Key Points

• Gold market gaining confidence
• Australian Gold Producers well placed
• Paradigm Gold Portfolio was up 75.5% in 13 months to 31 Dec
• Kalgoorlie gold region being reinvigorated
• 2016 should see further Australian gold development resurgence
• Long term trends may be indicating end of deflationary times

The strong performances of key ASX-listed Australian domestic gold producers have been a key feature of Dawes Points' views of the world.  Upbeat reports on production, cost reductions, earnings, cash and dividends assisting a +75% untraded weighted portfolio gain have insulated many clients from the external volatility in most other market sectors.  Exploration results have also helped for some companies. These gains in Australia have encouraged Dawes Points to consider that the actions in the global gold, gold equities, commodities and commodities equities will be following those in Australia sooner or later in the new year of 2016. The Paradigm ASX 300 Gold Index share of All Ords value turnover graphic has been of great assistance in showing that the relevance of Gold Stocks was recovering and that indeed a major turning point was coming about after a very long decline. Similar but still nascent changes seem to be underway in ASX Small Resources and also in the XMM, with prices still falling but volumes and market share increasing.  All good tentative signs. The Dawes Points 3 December 2014 untraded gold stock portfolio provided a 73.6% return for 13 months to 31 December plus almost 2% in dividends. Here is the proof. Great gains by overweighted leaders Northern Star and Evolution together with half weighted emerging companies Blackham, Saracen and Gold Road gave the portfolio most of the performance and it outperformed the ASX Gold Index by about 20 % points in value and about 0.5% in yield. It is easy to say that the local gold sector has done well because of the weaker A$ but the A$ gold price has been around A$1,500/oz for the past five years.  The recent moves above A$1,600/oz and last week's surge to A$1,588 will certainly help sentiment. The gold price at A$1,500/oz has made good earnings for many companies and I expect that the Dec Half of 2015 will bring even more gold production growth, lower operating costs and higher earnings. Expect many gold producers this month to put out early advice of good production stats ahead of the formal quarterlies. But it is not just the A$ gold price that has made these good market performances. Real effort, ingenuity and investment is involved in this local industry and here is where the industry is going with the production growth results very clear in WA which has consistently produced 65-70% of Australia's mined gold. The longer term appears robust for all Australia. In assessing the Gold Sector Portfolio, emphasis was placed on the S&P ASX 300 Gold Index to ensure investors were looking at visibility and liquidity for most chosen stocks. However, since the ASX sold its index business to S&P the resources market has never been quite the same.  The Gold Index was discarded and not resuscitated until about 2005 and then was backdated. The actual XGD Index was recently critically reviewed by Dawes Points to analyse its effectiveness. This index has been found to be an appalling collection of gold, non-gold, local and foreign listed stocks that gives no real reflection on the activity in the Australian gold industry of the past decade. So coming to the real action in the ASX Gold Index today we have a tale of two sub sectors:- Domestic gold producers; and locally domiciled companies with offshore gold production. The ASX 300 Gold Index currently has 22 stocks.  Ten are gold-only plays domiciled in Australia and operating mostly Australian gold mines.  Eight are Australian domiciled and operate mines offshore.  Two are foreign domiciled and have all or mostly foreign gold mining operations.  One is a diversified miner with local gold production and one is a diamond mine developer. Look at this. First of all, note the June 2013 low that I have often mentioned!    An unweighted index of up to ten Australian local producers is up 165% since that low. The eight offshore producers are down exactly 50%.  The Index itself is up just 28%. Where did you want to be in this index?  Clearly with Australian gold companies producing locally. The other four stocks in this 24 stock universe have little or no relationship with the Australian Gold Index. What a misallocation of resources.  What would be the interest in ASX gold stocks be if the ASX Gold Index actually reflected these strong gains and the activity in the Australian gold industry itself! ASX investors should be able to invest in confidence in Australian companies involved in the gold industry. Australia is the second largest producer of gold, after China, and the opportunities should be large and many.  A decade ago, almost two thirds of Australia's gold production was owned by overseas domiciled gold companies.  Recently, substantial gold production assets have come back to Australia through sell downs and acquisition by Northern Star, Evolution and MetalsX. Everyone should be investing in this production growth and not, as suggested by the ASX 300 Gold Index, in some foreign domiciled offshore producer and certainly not in an offshore uranium prospect.  Or in a coal miner, iron ore producer, or a gas company. Actually, the story of these Australian gold producers gets better. These terrific ten Australian gold producers make up over 90% of the XGD turnover and as noted above this is now back up to around 2% of All Ords turnover. Makes the current makeup of the XGD Index look silly. Well, my 2016 portfolio will still emphasise most of these top ten (eight actually) with a few more that should soon come into the XGD:- Only three of the offshore producers make the grade for the portfolio. I have added some emerging stars to give us the Dawes Points 2016 Gold Stock Portfolio for a A$100,000 portfolio.  $40% in the larger stocks, 30% in mid caps, 20% in growth opportunities and 10% in minnows. I am taking the 31 Dec as the start date so let's follow the performance over the year and compare it with the 2015 Portfolio. I would like to refer to two other minnows that wouldn't fit in the Gold Portfolio but could provide some excitement in 2016.  Mustang Resources (MUS.ASX) has some very high quality projects in Mozambique that include rubies and diamonds. Alt Resources (ARS.ASX) is a recently listed explorer with an outstanding copper porphyry target near Cooma in the Snowy Mountains on NSW.

