Key Points
- The Dark Side throwing in the towel?
- Shanghai finally joins the Global Bull Market
- All Ords breaks 5500 and joins in too!
- BHP is a Paradigm SUPER stock on oil and copper
- Expansion continuing with ASX XSR small resources up 8% in July
- Dawes Points 2014 resources portfolio up 64% for 1 January - 30 July
- Gold in super bull market with demand rising from India and China
- Oil and gas exploration activity in Australia stepping up
The Dark Side of Pessimism, Commodity Price Terrorism and China Envy appears to be finally throwing in the towel to surrender to the massive tide of global economic expansion as the aspirations of the world's rising middle classes prevail. Expansion with record levels of global cash to fuel it.
And what an event this is. It is one to savour and to pass on to your grandchildren. I have said that before but it is and it is all happening according to the Dawes Points script. It is crystal clear in the markets now that China is not collapsing, the European banking system is not melting down and the US economy is not falling into the Greater Depression.
If the world has done this well despite the pessimism, what will now happen as the Dark Side changes its view? Are you ready for it? What will happen with the extraordinary high levels of cash on the sidelines flow back to markets? And from the bond markets? You have been forewarned so are you fore-armed?
The Dark Side has for years churned out a never ending torrent of warnings based on China slowing or Europe collapsing and the ensuing oversupply of commodities that was going to push down iron ore, copper, coal, LME metals, silver and, of course, gold. The Super Cycle Bull Market in commodities was over and also was the strength in the A$. Oh yes, also buy US T bonds! And build up cash!
And all this has proven to be false prophesy. What can you say about their professionalism?
But the false prophesies have been enough to all but destroy the capital markets for resources stocks along with careers, opportunities, livelihoods and wealth. Yours and mine. FOR NO REAL REASON!
And we still hear it. Investors should build up cash and chase yield. Not capital growth. So why then have the Russell 2000 Small Caps and the S&P600 Small Caps done so well and have led this market up since the March 2009 lows?
The market facts tell it clearly.
|
Mar 2009 Low
|
30 July 2014
|
% change
|
| S&P 600 Small Caps |
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
|
And Google, Tesla and Face Book are hardly high dividend yield stocks.
So in great contrast to these strong highs, resources stocks are priced for the end of the world which is clearly not happening. So if not, then there should be some `normalisation' in the terms of Wall Street Wallys. That is, a major upward rerating of resources.
So, where to start with the plethora of positive market signals in July.
We could focus on any of the following:-
Stock Markets
| New All time Highs |
So Close to All time Highs |
Pre 2008 downtrends broken |
2011 downtrends broken |
| US |
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| Canada |
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| Germany |
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| India |
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Sth Korea |
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UK |
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Japan |
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Singapore |
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Taiwan |
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Europe |
And how about these for commodities
| New All time Highs |
So Close to All time Highs |
Pre 2008 downtrends broken |
2011 downtrends broken |
Waiting |
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Palladium |
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Silver |
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Bauxite |
Moly |
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Platinum |
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Cobalt |
Copper |
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Oil |
Zinc |
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Nickel |
Lead |
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Tin |
Gold |
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Uranium |
Aluminium |
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Resources stocks are not reflecting these conditions at all.
And then there is gold. It was covered in the last Dawes Points and gold stocks are performing well.
Just note the basing and reversal in the GDX ETF of the XAU (Philadelphia Gold Index).
Note that gold stocks in North America are still about just 30% of their `normal’ rating against the general market and are turning up again. Big % gains to come.
But the clearest signal is the economic data coming out of China.
The 7.5% pa GDP growth rate is being maintained and the various Purchasing Managers Indices (PMIs) are now all pointing up. Expect an acceleration from here. Overall, China never really slowed overall and never as much in most sectors as the commentators expected, as we saw through the crude steel production data. And the US had 4% growth for June Qtr!
My four visits to China from Sept last year gave no obvious indication of a real slowdown and in fact reinforced my views of an increasingly sophisticated and complex society so keen to improve living standards. And the infrastructure and technology standards are so high that Australia is not keeping up.
With economic expansion in China comes an increase in everything but particularly the demand for energy. In a slower 2013, BP Datashows energy demand only grew 4.4% and took China to 23% of total global energy consumption and 25% higher than the US.
