US$ Gold Price Finishing Consolidation #86

by Barry Dawes

Key Points

  • US$ Gold Price finishing two-month consolidation
  • North American Gold Stocks reflecting strengthening gold
  • A$ Gold Price resuming uptrend above A$1800
  • ASX Gold Index exhibiting key reversal character
  • Australian gold production achieves new record high of 331tpa
  • Australian gold exploration hits new high of annualised ~A$1bn
  • Dawes Points Dec 2014 Portfolio up 253% vs XGD up 220%
  • Australian resources exports reach A$280bnpa in Dec Qtr 2018

Call me to participate:
+61 2 9222 9111

After almost six years the US$ Gold price is still meandering in a roughly US$200 band between US$1180 and US$1350.  Each move toward US$1350 gets the market excited but we have seen about half a dozen false dawns in just the past three years.

The true ‘fundamentals’ on gold have always been unfathomable.  The bullish position on so many levels has been there for years and is so clear, but price response has been muted.  The Dawes Points simplified position of viewing of demand from Asia running down inventory in the West and likely to cause a short squeeze is wonderfully logical especially against the background of massive open positions on COMEX that are impossible to cover from registered COMEX stockpiles.  Currency volatility continues and sovereign bonds still seem absurdly overpriced. Inflation is rising in so many sectors and all the key indicators are positive, yet the meandering continues.

But something else seems to have just happened last Friday 26 April 2019.
The ASX XGD Gold Index jumped 2.15% with some of the leaders rising 3-4%.

On COMEX after a soft start US$ gold jumped ~US$9/oz in a constructive technical pattern that could give gold the power to push through US$1300 again and back up to retest US$1350. 

The breaking of the downtrends from the 2011 highs for gold and many other related assets has been highlighted here repeatedly because it is to me clearly signalling that the global change in trend is underway.

Reviewing the North American markets for gold and goldstocks is critical to an understanding of overall investor sentiment and the direction of capital flows in precious metals markets.  If it not happening there it won’t be happening here. 

Having said that of course, the ASX senior goldstocks have been the global market leaders but the smaller stocks are currently shunned and reflect the moods for many of their North American counterparts.

Moreover, the Australian market is far too small to be representative of global trends.   It is also clear that it is international funds not local funds involved in most activity in the ASX Gold Sector.

So, in the US it is the Philadelphia Gold Index ($XAU) that is the key gold index for the market place as it has the gold sector heavyweights like Barrick (GOLD) and Newmont (NEM).

As noted, we have been spoilt by the outstanding performances of the likes of NST, EVN, SBM, RRL and SAR in recent years but the XAU has still yet to break this important 2011 downtrend. 

In recent times, however, the market focus has passed from the XAU Index to the Van Eck GDX goldstock ETF as the market weathervane.

This HAS actually broken its downtrend and is very constructively supporting on its breakout line and now looks ready to move higher. 

As with the ASX gold stocks on Friday 26 April some North American gold stocks put on a 3-10% spurt.

Something is happening.

Rumours are suggesting a large central bank order is soaking up significant amounts of physical metal from the London market and from COMEX.

Might this be signs of the Dawes Points short cover rally we were talking about?

The US$ is gaining strength, particularly against the Euro (note the Euro might be heading for parity against the US$) but the US$ gold price is rising and the gold price in Euros is rising faster.

Gold in A$ has already broken out and is above A$1,820 again.
Positive price action of gold in many currencies shows the making of a true bull market in gold.

A bull market in ALL currencies.

From the Dawes Points perspective this constructive technical action across many markets should lead to the US$1350-70 resistance being tested and significantly exceeded in 2019.
The state of the Australian Gold Industry is excellent.

Recent Dept of Science and Industry data on Australian gold production showed a new quarterly annualised record of gold production at 331tpa.

At 331tpa Australia is the clear second largest producer of gold behind China.

Australia should see a new annual record of at least 325tonnes in 2019 and the is indeed a possibility of 350tpa within a couple of years.

Importantly, NSW (13% – mostly from Cadia and Cowal) and Victoria (5% – mostly from Fosterville) are beginning to show significant and growing shares of Australian output behind the leader WA (63%).

Expenditures on Gold Exploration are rising and the latest data giving Dec Qtr 2018 figures show an annualised rate of almost A$1000m and a very rapid and large recovery from the lows of 2014.  

Some Australian companies are highlighting new gold resource discovery costs of A$10/oz but even if the figures are A$50/oz this billion-dollar expenditure should add 20 million oz (~700t) of new gold resources per annum.

This could convert to an additional 1mozpa (30tonnes) of annual gold output each year within a couple of years through mine expansions or new mines.

