is very strong. Account Opening forms for Paradigm Securities are available to download here. Barry Dawes 27 January 2015 I own TBR, BLK, DRM, GOR, NST, CGN, MLX, ABU, KCN  

Blackham Resources Placement stock offer to eligible investors

Blackham Resources (BLK.ASX) is in Trading Halt to raise A$2.5m through the issue of 27.8m shares@ A$0.09 (close A$0.098 on 23 Jan). BLK has 4.4moz at its Wiluna Project and is seeking equity and debt funding to reopen the Wiluna Plant using nearby off site ores from the Matilda Project and from newly recognised high grade quartz reefs.   A full year production would produce over 80,000ozpa at <A$1000/oz ASIC. Contact me if you are interested  bdawes@psec.com.au BLK Term Sheet Download | BLK Jan 2015 Presentation Download  

Dawes Points Where are we now

by Alison Sammes

Where are we now?

Key Points

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
























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



Nth America      1,850      2,462



Asia Pacific      1,100      1,790



Europe         837      1,033



UK         147         186



Latin America           71           97



Other           39           55



Total      4,044      5,623



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
























































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

Commodity outlook encouraging

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

Steel in China

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

US$ strength

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





From high










































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

US T Bonds  - Surge then selloff

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

Gold price hammered into an important low?

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

Gold Market

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


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

It’s all happening now in this Bull Market!!

by Barry Dawes

Key Points

  • The Dark Side throwing in the towel?
  • Shanghai finally joins the Global Bull Market
  • All Ords breaks 5500 and joins in too!
  • BHP is a Paradigm SUPER stock on oil and copper
  • Expansion continuing with ASX  XSR small resources up 8% in July
  • Dawes Points 2014 resources portfolio up 64% for 1 January - 30 July
  • Gold in super bull market  with demand rising from India and China
  • Oil and gas exploration activity in Australia stepping up
The Dark Side of Pessimism, Commodity Price Terrorism and China Envy appears to be finally throwing in the towel to surrender to the massive tide of global economic expansion as the aspirations of the world's rising middle classes prevail.  Expansion with record levels of global cash to fuel it. And what an event this is.  It is one to savour and to pass on to your grandchildren.  I have said that before but it is and it is all happening according to the Dawes Points script.  It is crystal clear in the markets now that China is not collapsing, the European banking system is not melting down and the US economy is not falling into the Greater Depression. If the world has done this well despite the pessimism, what will now happen as the Dark Side changes its view?   Are you ready for it?  What will happen with the extraordinary high levels of cash on the sidelines flow back to markets? And from the bond markets? You have been forewarned so are you fore-armed? The Dark Side has for years churned out a never ending torrent of warnings based on China slowing or Europe collapsing and the ensuing oversupply of commodities that was going to push down iron ore, copper, coal, LME metals, silver and, of course, gold.  The Super Cycle Bull Market in commodities was over and also was the strength in the A$.   Oh yes, also buy US T bonds! And build up cash! And all this has proven to be false prophesy.  What can you say about their professionalism? But the false prophesies have been enough to all but destroy the capital markets for resources stocks along with careers, opportunities, livelihoods and wealth.  Yours and mine.  FOR NO REAL REASON! And we still hear it.  Investors should build up cash and chase yield. Not capital growth.  So why then have the Russell 2000 Small Caps and the S&P600 Small Caps done so well and have led this market up since the March 2009 lows? The market facts tell it clearly.