Importantly, gas consumption in China increased 10.6% in 2013 but it is still only 5.1% of total energy consumption in China whereas the total global average is 23.7%. Coal is still around 68% in China and 30% globally. The demand for gas in China has so far to go from this 5.1% to at least 20% to get anywhere near the world's 24% and 30% in the US. This graphic tells us a lot about the economies of China and the USA and the changes since 2006.
Focus on the gas numbers because China will be a major importer of gas via pipeline from Iran and from Russia and can be also expected to greatly increase LNG imports as well as develop its own shale gas resources. China needs to increase gas share from 5 to at least 20% in a growing energy consumption profile over the next 20 years.
See how the US has increased gas by 25% to a level of 30% from just 24% in 2006 and reduced its coal consumption by 20% from 24% to 20%. All from that shameful fraccing!! So much more garbage from the Greens.
Now just look at the markets.
My last visit to China provided strong signals that share ownership in China is not highly regarded. It seems much money was lost after 2007 with a steep index fall of 70%, a rally, then a grinding 45% decline over five years and a retreat to the levels of 2001. No one owns shares anymore. Its all in property and shadow banking high interest loans. Unfortunately the property developers can't quite make the payments on the 25-35% loans so the cash will likely go elsewhere. Shares maybe?
The markets are showing that the bearishness is now turning.
The US$15,600bn market cap Shanghai SEC Index is up 13% in the past year and is on a PER of 10.1x.
The 2007 downtrend is broken after the Index bounced off the 22 year uptrend.
This FTSE China 25 Index ETF is also pushing against the 2011 highs which are also post 2008 highs.
China had been holding back Australia but we are now leading Shanghai and with the break through 5500 the All Ords will now try to catch up the world.
These improvements have been anticipated by some of the better opportunities in the market and are reflected in the 30 stocks Dawes Points Nov 2013 Non-trading Portfolio which is now up 64% since the beginning of 2014. Big gains by LNG (4% of initial book value), LMB (0.8% ibv), AQA(4.3% ibv) and WSA(4.3%ibv) have helped significantly.
Here is the portfolio. Big caps have finally started to move but stock picking in the smaller end has produced stellar results. Much more to come.
Now one of the things that has been embedded in my brain since entering the financial markets is that the market in Australia can only go where the market leader goes. And this is BHP.
So if the market leader is not going higher then the market will find it difficult to move higher.
We all have been bombarded by the iron ore bears who equate the iron ore price with the future of the Western and Eastern Worlds. It affects BHP of course and RIO and then we have the numerous experts who have shorted FMG.
But the operational and production responses and the market action of BHP are not of the character of a company, and hence a market, going nowhere.
Note this extraordinary comment from a local fund manager who told Reuters:-
"At the end of the day, BHP's fortunes are tied to the iron-ore market," said ………., chief investment officer at ………. Asset Management, which recently sold its shares in the miner after holding the stock for close to 15 years.
"The stated strategy of the majors is to squeeze higher cost production out of the market," he said. "We're just not sure that maximizing production is as sensible as they think it is."
So he is sold out. Yet the stock is at 12 month highs so something else is happening.
This is the `Generals and the Maginot Line’ concept referred to in the February Dawes Points.
If the market for BHP is holding up and the iron ore price isn't that bad maybe this something else is happening. How about the something else being copper?
Copper prices have broken the 2011 downtrend and LME inventories are just 144kt for a 21mtpa market and are at 6 year lows.
The Dark Side has tried to tell us that the inventory has just been moved from LME warehouses to others in China and that financing of this inventory will bring us all unstuck. Garbage!
BHP will produce a net 1.8mt of copper in FY15 and at US$7000/t this is US$12.6bn in gross revenue. At US$7700/t this is US$1.26bn more. Escondida and Olympic Dam, each growing.
Now to another something else.
The 2011 acquisition of Petrohawk's Eagle-Ford and Permian oil and gas acreage and Chesapeake Energy's gas at Haynesville by BHP was derided by the
cognescenti at the time as an over-priced and strategically dumb acquisition. Gas prices fell after the acquisition so it was a big joke with writedowns on Cheaspeake's Haynesville assets. Another Magma Copper. HBI. Ravensthorpe. Failure.
But wait a moment.
Look at these numbers for gas which show a doubling for BHPP since the acquisition.
| Year end June (BCF) |
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
|
US Onshore provides almost 55% of BHP Petroleum's gas production but at the current US$4/mmbtu at Henry Hub its not too exciting.
