Oil markets are more concerned by Saudi Arabia's oil production than geopolitics in the region, says Barry Dawes, head of resources at Paradigm Securities.
Oil markets are more concerned by Saudi Arabia's oil production than geopolitics in the region, says Barry Dawes, head of resources at Paradigm Securities.
- Gold sector leading the market upturn
- Gold stock market action confirming new year long bull market
- Major players in gold physical market covering shorts
- Australian Gold Index up 46% since 1 December 2014
- Paradigm Portfolio is up 78%
- Resources turnover market share downtrends decisively broken
- Global economic activity still lively
- Global bond market continuing to roll over into bear market
- Further STRONG BUY signal for Australia gold stocks
- Preferred stocks NST, EVN, MLX, BLK, DRM, DCN, MML, RSG
- Smaller plays with TNR, TYX, PNR
The XGD is barely above the levels of 2003 and PERs and yields are now very attractive for this sector. Also the buybacks of so many Australian gold mines from the likes of Barrick and Newmont is actually giving domestic companies a more significant share of Australian gold production again.
The A$ below US$0.75 has provided an average gold price of around A$1,550 so far in 2015 and helped a large build up in cash for gold producers.
Dividends are flowing again.
Gold production in Australia is increasing and several new important expansions should see further growth over the next several years.
Source: BREE and Paradigm estimates
The action in the gold share market here in Australia is strongly suggestive of the bottoming process being mature and the real long term uptrend in gold and gold stocks is resuming.
As stated, this market action is very constructive and an improvement is being noted in market breadth, smaller stocks are running and investors are taking up capital raisings again.
I actually have my first gold sector IPO sponsorship since 2007 now underway with A$4.2m for Golden Eagle Mining coming soon.
The market action is very encouraging with XGD's share of All Ordinaries market $ turnover now well over 2% again and looking to double from here.
The prospects for earnings and dividends is what drives stock prices and gold companies always have also had the option value of a higher gold price or increased resources. The prospects in recent years have been quite the opposite so all option value has been squeezed out and value is now substantial.
The prospects now are greatly enhanced but sentiment is still very poor so the opportunity has ''once in a generation'' status.
The XGD is still 70% below the April 2011 high when A$ gold was A$1408/oz. It is now A$1550.
As always, it is important to put all market action in to perspective and to consider what the markets are really telling us.
Again, the adage, `heed the markets, not the commentators' has helped so much.
The markets are also saying that the physical demand from India and China is strongly underpinning demand and that, in great contrast, the record level of over 300 futures contract ounces sold for each deliverable ounce registered on COMEX says a serious mismatch might just develop along the way.
The current market is not a just a random point in time but a manifestation of the long term global outlook but coloured by today's sentiment.
Returning to my previously published long term themes we can note that the oil price bottomed at around US$10/bbl in Dec Qtr 1998 and then had almost 10 years of rising prices before peaking at US$147 in May 2008. The CRB index of commodities (itself highly skewed to energy) showed a similar rise.
The forces behind the commodity bull market were global growth and the remarkable entry of China and its voracious demand for raw materials. From the resource sector perspective, the rise of the steel industry in China to over 800mtpa and China being responsible for the consumption of around 50% of most industrial metals dwarfed anything in modern economic history.
Export volumes and market prices were very strong and the marginal increases in demand required marginal increases in output and often these marginal increases were from marginal projects.
So a slowing in demand growth created a change in the market momentum and sentiment and brought about a sharp fall in prices and over seven years of bear market since mid 2008.
The speculative blip was 2010-2011 but this has now been thoroughly squeezed out.
We can see this in the performances of the various resources indices in terms of price but we can see this even more painfully in the declining share of ASX market turnover.
Mining and Metals had 25-30% of turnover for 2007 to 2012 with spikes to 35%. Its down to just 13% now. Google, Apple, Tesla and banks have been far more attractive to investors.
But this downtrend has now broken and like the Gold Sector is attracting accumulation.
However, we should all note that the real reason for this improvement is what Dawes Points has been saying all along.
The Chinese economy is still growing and with the important One Road One Belt Silk Road concept the demand for raw materials will be maintained and will continue to grow.
Crude steel production has held up well against the calls for a major fall but surging steel exports to ASEAN and to the numerous China-sponsored infrastructure projects in many parts of the world have hidden weaker internal demand.
Nevertheless there has been a major drawdown of iron ore inventory on the part of the steel mills in China, a drawdown in the port stocks in China from over 110mt to under 90mt and all the major producers have run down their own mine and port stocks. Obviously the high cost exporters around the world have stopped and domestic magnetite concentrate production in China is falling sharply at last.
I had expected a short cover rally in iron ore in this half year as this inventory reduction is readjusted upwards but it hasn't eventuated.
Consumption of most metals however is still at record or near record levels and LME inventories continue their declines.
This is not the stuff of recessions and major declines in economic activity.
The GFC only spurred China onward but its 1,375m people have had a taste of a better life and this can only grow stronger.
China has also the long term goals of its westward-looking agenda that aims to link not only the 3,300 mi people Dawes Points referred to over the past few months but to Europe linking another 1,100m to East Asia.
In today's crisis with IS in the Middle East, the infrastructure quest through the `Stans might actually change the power base and outflank the extremists and lead to Islam's own Reformation. Who knows!