Mar 2009 Low

30 July 2014

% change

S&P 600 Small Caps




Russell 2000 Small Caps








Dow Jones 30




And Google, Tesla and Face Book are hardly high dividend yield stocks. So in great contrast to these strong highs, resources stocks are priced for the end of the world which is clearly not happening.  So if not, then there should be some `normalisation' in the terms of Wall Street Wallys.  That is, a major upward rerating of resources. So, where to start with the plethora of positive market signals in July. We could focus on any of the following:- Stock Markets
New All time Highs So Close to All time Highs Pre 2008 downtrends broken 2011 downtrends broken
Sth Korea
And how about these for commodities
New All time Highs So Close to All time Highs Pre 2008 downtrends broken 2011 downtrends broken Waiting
Palladium Silver
Bauxite Moly Platinum
Cobalt Copper
Oil Zinc
Nickel Lead
Tin Gold
Uranium Aluminium
Resources stocks are not reflecting these conditions at all. And then there is gold.  It was covered in the last Dawes Points and gold stocks are performing well. Just note the basing and reversal in the GDX ETF of the XAU (Philadelphia Gold Index). Note that gold stocks in North America are still about just 30% of their `normal’ rating against the general market and are turning up again.  Big % gains to come. But the clearest signal is the economic data coming out of China. The 7.5% pa GDP growth rate is being maintained and the various Purchasing Managers Indices (PMIs) are now all pointing up. Expect an acceleration from here.   Overall, China never really slowed overall and never as much in most sectors as the commentators expected, as we saw through the crude steel production data. And the US had 4% growth for June Qtr! My four visits to China from Sept last year gave no obvious indication of a real slowdown and in fact reinforced my views of an increasingly sophisticated and complex society so keen to improve living standards.  And the infrastructure and technology standards are so high that Australia is not keeping up. With economic expansion in China comes an increase in everything but particularly the demand for energy.  In a slower 2013, BP Datashows energy demand only grew 4.4% and took China to 23% of total global energy consumption and 25% higher than the US. Importantly, gas consumption in China increased 10.6% in 2013 but it is still only 5.1% of total energy consumption in China whereas the total global average is 23.7%.  Coal is still around 68% in China and 30% globally.   The demand for gas in China has so far to go from this 5.1% to at least 20% to get anywhere near the world's 24% and 30% in the US.  This graphic tells us a lot about the economies of China and the USA and the changes since 2006. Focus on the gas numbers because China will be a major importer of gas via pipeline from Iran and from Russia and can be also expected to greatly increase LNG imports as well as develop its own shale gas resources.   China needs to increase gas share from 5 to at least 20% in a growing energy consumption profile over the next 20 years. See how the US has increased gas by 25% to a level of 30% from just 24% in 2006 and reduced its coal consumption by 20% from 24% to 20%.  All from that shameful fraccing!!  So much more garbage from the Greens. Now just look at the markets. My last visit to China provided strong signals that share ownership in China is not highly regarded.  It seems much money was lost after 2007 with a steep index fall of 70%, a rally, then a grinding 45% decline over five years and a retreat to the levels of 2001.   No one owns shares anymore.  Its all in property and shadow banking high interest loans. Unfortunately the property developers can't quite make the payments on the 25-35% loans so the cash will likely go elsewhere.  Shares maybe? The markets are showing that the bearishness is now turning. The US$15,600bn market cap Shanghai SEC Index is up 13% in the past year and is on a PER of 10.1x. The 2007 downtrend is broken after the Index bounced off the 22 year uptrend. This FTSE China 25 Index ETF is also pushing against the 2011 highs which are also post 2008 highs. China had been holding back Australia but we are now leading Shanghai and with the break through 5500 the All Ords will now try to catch up the world. These improvements have been anticipated by some of the better opportunities in the market and are reflected in the 30 stocks Dawes Points Nov 2013 Non-trading Portfolio which is now up 64% since the beginning of 2014.   Big gains by LNG (4% of initial book value), LMB (0.8% ibv), AQA(4.3% ibv) and WSA(4.3%ibv) have helped significantly. Here is the portfolio.  Big caps have finally started to move but stock picking in the smaller end has produced stellar results.  Much more to come. Now one of the things that has been embedded in my brain since entering the financial markets is that the market in Australia can only go where the market leader goes.  And this is BHP. So if the market leader is not going higher then the market will find it difficult to move higher. We all have been bombarded by the iron ore bears who equate the iron ore price with the future of the Western and Eastern Worlds.  It affects BHP of course and RIO and then we have the numerous experts who have shorted FMG. But the operational and production responses and the market action of BHP are not of the character of a company, and hence a market, going nowhere. Note this extraordinary comment from a local fund manager who told Reuters:- "At the end of the day, BHP's fortunes are tied to the iron-ore market," said ………., chief investment officer at ………. Asset Management, which recently sold its shares in the miner after holding the stock for close to 15 years. "The stated strategy of the majors is to squeeze higher cost production out of the market," he said. "We're just not sure that maximizing production is as sensible as they think it is." So he is sold out.  Yet the stock is at 12 month highs so something else is happening. This is the `Generals and the Maginot Line’ concept referred to in the February Dawes Points. If the market for BHP is holding up and the iron ore price isn't that bad maybe this something else is happening. How about the something else being copper? Copper prices have broken the 2011 downtrend and LME inventories are just 144kt for a 21mtpa market and are at 6 year lows. The Dark Side has tried to tell us that the inventory has just been moved from LME warehouses to others in China and that financing of this inventory will bring us all unstuck.  Garbage! BHP will produce a net 1.8mt of copper in FY15 and at US$7000/t this is US$12.6bn in gross revenue.  At US$7700/t this is US$1.26bn more.   Escondida and Olympic Dam, each growing. Now to another something else. The 2011 acquisition of Petrohawk's Eagle-Ford and Permian oil and gas acreage and Chesapeake Energy's gas at Haynesville by BHP was derided by the cognescenti at the time as an over-priced and strategically dumb acquisition.   Gas prices fell after the acquisition so it was a big joke with writedowns on Cheaspeake's Haynesville assets.  Another Magma Copper.  HBI.  Ravensthorpe.  Failure. But wait a moment. Look at these numbers for gas which show a doubling for BHPP since the acquisition.
Year end June (BCF)