But more importantly however, the unconventional oil and liquids mostly from Black Hawk and Hawkville in the Eagle-Ford shales provided 26% of BHPP's FY14 net liquids output and 31% in the June Qtr at a rate of 28mmbbloepa (80,000bbloepd).
BHPP has advised a 17mmbbl liquids increase for FY15 and it had spent US$3.9bn in FY14 to achieve this. So taking a steady growth of +2.5mmbbloe per qtr growth rate to give just 15mmbbloe extra in FY15 then the June Qtr FY15 could be producing at a rate of over 60mmbbloepa (170,000bbloepd). What will FY16 look like? Can't really know today but BHPP has said 200,000bblpd by 2016(>70mmbblpa) so expect higher numbers in FY16.
What may be known is that BHPP is probably getting one year IRRs of over 70% and 60mmbloe pa gives annual revenue of US$6,000m and at a conservative 50% EBITDA margin this adds a lot to BHPP's earnings. Like about US$2bn in FY15 and US$3bn in FY16.
The technology changes in drilling are bringing down drilling costs, improving reservoir recoveries and boosting returns. BHPP `is testing high-temperature gels for better proppant transportation, different stage spacing to maximize stimulated rock volume, and reservoir modeling to simulate stress capture and optimize well sequencing.' (UOGR April 2014) BHP also reported that field trials achieving are 10-40% higher than production for comparable surrounding wells.
The rapid technology changes in unconventional oil production (now really a `manufacturing’ business rather than exploration) are suggesting increases in oil recovery from about 3% to as much as 6%, with about 50% recoverable in Year 1. Getting 400,000bbls @US$100/bbl in Year 1 is US$40m revenue with $8m op costs for a US$10m well is over 100% Year 1 IRR. Try 150%. And BHP is spending US$4bnpa. The above BHP numbers might be low.
So here are two major Divisions of BHP in cashflow growth mode that will offset any earnings weakness from any lower prices there in iron ore with its 10% higher FY15 225mtpa output, costs reduction and revenue of US$20bn.
It seems that the world has just focussed on BHP's iron ore and ignored Copper and Oil. BHP's share of All Ords market turnover has been at the lowest level for over 10 years suggesting it is very much underowned. Turnover in recent weeks has jumped up sharply suggesting BHP will again lead the market higher.
Other markets are giving BHP a better ranking so have a look at BHP in US$. More action than in Australia, possibly.
The raison d’etre for the establishment of DawesPoints in 2012 was to advise clients and the world in general that the real economy was operating at very different level to the financial economy. And that the real economy was doing far better than the financial community has been giving credit for.
The continual reference to the US markets has been a core activity of DawesPoints because these are far more liquid markets with vast numbers of buyers and sellers with different goals, views, responsibilities, time frames and of course attitudes. The Australia market appears to me to be concentrated with strong convergent groupthink views and guided by a generation of advisors investors with contrasting time frames compared to the real economies' requirements. Risk averse commentators driving investors away from equities and to overweight positions in bonds and cash.
The Australian investment market of course has had the luxury of being able to invest in a vast number of overseas markets with stocks such as Apple, Google and Tesla not available in the local market. So rightly competition for capital is substantial. However, it is a pity bank deposits have won this section of the race with their A$1,606bn balance.
How is it that our Australia prefers to back the banks and mediocrity or overseas companies rather than backing its citizens in their visions and endeavours? Why would you back XYZ Bank Ltd to invest in 4.8% mortgages rather than to invest in Ken Everyman who has uncommon drive and a great idea about how to produce and sell a better front door lock? What about Dr Phil Brown and his biotech innovation in a field that Australia is an acknowledged leader (did you know that the local George Institute is THE leading medical research unit of the world!!). Why indeed would you not invest in Bill Brilliant who has a copper deposit that he has assessed as worthy of further development? Or John with his iron ore opportunity? Or Frank with the acquisition of a major exploration target from large international mining company for whom the target no longer met corporate goals. Real ideas, real drive and real assets from real people.
Australia does have the world’s largest listed mining company in BHP and a range of other and its banks are world class with all the big 4 with AA ratings
The scope of this is vast and extraordinary. From gold to iron ore from new mining technologies to unconventional oil and gas. Opportunities everywhere.