We still need to continually revise what we think of China. Those 1,375m people will be 1,400m very soon and the build of infrastructure will continue to change trade patterns.
The Dongfang Modern Agricultural Holding Group IPO by Paradigm Securities also gave us a very important window into another side of China. (The IPO raised over A$39m and so far has reached a peak of 45% gain on the IPO price.)
China has so many important regions that have over 200m people individual economies that can be operating economically quite separately from each other so we should be wary of commentary from Guangzhou or Shenzhen close to Hong Kong when all the action might be in faraway Chongqing or Chengdu.
So China has this combination of 50% of global consumption on one hand and then the emergence and entry of so many new intermediaries with different trading policies and procedures. For the resources sector this really means numerous new players in the supply chains and the participation of these new traders with or without inventory. Who is long or short on anything? Who is a producer or user?
Extremely hard to know yet.
More new players are in the markets but many of the established groups elsewhere in the world are now holding back.
Could this be new but inexperienced players trading in the futures markets?
Following the sentiment and not the facts? Heeding the commentators and not the markets?
In my experience, all this is almost guaranteeing a return to robustly positive markets in the decade ahead.
In contrast, the market place is still extremely bearish and copper hit a six year low last week but some interesting things are taking place elsewhere.
Firstly here at home Australia is a major global producer of raw materials. The lower A$ has been very helpful in allowing A$ cost producers to recover and rapid changes have been made in the domestic cost structures as well. Some stocks are holding up well and like the Gold Sector, are leading the world out of the gloom.
On a bigger scale, the performance of commodities and the equities of those companies that produce and use them often give us clues to the sentiment of the market place.
Oil may be bottoming because major integrated oil and gas companies' stock prices and the US E&P indices are not confirming recent lower oil prices. Oil demand is still rising at 1.5mbopd each year and US tight oil output is declining.
We can look at Exxon, Conoco, Chevron, SHELL, BP and BG Group to show constructive market action and the S&P E&P (Exploration and Production) Index may be indicating its 60% fall in 18 months is overdone. In Australia, Woodside, Beach/Drillsearch and Origin look better and Santos after its capital raising might just get by.
Iron ore stocks FMG and Rio are not confirming a lower US$ iron ore price although BHP and Vale are weaker and are carrying the weight of the SAMARCO tailings dam collapse. (We might ask what the Brazillian bureaucracy was doing about the standards they had previously laid down.)
All this is against a global economy that hasn't fallen over and the US, China and India may just get stronger. Even Japan with its stagnant economy is still cranking out steel at full capacity of 110mtpa.
So the outlook is looking even more encouraging and for us in Resourcesland this graphic below is speaking volumes in clear data.
Our basic livelihood of emerging resources companies (XSR) is showing another clear break in the decline of market share of All Ords turnover.
The market for small resources is improving. This is hard evidence here but the signs are everywhere.
Interestingly, while the XMM and ASX200 Resources were breaking to new lows the XSR has been assisted by the XGD and has held up well.
Dawes Points also knows this from recent capital raisings for small resources companies.
THE BIG PICTURE AGAIN
The major trend assessments for investment markets have to start with assessing the direction of the bond markets. It is so clear that the growth figures in the US with record sales levels in many markets sectors and declining unemployment that interest rates must rise. US Housing Starts are still well below replacement levels of 1.5m units pa and the Philadelphia Housing Stocks Index looks to want to surge soon.
So the US bond market is looking very toppy with the 10 year having its peak over three years ago. It is taking a long time to roll over but the result is inevitable. The downward adjustment could take place at anytime now and the raising of short term interest rates may be the trigger.
The world has invested almost US$90trillion in bonds.
Even a tiny flow into hedges could be massive in commodity and resources stocks.
Stocks to think about
The recommended Gold stocks noted above are for Core Positions that should be held for years and not really traded. Stock | Price cents (AUD)
More speculative plays are
I own DRM, NST,MLX, RSG, TBR, GOR, BLK, MML, TNR, TYX and PNR. STO, BHP, DFM, BPT.
Edition #43 
Barry Dawes was recently interviewed on "The Magic in Mining" show by Kerry Stevenson. Talking about his early passion and interest in rocks, his introduction to China, and his enthusiasm for gold, this interview highlights how Barry is able to understand the resources markets as well as he does.
The Magic in Mining show is available to stream from the website or as a podcast download from iTunes http://magicinmining.com.au/podcast/015-barry-dawes-on-china-and-gold/
Key points
- ASX Gold index up 71% from Nov 2014 lows to 2819
- Paradigm Dec 2014 Gold Portfolio up 91% weighted (unwtd +76%)
- Major rerating in gold stocks only just starting
- LME metals surge on 9 Oct with no inventory left
- Equity markets oversold - bull market resumes
- A$ jumps and US$ slumps
- I think we are getting our boom!!
- Talk to me about the next winners +61 2 9222 9111 bdawes@psec.com.au
This index has bounced from the bottom.
Try to keep in mind the time frames in these markets we have been following.
Commodities last bottomed in Dec Qtr 1998 and rallied for almost the next 10 years into 2008. The GFC gave a big selloff followed by a rally into 2011 with new highs for some metals but not for most. The recent lows give almost 7 years of decline.
Seventeen years up and down cycle of sorts. I would expect at least another 10 years upward from here!!