Bass Strait





North West Shelf





US onshore















US onshore %





  US Onshore provides almost 55% of BHP Petroleum's gas production but at the current US$4/mmbtu at Henry Hub its not too exciting. But more importantly however, the unconventional oil and liquids mostly from Black Hawk and Hawkville  in the Eagle-Ford shales provided 26% of BHPP's FY14 net liquids output and 31% in the June Qtr at a rate of 28mmbbloepa (80,000bbloepd). BHPP has advised a 17mmbbl liquids increase for FY15 and it had spent US$3.9bn in FY14 to achieve this. So taking a steady growth of +2.5mmbbloe per qtr growth rate to give just 15mmbbloe extra in FY15 then the June Qtr FY15 could be producing at a rate of over 60mmbbloepa (170,000bbloepd).  What will FY16 look like?   Can't really know today but BHPP has said 200,000bblpd by 2016(>70mmbblpa) so expect higher numbers in FY16. What may be known is that BHPP is probably getting one year IRRs of over 70% and 60mmbloe pa gives annual revenue of US$6,000m and at a conservative 50% EBITDA margin this adds a lot to BHPP's earnings.  Like about US$2bn in FY15 and US$3bn in FY16. The technology changes in drilling are bringing down drilling costs, improving reservoir recoveries and boosting returns.  BHPP `is testing high-temperature gels for better proppant transportation, different stage spacing to maximize stimulated rock volume, and reservoir modeling to simulate stress capture and optimize well sequencing.'  (UOGR April 2014) BHP also reported that field trials achieving are 10-40% higher than production for comparable surrounding wells. The rapid technology changes in unconventional oil production (now really a `manufacturing’ business rather than exploration) are suggesting increases in oil recovery from about 3% to as much as 6%, with about 50% recoverable in Year 1. Getting 400,000bbls @US$100/bbl in Year 1 is US$40m revenue with $8m op costs for a US$10m well is over 100% Year 1 IRR.  Try 150%.  And BHP is spending US$4bnpa.  The above BHP numbers might be low. So here are two major Divisions of BHP in cashflow growth mode that will offset any earnings weakness from any lower prices there in iron ore with its 10% higher FY15 225mtpa output, costs reduction and revenue of US$20bn. It seems that the world has just focussed on BHP's iron ore and ignored Copper and Oil.   BHP's share of All Ords market turnover has been at the lowest level for over 10 years suggesting it is very much underowned.  Turnover in recent weeks has jumped up sharply suggesting BHP will again lead the market higher. Other markets are giving BHP a better ranking so have a look at BHP in US$.  More action than in Australia, possibly. The raison d’etre for the establishment of DawesPoints in 2012 was to advise clients and the world in general that the real economy was operating at very different level to the financial economy. And that the real economy was doing far better than the financial community has been giving credit for. The continual reference to the US markets has been a core activity of DawesPoints because these are far more liquid markets with vast numbers of buyers and sellers with different goals, views, responsibilities, time frames and of course attitudes.  The Australia market appears to me to be concentrated with strong convergent groupthink views and guided by a generation of advisors investors with contrasting time frames compared to the real economies' requirements.  Risk averse commentators driving investors away from equities and to overweight positions in bonds and cash. The Australian investment market of course has had the luxury of being able to invest in a vast number of overseas markets with stocks such as Apple, Google and Tesla not available in the local market. So rightly competition for capital is substantial.  However, it is a pity bank deposits have won this section of the race with their A$1,606bn balance. How is it that our Australia prefers to back the banks and mediocrity or overseas companies rather than backing its citizens in their visions and endeavours?  Why would you back XYZ Bank Ltd to invest in 4.8% mortgages rather than to invest in Ken Everyman who has uncommon drive and a great idea about how to produce and sell a better front door lock?  What about Dr Phil Brown and his biotech innovation in a field that Australia is an acknowledged leader (did you know that the local George Institute is THE leading medical research unit of the world!!). Why indeed would you not invest in Bill Brilliant who has a copper deposit that he has assessed as worthy of further development? Or John with his iron ore opportunity?  Or Frank with the acquisition of a major exploration target from large international mining company for whom the target no longer met corporate goals.  Real ideas, real drive and real assets from real people. Australia does have the world’s largest listed mining company in BHP and a range of other and its banks are world class with all the big 4 with AA ratings The scope of this is vast and extraordinary.  From gold to iron ore from new mining technologies to unconventional oil and gas. Opportunities everywhere. And yet still the large investment banks are still vying for the title of the most bearish.  How many of them have even been beyond Hong Kong into China.  