And yet still the large investment banks are still vying for the title of the most bearish. How many of them have even been beyond Hong Kong into China. Not many, it would seem.
And the fixation with a lower iron ore price and the collapse in the steel industry in China as it goes to yet another new record high (yes, new record of 843mtpa in June!!). Oh, puulease.
So what
is really happening now? The Bear Case of overwhelming debt leading to a US Depression with European banking collapse and China falling over has very simply failed to eventuate. You can say QE and other injections of liquidity have prevented the collapse and that unless we get more then it will still happen. Maybe.
The much proclaimed collapse in commodities hasn’t arrived yet and apart from the ridiculous preoccupation with the iron ore price it appears it won’t.
What is going to happen to these people who have been preaching Armageddon and worse? And to those who have listened?
I saw some `unverifiable’ data from a US columnist that showed that ten major global economies (including US, UK and Australia) had current savings rates in excess of 40%. No wonder global growth has been slightly anaemic.
But what does A$1,606bn in bank deposits suggest to you? How could Treasury, most banks, the disgraceful `asset allocators', a growing army of risk averse financial planners and scared ordinary people with the conventional wisdom of Cash is King be on the right side of the market? A thirty year bull market in bonds has certainly sucked in everyone, especially governments who think that the markets will always be there to take over priced paper.
But note that the tide has already turned with major US bond funds reporting a full year of redemptions as the risk of holding low yield, balance sheet-challenged government paper just keeps growing.
And here, the latest RBA data shows that although total bank deposits are still rising ( up 0.7% to a new record A$1,606bn) in June the Term Deposits category had the biggest ever monthly fall (A$7.9bn) to just A$529bn and at -1.5%, the largest % fall since deposits began to rise sharply in 2007.
Funds flowing from bonds and term deposits is now well underway. Into investments, property and soon into retail consumption. For us that is into equities and commodities and into resources equities (read small cap resources stocks!).
Well if you are reading these DawesPoints you know these have been my views and you have had it consistently straight and true.
Bull market for resources and commodities.
And these views haven't changed in the past two years.
Now some more facts for you to consider.
Resources sector bottomed in the GFC in Nov 2008 and the broad markets Dow, S&P, All Ords, FTSE and DAX bottomed almost 4 months later in Mar Qtr 2009.
Say that again. The Resource Sector (XMM.ASX) bottomed in Dec Qtr 2008 and the broader market bottomed in March 2009.
So technically we have been in a bull market uptrend in resources for almost six years now! Hasn’t felt like it has it?
The resources market rallied into April 2011 then weakened into June 2013 for the first major pull back. A 53% fall was some pullback. Ouch.
And 71% for Small Resources was ,.. er,..er,.. um,.. some pull back. But it is bottoming!
The poor old gold sector after making a magnificent 230% rally from the GFC into 2011 then fell 80.0% to Dec 2013. Mere details! And of course the small caps became microcaps and then nanocaps and worse. Quite few 95% falls here. More than OUCH.
All these share price collapses for no real macro economic reason. Just misinformation, groupthink and fear.
But what value has been created!!
And strong stock and portfolio performances in 2014 reflect that. So much more to come.
I have referred to the `stealth’ bull market in Australian oil and gas exploration that is well underway now. The new LNG projects in Australia will be export conduits for many new gas fields in Australia and will change the entire industry.
I particularly like the key Cooper Basin stocks (BPT, DLS and SXY) and also those in the NT and parts of WA. Hopefully a full report might be available very soon. The implications are very great and the opportunities will be very rewarding.
There are hundreds of companies with quality projects that need to be financed and I am happy to recommend dozens of them. This is going to be an extraordinary Bull Market for the next decade!
So the opportunities in Australia now start with our preferred leaders.
BHP and FMG (SUPER stocks) with WPL, OSH, STO, WSA, ORG as leaders.
Onshore oil and gas led by BPT, DLS, SXY in the Cooper Basin and then AJQ, CTP and REY.
Gold stocks NCM, NST, ABU, GOR, SLR, SAR, BLK
Copper stocks CDU, PNA
Industrial metals TRO, AMI, IBG,
Technology metals ORE, ALK, LMB, VXL, KNL, CNQ
Metals explorers SIR, CZI, KGL,
Many more as this market moves up, as we discover new opportunities and as relative values warrant switches.