350tpa doesn’t seem so far away.

At the same time China just might find that many of its multitude of small mines might not maintain output so China might quickly fall from its now sub 400tpa gold production to less than 350tpa.    
The MPS Gold Matrix of 19 important Australian producers gives total FY2019 gold production from these 19 of about 5.3moz, up about 10.5% on FY2018.  This is almost 90% Australia-only production.

This forecast to grow further so that the 2014-2021 CGR is 12%pa.

Newcrest and Kirkland Lake are not included, nor are the Australian operations of companies such as Barrick, Newmont and Goldfields.  (The 21 key companies here includes two about-to-be-completed mergers to become 19 in the Matrix)

Additional stocks will be added to this Matrix so it will be clear to see that Australian gold production is still on the rise.

The performance of the XGD has historically been very robust in its bull phases.

From 2000 to 2008 it was 585% over 8 years
From 2000 to 2011 it was 750%  
From the Nov 2014 low the XGD is up 243%

The technicals of the break in the 2011 downtrend, the backtest on that downtrend line and then the surge, are classic text books examples.

It should not be too long before the XGD makes new highs above the 2011 peaks.

Note that NCM currently makes up around 43% of the XGD so NCM will be a massive influence on the price level3 of the XGD.

Also, the big seven (NCM, EVN, NST, SBM, RRL, OGC and SAR) make up 90% of the XGD.

The ratio of the XGD against the A$ gold price has been an average of around 5x but this ratio is only just over 3x.

I think 5x might well be more appropriate.

That is a 66% rise in ASX Gold Index against the A$ gold price.

Coming soon.

This graphic below had shown mostly one-way traffic lower since the 2011 highs but the XGD did exceed 6,000 in March 2019 to make new six year highs.

This graphic should become very useful again once the old high of 8499 is exceeded.  We will be able to look for and recognise the 25% style pullbacks that we saw in the 2000-2008 stages of this bull market.


ASX Gold Sector

The ASX XGD is not a very useful index given that is has 21 stocks and 90% of its market cap is covered by just 7 stocks.

There are hundreds of other gold companies outside the ASX XGD and that index is simply not representative.

MPS has therefore set up its own index for 25 emerging gold producers where stocks have current production, are in mining development or have a reasonable expectation of being able to mine ore and produce gold within 5 years.  
Smaller stocks have significantly underperformed the XGD over the past 18-24 months.

It should be time for these smaller stocks to catch up with their bigger cap brothers.
In early December 2014 Dawes Points called the low in the ASX XGD Gold Index in that November of 2014.
In that 4 December issue of Dawes Points a portfolio of gold stocks was recommended.
The 17 stock portfolio has been published a number of times.

The key to the portfolio was to overemphasise size and liquidity but to also include smaller stocks that could provide deliver very high returns.

The portfolio has been published a few times but this is the first time the weekly performance can be seen over the past 4.5 years.

In these 4.5 years there has been no trading in the model portfolio.  Just the original stocks.  No adding or subtracting from holdings, no rights issue take ups or option exercise. Dividends are banked and no interest is derived from cash at bank.
Over the 53 months the portfolio returned 253% at current market prices.
The XGD was up 220% whilst the XGDAI Accumulation Index was up 208%.
The Dawes Points diverse portfolio provided the best result even though some of the smaller stocks had appalling performances.

The current moment of confluence of technical price indications is suggesting that the current market mood maybe leading to a significant low in prices for the Gold Sector assets.
Accordingly Dawes Points has suggested another 20 stock portfolio to participate in the market for the next three to five years.

Let’s see how this portfolio runs.
I will tell you the stock codes in a couple of months.
You will probably be able to work out the bigger stocks but some of the smaller ones might keep you guessing.
And as a parting comment, just look at the results of the 2012-14 Resources Boom.
Total Resources Sector Commodity exports in Dec Qtr 2019 hit A$280bnpa   Almost 70% of this came from just iron ore, coal and LNG.

The gains are coming from price and volumes.

The gain in total Resources export revenues since Dec Qtr 2017 was 23% up on that pcp.  Prices are even higher in Mar and June Qtrs 2019. 

It is hard to see a weaker A$ with a rising US$ gold price and such strong revenue growth.
The iron ore market is continuing to show the strength recognised here almost three years ago and there will be new highs in iron ore prices.

Oil is still tight and LNG prices will continue to reflect oil prices and not US domestic gas prices.

It will not be just gold that is to rise.

Call me to participate.

Barry Dawes BSc F AusIMM (CP) MSAFAA

Executive Chairman
Martin Place Securities

I own many of the stocks mentioned in this report.

+61 2 9222 9111

28 April 2019