The US economy seems to be strengthening (no Greater Depression there yet!!) with basic indicators such as housing and auto sales very robust, China is still doing 7% GDP growth and the Shanghai stock market seems to bottoming out OK despite the hysteria. India is off to double digit growth and all those 3,300m people in Asia are doing OK.
Dawes Points views on metals consumption growth have held up with record levels still being achieved in most and this seems to be clearly shown with the continuing decline in LME inventories.
The LME inventory graphic says so much. No LME inventory for most metals. Even Aluminium has had 21 months of relentless decline from 5.4mt to 3.1m against nearly 50mtpa consumption – just 3 weeks there now.
So much in fact that the LME metals decided to have a major surge last Friday in London.
So after all the media focus on Glencore and how its impending demise was going to bring everything down it seems that maybe things aren't so bad after all.
For oil, US crude production has begun what I consider will be a sharp decline of about 800,000bopd. It is already down 400,000bopd from the highs. The high decline rates accompanying shale oil wells are still applying and the number of new wells has dropped sharply. Significantly higher productivity per well including through the use of multiple fraccs and increased charges of proppants is helping but a gross US$50/bbl is not enough for profitable operation and the drilling of the next well. Those days of +100% IRRs on US$100 oil seem far away today.
Global oil demand has been rising with the lower oil prices and the market still needs about 1.5mmbopd new supply each year.
No wonder WTI has jumped up through US$50/bbl again.
The ISIS battles and aggravation in the Middle East are getting very close to the internal workings of Saudi Arabia. Oil purchases for inventory security are likely to increase despite the current high levels. I have always considered the last fall in oil prices as a correction in the bull market.
Gold Sector Opportunities
Back to gold, Asia's strong economic growth and particularly in India and China is increasing demand for gold which should be in robust growth mode for now and for the foreseeable future. The tightness in the gold market continues and premiums are being paid for physical delivery. The COMEX games of selling paper gold where there is only one physical ounce available for every 200 contract ounces will not end happily for many who have short positions but as to when we can only ponder. The ASX gold index closed on Friday on 2819, up 72% from the Nov 2014 low. The ASX Australian Gold Producers are leading the entire resources market but I still see considerable upside in the gold sector ahead of a more general market surge. By my reckoning, a break through 3000 on the XGD would see a move to 4500 then to 6300 in quite a short time.
After almost five years of declining market interest in ASX gold stocks the trend has now clearly changed so the graphic above should show continuing relative strength as an underweight market plays catch up. Obviously initially in the leaders, NCM, NST, EVN, SBM and OGC but the smaller plays will provide exceptional returns as even modest new capital inflows to the sector just won't find enough stock.
My 30 stock ASX gold stock universe still shows an unweighted PER average of
The ASX Gold Index should now show a major increase in market share of the All Ordinaries turnover.
I will reiterate my views on the gold mining sector in Australia where I see new focus around Kalgoorlie and in particular the Strzelecki and Zuleika Shears. These gold bearing `structures' are proving to be strong continuity narrow high grade deposits that have low costs and are delivering handsome cashflows to the owners. The strike length of the Shears is tens of kilometres.
You need to know what NST is doing here and why EVN and Zinjin are so keenly interested.
From Northern Star:-
Kundana – A Corridor of Riches
- East Kundana JV Gold Output 200koz at AISC A$711/oz and grades of +8g/t,
- FY16 Gold Production 220koz at AISC of A$850-A$900/oz
- Resources 1.6Moz, up 134% and
- Reserves 0.45Moz, up 61% even after mining 200koz in FY15
- Skinners, Pope John, Moonbeam, Centenary, Strzelecki and Barkers
And watch this too:-
A little company called Cascade/Torian is very active here too on tenements that stretch along over 40 km of strike. And its share price is up almost 100% since June.
You will need to get to know this map as well.
Discoveries here have been brought into production very quickly and local excess mill capacity means rapid cash returns and very high IRRs. As an example, Barrick found the indications of the 1.2moz 11g/t Pegasus deposit in mid 2013 prior to its sale of the East Kunduna JV interest to NST in March 2014. NST had subsequently proved a 750koz resource by Dec 2014 and began mining in Feb 2015 after upgrading it to 1.1moz @ 10.6g/t. It is now 1.2moz. Most of the 220kozpa EKJV output will come from Pegasus. I like NST, TBR and TNR here.
Also ask me about a Nov 2015 A$4.2m high quality gold mining IPO I am doing in this region. Might just be the first ASX gold IPO since 2013.
And while we are talking extensive mineralisation along strike have a look at our favourite Blackham Resources (BLK.ASX).
This is a good analogy to the Strzelecki Shear projects and BLK owns 55km @ 100%.
Oh yes, and BLK is fully funded to restarting gold production at Matilda through the Wiluna mill. Up to 100,000ozpa by July 2016 at costs under A$1000/oz AISC. That's A$60mpa net cashflow (EBITDA) for a company with a market cap of just A$45m. My numbers say PER
Blackhams abridged 25km of strike along the Wiluna Structure
The ASX gold index closed on Friday at 2819 which is a 72% gain from the low in November 2014.
Some very important technical issues actions suggest much more is to come and that something very special is about to happen.
Long term Dawes Points readers will know my view on Disbelief, Pessimism, Optimism and Opportunity before the Euphoria sets in. Investors should also understand that each leg of the market has taken many years to unfold.