So what happens now for the supporters of the Dark Side?
This is a very important question.
If the end of the world hasn’t happened by now what might be the options for them?
- Wonder what to do with A$1,606bn in bank deposits?
- Get even more bearish?
- Actually go to China and see it first hand rather than pontificating with propaganda of envy?
- Look for undervalued sectors?
- Concluding resources and Australia look very appealing?
All of the above.
And that suits us just fine!
I own shares in BHP and FMG, STO, DLS, AJQ, CTP and REY. NCM, NST, ABU, GOR, SLR, SAR, CDU, TRO, AMI, IBG, ORE, ALK, LMB, VXL, KNL, CNQ and CZI.
7 August 2014
Sydney
Following the share of market turnover of the ASX S&P 300 Gold Index has been a very useful task with this indicator giving us a great deal of confidence in the Dawes Points views.
So have a look at this! The Gold Sector made up 14% of ASX AllOrds turnover in the past 2 weeks and the 5 week moving average hit 12.6% while the 12 week is 7.5%. Astonishing!
I was happy that the downtrend had broken but the moving averages of the last peak in the sector have just been left behind.
There is a massive need to BUY! The market is drastically underweight.
The Index is only just starting to move and this break above 3000 should get close to 6000 in 2016.
And the Dawes Points Gold Index corrections chart is suggesting a massive rally is about to unfold.
The driver is primarily that gold stocks are still very cheap against the A$ gold price.
The Australian stocks are leading their North American counterparts but a high volume break out also occurred last week.
And I hope you recall this very long term graphic of the Barron's Gold Mining Index back to 1940.
And the North American stocks are trading at less than 25% of previous 25 year history. (plus graphic)
Gold stocks will outperform gold and probably almost everything else for the next few years.
The portfolio gives everyone a mix of size, liquidity, dividends, growth and risk so I am very happy to reinforce the selections.
Newcrest has more gold resources than anyone else and improvements will allow resumption of dividends. Northern Star is just brilliant and Oceania Gold has some excellent leverage. Evolution has acquired a massive swag of gold resources over the past couple of years and will be a big player in the Zuleika Shear zone.
These stocks will be the dividend paying cornerstones of every pension fund for the next decade.
Blackham will continue to please everyone for quite a while and my target of A$1 in my research report in early 2015 stands firm. This is a potentially very long mine life play.
Doray, Saracen, MetalsX and Gold Road among the developers are flying.
Tribune is outstanding and the market place will soon cotton on to the significance of Pegasus and the East Kundana JV. Its 140koz of gold bullion in the vaults currently worth over A$4.00 per share is an added golden bonus.
The offshore players of Medusa and Resolute are just too cheap.
The smaller growth players look very exciting and will be happy to talk to anyone about them.
There are of course many other attractive gold stocks out there( like Dacian Gold and Perseus) and they will be covered soon but let's just stay focussed for now.
And the Australian Gold Sector is leading the world out of this miserable pricing time. Gold stocks, gold, metals companies, industrial metals, technology metals, then oil, oil and gas companies and the bulk commodity producers will follow.
So participate in the gold sector now with a good portfolio approach and let's have some real fun.
I own NST, NCM, GOR, DRM, MLX, CGN, TYX, TBR, BLK, TNR, MML, RSG, GEE
8 February 2016
Edition #45
Similar but still nascent changes seem to be underway in ASX Small Resources and also in the XMM, with prices still falling but volumes and market share increasing. All good tentative signs.
The Dawes Points 3 December 2014 untraded gold stock portfolio provided a 73.6% return for 13 months to 31 December plus almost 2% in dividends.
Here is the proof.
Great gains by overweighted leaders Northern Star and Evolution together with half weighted emerging companies Blackham, Saracen and Gold Road gave the portfolio most of the performance and it outperformed the ASX Gold Index by about 20 % points in value and about 0.5% in yield.
It is easy to say that the local gold sector has done well because of the weaker A$ 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 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$248/oz low in 2000.
My reading of this indicates we are near the lows in these major North American gold stocks and if the market is completing the Wave 2 correction then the upside should be strong and should follow what we have already seen in the Australian Gold Production Sector above.
The market is currently all about sentiment and the sentiment has not yet turned favourably towards gold but that change cannot be too far away now and the response could be rapid.