The Big Picture

The current sell-offs in commodity and equity markets continue the bearish trend of the past few years and we all are experiencing tough times outside these local gold stocks. But these gold stocks are showing that not all is dismal and pessimistic. The big picture for gold remains that market sentiment remains poor and most professional investors have been out and probably short since the highs in 2011. We have now had over four years of declining US$ gold prices and all manner of uptrends have been broken.  However, the graphic below shows US$ gold is almost bouncing off the US$1032 high of the GFC in March 2008.  This may be very important.  The momentum and sentiment indicators are good enough for the gold price to have completed most of its decline and to bounce and renew the bull market. Long Term Gold Price from 1980. The US Fed has begun its interest rate hikes as that economy strengthens.  The evidence is clear that this is a sub normal recovery but the deleveraging has been substantial at personal and government levels and even the US Budget Deficit seems to now be 40% lower than just a few years ago.  Savings rates around the world have improved balance sheets everywhere.  The US$18trillion debt is still there but the bond market is still signalling that higher yields are in store over the next few years. Rising bond yields after such an extended period of easy money will be reinforcing the probabilities of the end to the deflationary days and a pick up in inflation. Over US$90trillion of capital is tied up in government and corporate bonds.  This is a massive source of capital and when coupled with the global cash levels, there should be strong flows of capital out of cash and bonds to gold when sentiment changes. US 10 Year Bond Prices - Weekly The market for gold is now driven by the Love Trade for jewellery in India and China and is likely to do so for quite some time. From this graphic it is easy to see that most of the world's 170,000 tonnes of gold is held as jewellery and demand for gold into India is insatiable. China in 2015 according to Koos Jansen at Bullion Star had another record year of imports (~1,200tpa) and domestic withdrawals (2,405t ytd) through the Shanghai Gold Exchange. World mine production is only about 3100t so between them China and India absorb all mine production. Coin demand remains robust and silver coins mint production in North America has maintained the very high levels of 2013 and 2014 to meet this strong demand. This Supply and Demand for Gold for the Next Ten Years strongly suggests a tight market for gold will exist for quite some time. You will be familiar with graphics of the Philadelphia Gold Index (XAU) that is showing an index level that is almost as low as that at the US$248/oz low in 2000. My reading of this indicates we are near the lows in these major North American gold stocks and if the market is completing the Wave 2 correction then the upside should be strong and should follow what we have already seen in the Australian Gold Production Sector above. The market is currently all about sentiment and the sentiment has not yet turned favourably towards gold but that change cannot be too far away now and the response could be rapid. This strong view for North American gold stocks is supported by the very long term graphic for the Barron's Gold Mining Index which goes back to 1940. An excellent long term uptrend is matching support of 2000 and is also about the same as highs in 1969! Readers will probably be also familiar with the XAU vs the S&P500 whereby gold stocks there have fallen 90% against the S&P500. We can look again at the S&P500 against all commodities (CRB Index) and extreme is the only word that can apply! And market sentiment shows it very well. Finally, four major indices that don't look as if they are about to crash.

Shanghai	Germany

India	Japan

The Paradigm Gold Portfolio has performed well in 2015 and by my assessment the stocks are cheap on PERs and yields and well as having the lower A$ protection and production growth. As noted, this portfolio performance has underpinned the optimism of this newsletter and as noted on a recent CNBC interview  appearance, it was hard to be overall bearish when the portfolio was doing so well. Of course the Non Gold sectors have been horrible despite record exports, imports and consumption for almost all the industrial metals and for iron ore.  Please note that LME inventories have continued their medium term declines (other than some obvious warehouse transfers from stale bulls(?)) and this reflects the record consumption and limited new supply. Oil, iron ore and coal have seen substantial investment in new capacity so the concept of oversupply against firm demand has applied.  More on oil at a later date and but you should note this data :-

• double digit growth in consumption of transportation fuels in many countries in 2015,
• the ~1.8% total increase in global oil consumption in 2015 and more in 2016
• the 64% decline in the Baker Hughes US oil rig count in Calendar 2015(52% fall for gas rigs)
•  the 30% decline crude oil output since  the peak in Dec 2014 in key Eagle Ford tight oil field.
• Global crude oil stocks are high but are still only 6-8% above the five year averages

All make fascinating reading and the issues developing between Iran and Saudi Arabia may yet become a major issue for Saudi oil production.   Note too the big bond issues to prop up the Saudi budget, local petrol price subsidies significantly reduced there and also the discussions on selling assets, including listing 5% of Saudi Aramco oil company with its 260bn bbls of reserves.  Saudi Arabia might also be raising cash to fund military activities. Oil is back to the 2008 lows and also the highs of the 1990s.  May soon be time to call a bottom here. Markets are always difficult to assess but true value always wins. You can contact me at bdawes@psec.com.au or +61 2 9222 9111. I own: NST, BLK, GOR, MLX, TBR, DRM, MML, RSG, CGN, GEE, TNR, TYX, MUS, ARS Edition #44