My view has been that Disbelief was 2000-2011 and Pessimism was 2011-2014. We are now finally into that Optimism Leg that should last at least as long as Disbelief (~10 years (say)).
This next leg will be driven by earnings and dividends and then by production growth and then by the US$ Gold price.
So there you have it.
I called the low in ASX Gold Sector in Dawes Points on 1 December 2014. I rang the bell again for gold in August and in September rang the bell for resources generally.
Opportunities abound and I am well prepared for it. Are YOU??
Call me. +61 2 9222 9111. Email bdawes@psec.com.au
I own NST, SBM, TBR, TNR, MLX, MML, RSG, BLK.
Edition #41 
Barry Dawes, head of resources at Paradigm Securities, appeared on CNBC on Wednesday 5th August to explain why the recent fall in gold prices have offered a buying opportunity for investors now.
What if ... a rising gold price forces a short cover rally ???
Key Points
- US equity markets at all time highs again
- Asian markets still surging
- Gold price jumps from recent 54 month lows
- Gold stocks surging from 10 year lows
- Coal market turning?
# gains from November lows
Interesting to see that agricultural commodities fell about 15% to make their lows in September while the USDX rose 4% and subsequently recouped all their losses while the USDX rose. Industrial commodities made their 6-12% lows in Oct and then rose with the USDX. Precious metals and oil made lows in November and sharp gains have been made since those lows.
The markets have had at least 44 months to play the bear side and now the world is fully convinced that war, plague and debt will continue to cut demand, China will slow down sharply and Europe will be in recession for ever. And of course that the silly mining industry will continue to increase supply.
But what if? What if the Dawes Points view that the US is doing very well as indicated by a strong stock market and GDP data and that positive attention might now be paid to commodities as demand is seen to no longer be falling?
Short cover rally anyone? Note the very positive action in the US equity markets this week.
What is a Short Cover Rally? Well, some traders have sold assets that they hope to buy lower and make a profit. If you are `short’ in futures or securities markets you have to buy them back or face unlimited losses. Other have sold and gone to cash. Others have just not bought so are underweight or underrepresented. To cover `shorts’, stock needs to be bought back. Underweight investors need to add to positions and then new money comes in. Can be explosive.
What could this short cover rally actually mean?
First, there should be a bottoming in gold which is a proxy for all things commodity. Did we get that last week when, as the last Dawes Points suggested, that gold was being `hammered into an important low’? Demand is so strong and physical metal is hard to find. Coins have been sold out from the mints. The extreme low valuation positions of gold equities give a lot of credibility to that possibility of an important low. Platinum also made a key daily 'reversal' of making a new low then closing above the previous day's high on Friday. Higher gold might solve a lot of problems. Then other commodities should start to improve. As shown above, sugar, wheat, corn and soy beans have already jumped well off their lows. The LME metals and natural gas are higher today than in their October lows. Oil may have also made a very important low last week after a 32% fall since July, and note that the oil majors Exxon, Conoco and Chevron made their lows in mid October, a month before this low in oil. US Lumber made its 2014 low in June and now could be very strong as housing starts continue to pick up. Iron ore looks to be still weakening through oversupply. I was amazed at this graphic. Housing starts have fallen so much that it will take years to catch up to the need for another 1.5 million new units per year. The Philadelphia Housing Sector Index made an 11 month low in October but has bounced back to almost make a new all time high.
The industrial sensitive stocks and mining stocks should start to rally as short positions are unwound and bought back.
Alcoa, Boeing, US Steel and Caterpillar are all bouncing. BHP, RIO and Freeport have improved from recent lows.
Then the bond market needs to reassess itself. Those holding low yielding bonds will be asking questions about how they will be able to sell them. And where will the money go?
And where will all the cash sitting on corporate balance sheets go? Where will the bank deposits go? Probably chasing real assets. These numbers were discussed in the last Dawes Points.
The amounts of cash and bond holdings are way bigger than equities today. A short cover rally could ignite a much stronger market response. What will the remainder of the year bring us?
I understand many `value investors’ have reduced equity holdings in the US. These may be forced to change their views, especially since the Dow Theory is now bullish.
Where will the US$ sit in all this? Where will the A$ go?
You know my views. Now, let the markets do the talking.