This strong view for North American gold stocks is supported by the very long term graphic for the Barron's Gold Mining Index which goes back to 1940.
An excellent long term uptrend is matching support of 2000 and is also about the same as highs in 1969!
Readers will probably be also familiar with the XAU vs the S&P500 whereby gold stocks there have fallen 90% against the S&P500.
We can look again at the S&P500 against all commodities (CRB Index) and extreme is the only word that can apply!
And market sentiment shows it very well.
Finally, four major indices that don't look as if they are about to crash.
Markets are always difficult to assess but true value always wins.
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The XGD is barely above the levels of 2003 and PERs and yields are now very attractive for this sector. Also the buybacks of so many Australian gold mines from the likes of Barrick and Newmont is actually giving domestic companies a more significant share of Australian gold production again.
The A$ 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 
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.
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.
More speculative plays are
I own DRM, NST,MLX, RSG, TBR, GOR, BLK, MML, TNR, TYX and PNR. STO, BHP, DFM, BPT.
Edition #43 
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.
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.
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
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$45m. My numbers say PER
Blackhams abridged 25km of strike along the Wiluna Structure
The ASX gold index closed on Friday at 2819 which is a 72% gain from the low in November 2014.
Some very important technical issues actions suggest much more is to come and that something very special is about to happen.
Long term 
My view has been that Disbelief was 2000-2011 and Pessimism was 2011-2014. We are now finally into that Optimism Leg that should last at least as long as Disbelief (~10 years (say)).
This next leg will be driven by earnings and dividends and then by production growth and then by the US$ Gold price.
So there you have it.
I called the low in ASX Gold Sector in
Source: Ipsos Report - Dongfang Modern Agriculture Holding Group Prospectus
China and India populations are also buying more gold and silver.
So who now owns the gold and who will be making the rules?
The demographics of the West are strongly influenced by the Baby Boomers who grew up in a rapidly changing world that was actually a slipstream sucking them in behind a World War II-depleted generation of cold-reality shaped stalwarts and but then the BBs also graduated into a generation of the Lyndon Johnson Great Society of publicly funded under-achievers.
The initial gains were spectacular but the aging hippies and their uninspiring Generation X progeny gave us all massive government spending, Budget Deficits and the Welfare State. And generations of reactionary bureaucrats.
For us unreconstructed Baby Boomers, the 1960s and 1970s were a time of revolution in thinking after the conservatism from the Great Depression of the 1930s and the upheaval of World War II in Europe and in the Pacific. The Depression said money was hard to come by and your savings were hard to hold on to and then WWII said that your life and personal safety, as well as savings, were hard to hold on to.
Lord Keynes in the1930s with his Deficit Spending backed up by some US attention seekers announced to the world that `Government’ knew better and it could invest OPM (Other People’s Money – yours, as the Taxpayer) better than the people who earned it, i.e., you and corporations you might have invested in.
The Revolutionaries of the 1960s and 70s are now the Reactionaries. And their children too. Governments and quangos and NGOs all wanting to tell you what to do and how to do it. Using your tax paid dollars of course. Groupthink and consensus overruling facts and natural evidence.
And calls for an inquiry on iron ore. For heavens’ sake. Dawes Points set out precisely in early May what was happening within the iron ore market. The expected short cover rally is now underway. How far will it run? The bureaucrats are wanting to be heard now but the horse has bolted. Yet another thought bubble.
But perhaps the people overall have their own special way of responding to the uncertainty . Building up cash deposits. It is truly fascinating how people everywhere have taken to building up savings. Inventory of Money. Conserved labour. Private Savings. (And in contrast, Public Profligacy). This Inventory of Money has come up often in these Dawes Points. As does flow of funds. These funds will need to flow!
Now with that flows of funds. Recall that we have gargantuan annual expenditures in USA (US$3tn), Europe (Euro 2tn) and here in Australia (~A$430bn(US$320bn) Federal Budget Expenditures) with deficits that add annually to the debt burden. Funded by bond sales. Government bonds now have higher yields than corporates!
Dawes Points has been talking about the bond markets for some time now but I hope you have noted what has happened in the major bond markets over the past couple of months? A volatile top and then carnage! The bank shares are following.
Just think about bond prices. The lower the coupon the higher the volatility. Doubling in yield. Halving in price? Well, not quite but horrible anyway. And much more pain to come.