Not many, it would seem. And the fixation with a lower iron ore price and the collapse in the steel industry in China as it goes to yet another new record high (yes, new record of 843mtpa in June!!).    Oh, puulease. So what is really happening now?  The Bear Case of overwhelming debt leading to a US Depression with European banking collapse and China falling over has very simply failed to eventuate.  You can say QE and other injections of liquidity have prevented the collapse and that unless we get more then it will still happen.  Maybe. The much proclaimed collapse in commodities hasn’t arrived yet and apart from the ridiculous preoccupation with the iron ore price it appears it won’t. What is going to happen to these people who have been preaching Armageddon and worse?  And to those who have listened? I saw some `unverifiable’ data from a US columnist that showed that ten major global economies (including US, UK and Australia) had current savings rates in excess of 40%.  No wonder global growth has been slightly anaemic. But what does A$1,606bn in bank deposits suggest to you?  How could Treasury, most banks, the disgraceful `asset allocators', a growing army of risk averse financial planners and scared ordinary people with the conventional wisdom of Cash is King be on the right side of the market?   A thirty year bull market in bonds has certainly sucked in everyone, especially governments who think that the markets will always be there to take over priced paper. But note that the tide has already turned with major US bond funds reporting a full year of redemptions as the risk of holding low yield, balance sheet-challenged government paper just keeps growing. And here, the latest RBA data shows that although total bank deposits are still rising ( up 0.7% to a new record A$1,606bn) in June the Term Deposits category had the biggest ever monthly fall (A$7.9bn)  to just A$529bn and at -1.5%, the largest % fall since deposits began to rise sharply in 2007. Funds flowing from bonds and term deposits is now well underway.  Into investments, property and soon into retail consumption.  For us that is into equities and commodities and into resources equities (read small cap resources stocks!). Well if you are reading these DawesPoints you know these have been my views and you have had it consistently straight and true. Bull market for resources and commodities. And these views haven't changed in the past two years. Now some more facts for you to consider. Resources sector bottomed in the GFC in Nov 2008 and the broad markets Dow, S&P, All Ords, FTSE and DAX bottomed  almost 4 months later in Mar Qtr 2009. Say that again. The Resource Sector (XMM.ASX) bottomed in Dec Qtr 2008 and the broader market bottomed in March 2009. So technically we have been in a bull market uptrend in resources for almost six years now!  Hasn’t felt like it has it? The resources market rallied into April 2011 then weakened into June 2013 for the first major pull back.  A 53% fall was some pullback.  Ouch. And 71% for Small Resources was ,..  er,..er,.. um,.. some pull back.  But it is bottoming! The poor old gold sector after making a magnificent 230% rally from the GFC into 2011 then fell 80.0% to Dec 2013.  Mere details!  And of course the small caps became microcaps and then nanocaps and worse.  Quite few 95% falls here.  More than OUCH. All these share price collapses for no real macro economic reason.  Just misinformation, groupthink and fear. But what value has been created!! And strong stock and portfolio performances in 2014 reflect that.  So much more to come. I have referred to the `stealth’ bull market in Australian oil and gas exploration that is well underway now.  The new LNG projects in Australia will be export conduits for many new gas fields in Australia and will change the entire industry. I particularly like the key Cooper Basin stocks (BPT, DLS and SXY) and also those in the NT and parts of WA.  Hopefully a full report might be available very soon.  The implications are very great and the opportunities will be very rewarding. There are hundreds of companies with quality projects that need to be financed and I am happy to recommend dozens of them.  This is going to be an extraordinary Bull Market for the next decade! So the opportunities in Australia now start with our preferred leaders. BHP and FMG (SUPER stocks) with WPL, OSH, STO, WSA, ORG as leaders. Onshore oil and gas led by BPT, DLS, SXY in the Cooper Basin and then AJQ, CTP and REY. Gold stocks NCM, NST, ABU, GOR, SLR, SAR, BLK Copper stocks CDU, PNA Industrial metals TRO, AMI, IBG, Technology metals ORE, ALK, LMB, VXL, KNL, CNQ Metals explorers SIR, CZI, KGL, Many more as this market moves up, as we discover new opportunities and as relative values warrant switches. So what happens now for the supporters of the Dark Side? This is a very important question. If the end of the world hasn’t happened by now what might be the options for them?
  • Wonder what to do with A$1,606bn in bank deposits?
  • Get even more bearish?
  • Actually go to China and see it first hand rather than pontificating with propaganda of envy?
  • Look for undervalued sectors?
  • Concluding resources and Australia look very appealing?
All of the above. And that suits us just fine! I own shares in BHP and FMG, STO, DLS, AJQ, CTP and REY. NCM, NST, ABU, GOR, SLR, SAR, CDU, TRO, AMI, IBG, ORE, ALK, LMB, VXL, KNL, CNQ and CZI.  7 August 2014 Sydney