Let’s talk commodities
Commodity prices should be all about supply and demand, and these factors are far more important than the level of the US$. Since the beginning of 2012 the USDX has risen 10% and the CCI has fallen 20%. Since the latest 10% rally in the USDX since 1 July, commodities, as shown by the CRB Index (basis – CCI), have fallen 12%. Not much of longer term correlation and the relative performances of agriculturals etc as noted above doesn't give much to rely on. At the margin, lower prices increase demand for commodities and reduce supply. This is happening now. Individual commodities have their own market patterns and the September lows of the agriculturals may be telling us something here. The industrial production data for China was >8%pa for Sept Qtr and India is looking at a GDP number in 2015 at >8%, higher than China. These two great nations are important keys in commodity demand. Demand for gold from China and India has most recent data running at extraordinary high levels and has kicked the gold price up an important US$50/oz. The world is generally short raw materials and despises gold. Gold shares hit a low last week and the ASX Gold Index was down to 83% below the April 2011 highs. Australian investors, however, are significantly underweight resources shares.What about Equity Markets
The US markets are making new highs again today in what can be called a `bull hook’ - the left side of an inverted parabola that then just surges! Many of these US stocks are truly remarkable given their earnings and their strong performances over the past few years. The Dow Jones 30 Industrials have done well as has the S&P 500 but don’t forget that the Wilshire 5000 shows great strength in its breadth. Looking at the breadth and gains of these stocks it is hard to see how the market place could be negative on the US economy. It is worth reviewing the Dow 30 to see what is there now. Gains by Dow Jones 30 Stocks Market cap US5.0 trillion PER 15.75x| 14 Nov 2014 | US$ | 4 years | 3 Years | 2 Years |
2104 |
|---|---|---|---|---|---|
| Communications | |||||
| AT&T |
35.90 |
22% |
19% |
6% |
2% |
| Verizon |
51.50 |
44% |
28% |
19% |
5% |
| Consumer | |||||
| Disney |
90.80 |
142% |
142% |
82% |
19% |
| Home Depot |
98.24 |
180% |
134% |
59% |
19% |
| Coca Cola |
42.73 |
30% |
22% |
18% |
3% |
| MacDonalds |
96.21 |
25% |
-4% |
9% |
-1% |
| Nike |
95.50 |
124% |
98% |
85% |
21% |
| Proctor & Gamble |
88.11 |
37% |
32% |
30% |
8% |
| Walmart |
82.96 |
54% |
39% |
22% |
5% |
| Financial Services | |||||
| American Express |
90.67 |
111% |
92% |
58% |
0% |
| Goldman Sachs |
189.98 |
13% |
110% |
49% |
7% |
| JP Morgan |
60.28 |
42% |
81% |
37% |
3% |
| Travellers |
102.43 |
84% |
73% |
43% |
13% |
| Visa |
248.84 |
254% |
145% |
64% |
12% |
| Health | |||||
| Johnson & Johnson |
108.16 |
75% |
65% |
54% |
18% |
| Merck |
59.07 |
64% |
57% |
44% |
18% |
| Pfizer |
30.34 |
73% |
40% |
21% |
-1% |
| United Health |
95.11 |
163% |
88% |
75% |
26% |
| Manufacturing |
|
|
|
|
|
| Boeing |
128.86 |
97% |
76% |
71% |
-6% |
| Caterpillar |
101.34 |
8% |
12% |
13% |
12% |
| Du Pont |
70.80 |
42% |
55% |
57% |
9% |
| Gen Electric |
26.46 |
45% |
48% |
26% |
-6% |
| MMM |
158.85 |
84% |
94% |
71% |
13% |
| United Technologies |
107.45 |
36% |
47% |
31% |
-6% |
| Petroleum | |||||
| Chevron |
116.32 |
27% |
9% |
8% |
-7% |
| Exxon |
95.09 |
30% |
12% |
10% |
-6% |
| Technology | |||||
| Cisco |
26.32 |
30% |
46% |
34% |
17% |
| IBM |
164.06 |
12% |
-11% |
-14% |
-13% |
| Intel |
33.95 |
61% |
40% |
65% |
31% |
| Microsoft |
49.58 |
78% |
91% |
86% |
33% |
|
Average |
70% |
59% |
41% |
8% |
|
| Dow Jones 30 |
17634 |
52% |
44% |
35% |
5% |
| Russell 2000 |
1173.81 |
50% |
58% |
41% |
1% |
Gold
This has been discussed in Dawes Points but the extreme low levels for gold stocks are telling us that the lows for gold are probably very close (and probably behind us).
The 23% rally from the lows here is probably signalling a major change.
Also, gold in other currencies looks ready to continue the long term uptrend, especially in Yen.
Gold is now all about demand from India and China. This demand is unprecedented and will change the way gold is viewed. Much higher prices are coming.
Resources stocks in Australia
The activity and optimism obvious in recent trips to China, Singapore, Kuala Lumpur and Bangkok contrasts greatly with the deep pessimism in Australia and the holdings and activity in resources stocks are well down on long term averages. You might say they are hated. Certainly despised. Some fund managers no longer hold BHP. It is now only 6% of market turnover- down at least 50%.
Mining and Mining is down 50% or more. Ignored.
Small Resources. Irrelevant.
Gold. Clearly despised at just 1.5% of turnover!
A turn coming in coal?
A final note. If gold is despised then coal is truly hated. But just look at these. Maybe a turn coming in coal. A coal ETF had an October low.
Coal stocks in the US are looking to turn up after long declines.
Walter Energy
Consol Energy
Let’s hope this all happens. 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!!