Germany 10 years are now 0.88% after falling to below 0.05%! And the UK has blasted through 2.0% after seeing 1%.
This next one has to be one of the great technical graphics in my investing life! US 10 Year Treasury Notes by price. The peak in 2012. The break of the break of the uptrend in 2013. The rally in 2015 back to the trend break line for the `goodbye kiss’ then a sell off! A break through about 122 (but probably 125!) might just put the fear of God into the `safe haven’ believers. The falls this past month have been truly horrendous. No wonder banks stocks are weak. Keep watching this key indicator because it is not yet “oversold”!
US$85-90tn in useless overpriced global sovereign debt. And more coming every year. These graphics on US, German and UK bonds should be telling YOU something LOUD and CLEAR. Disinflation is over. The central banks want some inflation and I just think they are going to get it. Maybe bigger than they expect.
And what does Dawes Points think of rising bond yields?
Good news!! All time highs in equity markets! Almost everywhere but here in sleepy Oz. A nation of bureaucrats chasing bank shares.
Funds will be flowing out of these bonds (and bank shares) now. Where will they go? General equities of course, then resources shares. Then gold and commodities. Let’s just watch this play out.
The oil price as expected has decided that low is no use to anyone and China’s 5.4% pa June Half 2015 gain means another 0.5mmbbl per day consumption. The glut might just be over in the Dec Half and oil prices could be higher.
And while we were talking of the build up in bank deposit holdings we can also already see the build up in gold holdings. Certainly underway in China and India.
Do you go along with that rising interest rates will sink the global economy? Possibly that might happen, but the markets are telling you differently. The US$ may have a last gasp rally and the fraudsters on COMEX may try to hit gold and commodities again but it will be futile.
Recall the LME metals graphics in the last Dawes Points. Consumption growth rates that even surprised me with their strength. And no LME inventories. Thank goodness we are going into Northern Hemisphere Summer otherwise the commodities would be surging already.
Just come back to LME inventories. Other stocks do exist but LME stocks are a helpful indicator. The composite is at just one week and some of the individual metals are below. Copper, lead and tin are down to just one week and zinc is less than two and falling rapidly. Stocks of Nickel metal are at an all time high but this is disguising a major shortage developing in nickel-rich iron ores in China.
And China crude steel production is still confounding the doomsters. 838mtpa in April 2015. Up just marginally on 2014 and the second highest rate ever! Iron ore inventory movements will be so important to watch and will strongly influence iron ore prices. Expect a rally to US$80 by year end.
There is just so much more to come here. I hope you all have an understanding of the significance of the Chinese Silk Road Infrastructure programme and the Asian Infrastructure Investment Bank. No slowdown in China and acceleration in ASEAN and India.
You have seen how the probable iron ore short squeeze as suggested in the last Dawes Points is materialising. It might be one of the largest volume global markets but it is still a very thin market for traders.
The inventory shift highlighted there has seen China port inventories down over 25mt (~20%) to <85mt.
So the basic fundamental supply/demand data is overwhelmingly positive and a commentariat environment has been created that is overwhelmingly negative.
I am seeing dozens of small resources stocks attracting good volume and recovering stock prices. The opportunities are many. Companies with decent projects trading at a few % of their NPVs and are just awaiting funding. Producing companies trading a low single digit PERs. Explorers with some outstanding results. Technical geological and geophysical evidence is building up for the most extraordinary decade of new major discoveries in Australia in oil and gas, copper, lead-zinc-silver and gold.
The indefatigable Kerry Stevenson and her recent Symposium at Broken Hill has just delivered a focussed insight into the massive potential for new discoveries in central Australia. Knowledge and technology that begets new knowledge and then great wealth. The mining and exploration sectors provide some of Australia’s most dynamic Intellectual Property.
Hats off to the staff from the universities and Geological Surveys of NSW, Sth Australia and the Northern Territory. The base that is being laid out before us is truly exhilarating. Australian exploration will be having a vintage decade.
I hope I have the time to cover this in more detail in the next few months because the implications are vast.
So here is your chance to do very well on most resources companies.
I know dozens of these companies with outstanding operations and projects and there are scores more that I don’t. Many are already up 100s of % in 2015.
Most are too small to even fit within the ASX 300 sub indices but I am seeing improving volumes, increasing market breadth and the rising prices that go with them.
