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
7-Nov-14	1642*
14-Nov-14	1746	6.4	6.4
21-Nov-14	1852	6.1	12.8
28-Nov-14	1922	3.8	17.1
5-Dec-14	1913	-0.5	16.5
12-Dec-14	1968	2.9	19.8
19-Dec-14	1972	0.2	20.1
26-Dec-14	1932	-2.0	17.7
2-Jan-15	2069	7.1	26.0
9-Jan-15	2315	11.9	41.0
16-Jan-15	2504	8.1	52.5
23-Jan-15	2643	5.5	61.0

* 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.

	Stock	Price 1 Dec	Price 23 Jan	Change	Target	Potential
1	BDR	19	38	100%	40	5%
2	DRM	27	59	119%	110	86%
3	EVN	43	94	119%	180	91%
4	KCN	62	79	27%	180	128%
5	MML	57	90	58%	250	178%
6	NCM	918	1362	48%	2000	47%
7	NST	96	214	123%	450	110%
8	OGC	207	260	26%	600	131%
9	RRL	129	204	58%	450	121%
10	RSG	23	42	83%	60	43%
11	SAR	21	40.5	93%	90	122%
12	TBR	265	330	25%	450	36%
13	GOR	20.5	39	90%	200	413%
14	CGN	12.5	11.5	-8%	50	335%
15	ABU	22	33	50%	60	82%
16	MLX	70	106	51%	180	70%
17	BLK	6.7	10	49%	25	150%

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
A$1200	18.1	57.1	3.5	2.1
A$1300	10.8	14.2	5.0	5.1
A$1400	2.9	5.1	6.5	8.1
A$1600	4.1	4.3	9.6	14.2
A$1700	3.3	3.4	11.1	17.2
A$1800	2.8	2.8	12.6	20.2
A$1900	2.4	2.4	14.1	23.2

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. 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:-

• Euro (EUR), 57.6% weight
• Japanese yen (JPY) 13.6% weight
• Pound sterling (GBP), 11.9% weight
• Canadian dollar (CAD), 9.1% weight
• Swedish krona (SEK), 4.2% weight
• Swiss franc (CHF) 3.6% weight

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. 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  

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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