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 |
2014 |
2015* |
| US |
3.2 |
3.1 |
| Japan |
0.9 |
0.8 |
| UK |
3.2 |
2.7 |
| Germany |
1.4 |
1.5 |
| China |
7.4 |
7.1 |
| Taiwan |
3.9 |
4.0 |
| India |
5.6 |
6.4 |
| Region | August 2012 | August 2013 |
+% |
Now?? |
| Nth America | 1,850 | 2,462 |
33% |
3,000?? |
| Asia Pacific | 1,100 | 1,790 |
63% |
2,000?? |
| Europe | 837 | 1,033 |
23% |
1,100?? |
| UK | 147 | 186 |
27% |
200?? |
| Latin America | 71 | 97 |
37% |
110?? |
| Other | 39 | 55 |
41% |
60?? |
| Total | 4,044 | 5,623 |
39% |
6,470??? |
| 000t |
1-Jan-13 |
1-Jul-13 |
1-Jan-14 |
1-Jul-14 |
current |
Jul-13 |
Jul-14 |
| Copper |
320 |
665 |
366 |
155 |
162 |
-75.6% |
4.8% |
| Zinc |
1220 |
1061 |
933 |
668 |
698 |
-34.2% |
4.5% |
| Lead |
320 |
198 |
214 |
194 |
227 |
14.4% |
16.9% |
| Tin |
12 |
14 |
10 |
11 |
10 |
-25.8% |
-8.8% |
| Nickel |
139 |
187 |
262 |
305 |
385 |
106.0% |
26.4% |
| Aluminium |
5210 |
5435 |
5458 |
5046 |
4429 |
-18.5% |
-12.2% |
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 |
2011 |
2012 |
2013 |
2014 |
From high |
2014 |
|
| US$ |
100 |
82 |
80 |
74 |
70 |
-30.0% |
-5.1% |
| Euro |
100 |
88 |
85 |
75 |
78 |
-21.8% |
4.5% |
| Yen |
100 |
74 |
82 |
91 |
93 |
-7.2% |
1.7% |
| SF |
100 |
82 |
79 |
71 |
72 |
-27.6% |
2.7% |
| A$ |
100 |
81 |
78 |
84 |
81 |
-19.5% |
-3.6% |
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$16m has already been reached and the offer has a closing date of 20 November.
A flyer on this will be circulated this week, but please call me on +612-9222-9111 if you'd like to discuss this.
5 November 2014
- Gold bull market set to resume uptrend
- Sovereign markets for gold, currencies and bonds confirming a positive resources outlook
- Gold demand still robust
- Islamic State issues concerns increasing
- Gold bullion account established for investing or trading
- Australian gold equities still very cheap
Gold in other currencies is also encouraging with Euro Gold close to E1000/oz. 
Gold in GBP has broken a downtrend.
Gold in Yen seems to be leading. Something is odd with Yen just now, could it be energy dependency? Or something else? I will come back to this later.
Gold in A$ 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. 
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
|
Mar 2009 Low |
30 July 2014 |
% change |
|
|---|---|---|---|
| S&P 600 Small Caps |
131.54 |
475.25 |
360 |
| Russell 2000 Small Caps |
355.91 |
1146.57 |
321 |
| S&P500 |
695.27 |
1970.07 |
282 |
| Dow Jones 30 |
6709.61 |
16880.36 |
251 |
| New All time Highs | So Close to All time Highs | Pre 2008 downtrends broken | 2011 downtrends broken |
|---|---|---|---|
| US | |||
| Canada | |||
| Germany | |||
| India | |||
| Sth Korea | |||
| UK | |||
| Japan | |||
| Singapore | |||
| Taiwan | |||
| Europe |
| 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 |
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) |
2011 |
2012 |
2013 |
2014 |
|---|---|---|---|---|
| Bass Strait |
107 |
112 |
124 |
109 |
| North West Shelf |
125 |
144 |
131 |
128 |
| US onshore |
36 |
448 |
479 |
449 |
| Other |
137 |
118 |
140 |
153 |
| Total |
405 |
822 |
874 |
839 |
| US onshore % |
9 |
55 |
55 |
54 |
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?
Key Points
-
Global economic expansion on track
-
Major global indices at alltime highs
-
Small caps and New Age technologies leading
-
Resources big cap cyclicals starting to move and catching up
-
Gold sector recovering
-
Expect strong rally to year end
| As at 28 Oct 2013 | Current | Dec-11 | June low | Oct low | % gain | % gain | % gain | ||
|---|---|---|---|---|---|---|---|---|---|
|
Dec-11 |
Jun-13 |
Oct-13 |
|||||||
| Russell 2000 |
1118 |
741 |
943 |
1038 |
51% |
18.6% |
7.8% |
||
| Wilshire 5000 |
18794 |
13190 |
16442 |