Participation by a broader section of the market place is still not with us, reflecting the fear and pessimism but this has been a very long period of bear market so it will take time to bring this back to normal. That means this bull market will last a very long time too!
Call me if you want to make some real money in the year ahead!
But now however, the evidence can be best seen in the actual performance of ASX the Small Resources and Gold Sector Indices.
Market share of ASX turnover is picking up and the four year-long downtrend declines have been broken. The momentum is now with the Resources Sector.
Have a close look at these graphics and I haven’t done them because they look colourful.
Each one suggests major changes are coming in the markets.
There is a downtrend trend break for the Metals and Mining.
Small Resources had its bottom in June 2013 which is my `low’ for this cycle and many stocks outside the XSR have done very well indeed.
The XGD is showing leadership after bottoming in November 2014.
Gold sector turnover is rising as breadth and participation increases. Appreciate that the ASX Gold index is still down 70 % from its high and is now turning up.
Certainly the weakness of the A$ in late 2014 helped kick the market and some people might have thought it was just an A$ gold adjustment that would soon peter out. Nice jump. Take profits. Now what?
Well it has held its ground and then moved marginally higher.
In my view, the XGD is readying itself for another major move up. Perhaps mirroring the bond markets that seem to be expecting an even bigger thump to come there. Timing suggests mid to late June so you may not have much more time to dilly dally.
This looks very interesting and a break above 2800 could see a sharp rush to 4400 (up 64% from here). Will we get it?
Looking at this index more closely there is much to like.
It is showing intra sector rotation as some stocks have weakened, some have moved sideways and some others have surged.
Dawes Points has its favourites. NST, MLX, TBR, BLK, SBM, OGC, NCM, EVN, BDR, MML, GOR, DRM and CGN.
XGD Gold stocks against A$ gold had fallen 80% from April 2011 to the Nov 2014 low! A$ gold at the low was the same as at peak in April 2011!!
Other sectors are moving up and the takeover of Sirius by Independence Group along with the consolidation in the gold sector should be giving everyone confidence.
And I do like the oil and gas sector. Oil is holding up well with strong demand from Asia and the US output is stabilising or falling.
The thesis in Dawes Points hasn’t changed these past two years even though some things have gone terribly wrong in the A$, the iron ore price, the oil price and…… oh yes, resources stocks themselves.
But the rest of the scenario of:-
Are these attractive enough for you now at A$1630?
PER 4.0x FY16 and 4.1x FY17 this universe? And yields of 10.0% and 15.0%.
And at a range of higher prices?
It is still 71% below that high. Cheap here.
And gold stocks have fallen against the A$ 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$1,660bn in bank deposits.
And just remember the ASX Gold Index history.
Well, did you get aboard? And do you have in your portfolio these producing stocks that will be big dividend payers in 2015 and beyond now that most sector capex is complete and debts are being paid down?
If not, 
Those large dividend blue chip gold companies should be making shareholders very wealthy over a very long time. Have you enough gold and gold shares?
I am going to come back to this concept in another Dawes Points very soon. The implications are extraordinary.
The 10 year bull market was saying something and something big was afoot. Many reasons. Currency, debt, inflation, wars and deficits. All contributed. Many more reasons out there too.
For me, the build up in public sector debts and the gyrations in currencies are my preferred reasons. Who can really trust politicians or their government bureaucracies and their welfare recipient supporters to protect a currency and the population’s wealth?
But then we had the extension of the 30 –year rally in the US T-Bond market that brought yields down even lower and bond prices into the sky. And a US$ that rallied hard.
Do keep in mind that the US$ Index is made up as follows:-
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.
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.
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.
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$80 should be an important level but Chinese steel mills inventory actions will have the final say by the end of the year.
While the US$ 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.
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$16m has already been reached and the offer has a closing date of 20 November.
A flyer on this will be circulated this week, but please call me on +612-9222-9111 if you'd like to discuss this.
5 November 2014
Gold in other currencies is also encouraging with Euro Gold close to E1000/oz. 
Gold in GBP has broken a downtrend.
Gold in Yen seems to be leading. Something is odd with Yen just now, could it be energy dependency? Or something else? I will come back to this later.
Gold in A$ 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:
Barry Dawes
8 September 2014
Disclosure: Barry Dawes holds GOR, NST, ATV, BLK. 