17563 |
42% |
14.3% |
7.0% |
||
| NASDAQ |
3943 |
2605 |
3295 |
3650 |
51% |
19.7% |
8.0% |
||
| S&P 500 |
1760 |
1258 |
1560 |
1647 |
40% |
12.8% |
6.8% |
||
| Dow Industrials |
15570 |
12217 |
14511 |
14719 |
27% |
7.3% |
5.8% |
||
| Dow Transports |
7009 |
5019 |
5952 |
6401 |
40% |
17.8% |
9.5% |
||
| German DAX |
8986 |
5898 |
7656 |
8490 |
52% |
17.4% |
5.8% |
||
| UK FTSE |
6721 |
5572 |
6023 |
6317 |
21% |
11.6% |
6.4% |
||
| HK Hang Seng |
22698 |
18434 |
19914 |
22744 |
23% |
14.0% |
-0.2% |
||
| Taiwan TW Dow |
199 |
167 |
183 |
194 |
19% |
8.9% |
2.3% |
||
| Sth Korea Kospi |
2034 |
1826 |
1771 |
1981 |
11% |
14.9% |
2.7% |
||
| Shanghai |
2133 |
2199 |
1850 |
2123 |
-3% |
15.3% |
0.5% |
||
| India |
20684 |
19906 |
18487 |
19265 |
4% |
11.9% |
7.4% |
||
| Japan |
14088 |
8455 |
12415 |
13749 |
67% |
13.5% |
2.5% |
||
| ASX 300 |
5395 |
4052 |
4589 |
5076 |
33% |
17.6% |
6.3% |
| As at 28 Oct 2013 | Current | Dec-11 | June low | Oct low | % gain | % gain | % gain | ||
|---|---|---|---|---|---|---|---|---|---|
|
Dec-11 |
Jun-13 |
Oct-13 |
|||||||
| GOOG |
1015.00 |
645.90 |
847.22 |
842.98 |
57% |
19.8% |
20.4% |
||
| FB |
51.95 |
29.60 |
22.67 |
45.26 |
76% |
129.2% |
14.8% |
||
| Amazon | AMZN |
363.39 |
173.10 |
262.95 |
296.50 |
110% |
38.2% |
22.6% |
|
| Yahoo | YHOO |
32.25 |
16.37 |
23.82 |
31.79 |
97% |
35.4% |
1.4% |
|
| Apple | AAPL |
525.96 |
405.00 |
388.87 |
478.28 |
30% |
35.3% |
10.0% |
|
| Microsoft | MSFT |
35.73 |
25.96 |
32.57 |
32.80 |
38% |
9.7% |
8.9% |
|
| Netflix | NFLX |
328.03 |
69.29 |
205.75 |
282.80 |
373% |
59.4% |
16.0% |
|
| Tesla | TSLA |
169.66 |
26.03 |
88.25 |
160.15 |
552% |
92.2% |
5.9% |
|
| YY | YY |
46.22 |
14.17 |
23.06 |
41.28 |
226% |
100.4% |
12.0% |
|
| Priceline | PCLN |
1070.85 |
467.71 |
787.00 |
972.40 |
129% |
36.1% |
10.1% |
|
| 3D Systems | DDD |
58.64 |
9.60 |
41.05 |
47.33 |
511% |
42.9% |
23.9% |
| 28 Oct | 000 tonnes | Index Dec 2011 =100 | Dec 2012 | June 2013 | Oct 2013 | Weeks consumption |
|---|---|---|---|---|---|---|
| Copper | 480 | 100 | 86 | 180 | 130 | 1.2 |
| Zinc | 1040 | 100 | 147 | 129 | 109 | 4.6 |
| Lead | 231 | 100 | 91 | 56 | 65 | 1.0 |
| Tin | 13 | 100 | 99 | 127 | 108 | 1.9 |
| Nickel | 235 | 100 | 155 | 208 | 261 | 7.7 |
| Aluminium | 5397 | 100 | 105 | 109 | 109 | 9.5 |
| Stock | Code | Current$ | Dec-11 | June low | Oct low | % gain | % gain | % gain | |
|---|---|---|---|---|---|---|---|---|---|
| As at 28 Oct 2013 |
Dec-11 |
Jun-13 |
Oct-13 |
||||||
| Newmont | NEM |
27.83 |
60.01 |
27.07 |
25.33 |
-54% |
2.8% |
9.9% |
|
| Barrick Gold | ABX |
20.14 |
45.25 |
14.67 |
17.13 |
-55% |
37.3% |
17.6% |
|
| Freeport Copper | FCX |
37.44 |
36.79 |
26.38 |
32.34 |
2% |
41.9% |
15.8% |
|
| Alcoa | AA |
9.24 |
8.65 |
7.70 |
7.82 |
7% |
20.0% |
18.2% |
|
| Vale | Vale |
16.08 |
21.45 |
12.73 |
14.90 |
-25% |
26.3% |
7.9% |
|
| BHP | BHP |
37.41 |
34.42 |
30.43 |
34.35 |
9% |
22.9% |
8.9% |
|
| Cliffs Resources | CLFV |
24.99 |
62.35 |
15.50 |
19.88 |
-60% |
61.2% |
25.7% |
|
| US Steel | X |
23.49 |
26.46 |
16.12 |
20.44 |
-11% |
45.8% |
14.9% |
|
| Fortescue | FMG |
5.21 |
4.27 |
2.87 |
4.61 |
22% |
81.5% |
13.0% |
|
| Iluka | ILU |
9.98 |
15.50 |
9.34 |
9.73 |
-36% |
6.9% |
2.6% |
|
| Santos | STO |
14.76 |
12.24 |
12.02 |
14.48 |
21% |
22.8% |
1.9% |
|
| Woodside | WPL |
38.45 |
30.13 |
33.31 |
36.95 |
28% |
15.4% |
4.1% |
|
| Oil Search | OSH |
8.43 |
6.25 |
7.51 |
8.20 |
35% |
12.3% |
2.8% |
|
| S&P E&P index | XOP |
71.44 |
51.65 |
55.89 |
64.97 |
38% |
27.8% |
10.0% |
|
| Newcrest | NCM |
10.99 |
29.60 |
9.06 |
10.01 |
-63% |
21.3% |
9.8% |
|
| Ozminerals | OZL |
3.73 |
9.42 |
3.90 |
3.70 |
-60% |
-4.4% |
0.8% |
|
| Pan Aust | PNA |
2.06 |
3.20 |
1.76 |
1.86 |
-36% |
17.0% |
10.8% |
|
| ASX Mets and Mins | XMM |
3370 |
3722 |
2653 |
3094 |
-9% |
27.0% |
8.9% |
| Stock | Code | Current $ | Dec-11 | June low | Oct low | % gain | % gain | % gain | |
|---|---|---|---|---|---|---|---|---|---|
| As at 28 Oct 2013 |
Dec-11 |
Jun-13 |
Oct-13 |
||||||
| Drillsearch | DLS |
1.18 |
0.80 |
0.91 |
1.10 |
48% |
29.7% |
7.3% |
|
| Senex | SXY |
0.78 |
0.62 |
0.55 |
0.72 |
26% |
41.8% |
9.1% |
|
| Buru | BRU |
1.67 |
2.40 |
1.18 |
1.49 |
-30% |
41.5% |
12.1% |
|
| Armour Energy | AJQ |
0.28 |
0.50 |
0.19 |
0.28 |
-44% |
51.4% |
1.8% |
|
| Beach | BPT |
1.35 |
1.21 |
1.09 |
1.28 |
12% |
23.9% |
5.5% |
|
| LNG | LNG |
0.34 |
0.27 |
0.12 |
0.18 |
26% |
179.2% |
91.4% |
|
| Silver Lake | SLR |
0.81 |
0.64 |
0.51 |
0.64 |
27% |
57.8% |
26.8% |
|
| Kingsgate | KCN |
1.53 |
5.70 |
1.24 |
1.38 |
-73% |
23.4% |
10.9% |
|
| Resolute | RSG |
0.67 |
1.59 |
0.56 |
0.51 |
-58% |
19.1% |
32.1% |
|
| St Barbra | SBM |
0.53 |
1.94 |
0.37 |
0.43 |
-73% |
43.8% |
22.1% |
|
| Medusa | MML |
2.16 |
4.45 |
1.26 |
1.85 |
-51% |
71.4% |
16.8% |
|
| Regis Resources | RRL |
3.62 |
3.38 |
2.87 |
3.41 |
7% |
26.1% |
6.2% |
|
| Sovereign Gold | SOC |
0.22 |
0.28 |
0.10 |
0.19 |
-21% |
120.0% |
15.8% |
|
| ASX Gold Index | XGD |
2507 |
6034 |
1984 |
2262 |
-58% |
26.3% |
10.8% |
| Stock | Code | Current $ | Dec-11 | June low | Oct low | % gain | % gain | % gain | |
|---|---|---|---|---|---|---|---|---|---|
| As at 28 Oct 2013 |
Dec-11 |
Jun-13 |
Oct-13 |
||||||
| Orecobre | ORE |
2.43 |
1.27 |
1.32 |
2.15 |
91% |
84.1% |
13.0% |
|
| Cudeco | CDU |
2.15 |
3.70 |
3.84 |
1.76 |
-42% |
-44.0% |
22.2% |
|
| Lamboo | LMB |
0.09 |
0.16 |
0.08 |
0.06 |
-41% |
25.3% |
51.6% |
|
| Kings Range Cop | KRC |
0.11 |
0.16 |
0.02 |
0.06 |
-29% |
358.3% |
74.6% |
|
| Carbine Tungsten | CNQ |
0.05 |
0.11 |
0.05 |
0.05 |
-51% |
0.0% |
0.0% |
|
| Gas2Gird | GGX |
0.02 |
0.05 |
0.02 |
0.02 |
-53% |
-12.5% |
10.5% |
|
| Alligator Energy | AGE |
0.08 |
0.10 |
0.02 |
0.06 |
-23% |
221.9% |
31.6% |
|
| Ironbark | IBG |
0.06 |
0.20 |
0.04 |
0.05 |
-73% |
41.0% |
17.0% |
|
| ASX Small Res | XSR |
2432 |
4682 |
1892 |
2215 |
-48% |
28.6% |
9.8% |
It is still possible to be very bullish on gold as emerging nations, particularly China and India, just absorb any physical gold and tighten the markets. A much higher gold price will act as a brake on politicians spending proclivities with other peoples' money sooner rather than later so it just might be a virtuous circle. Higher gold means less budget deficits and less debt. We hope anyway.
Gold stocks were `strangely stronger' on cue. And gold stocks are EXTREMELY oversold against gold.
So a rally in XAU to 140 (+70% from the June low) and then 180 (up 120%) is fine but a rise from 0.074 on the stocks:gold ratio towards the long term 0.25 says something bigger.
| XAU Philadelphia Gold Index | XAU against US$ gold price |
 |
 |
If these market moves actually come to pass in direction, if not magnitude, I will feel more inclined to comment on sectors and individual stocks.
I am itching to talk up the wonderful work of our geoscientific explorers over the past few years in copper and other base metals as well as the exotics of rare earths, technology elements like tungsten and graphite and the excitement of Australia's stealth onshore oil boom. And of the numerous developments awaiting finance in coal, gold, iron ore and hydrocarbons.
After sitting in on over 150 in-office presentations plus numerous others at conferences I consider that the many extraordinary efforts by our resources managers will result in extraordinary gains for those who participate now.
I hope you are on board.
In keeping with the New Age I have been tweeting some daily comments on markets and stocks so if you are so equipped you can follow me on Twitter @DawesPoints.
28 October 2013
Barry Dawes
B Sc FAusIMM MSAA MSEG