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In this issue: Asian demand for gold is still determining gold price, while the US$ gold testing 2011 downtrend, and the latest Martin Place Securities (MPS) portfolio and gold sector universe. Read this latest Dawes Points to better understand investing in the resources sector.
Key Points
- Asian demand for gold still determining gold price
- US$ gold testing 2011 downtrend
- US Fed Funds Rate Hike is not negative for gold
- Global bond markets weakening again
- Block chain cryptocurrency boom is probably leading gold and commodities
- ASX Gold stocks now very attractive
- 1 July 2017 Gold Stock Portfolio prepared
- MPS Senior gold stock universe PER 8.4x FY2018 EPS (excl NCM)
- Emerging gold sector universe PER 2.5x FY2020 EPS
Preferred Stocks
- Evolution Mining Ltd ( ASX:EVN)
- Newcrest Mining Limited (ASX:NCM)
- Northern Star Resources Ltd (ASX:NST)
- OceanaGold Corporation (ASX:OGC)
- Westgold Resources Ltd (ASX:WGX)
- Tribune Resources Ltd (ASX:TBR)
- Cardinal Resources Ltd (ASX:CDV)
- Eastern Goldfields Ltd (ASX:EGS)
- Gold Road Resources Ltd (ASX:GOR)
- St Barbara Ltd (ASX:SBM)
- Beadell Resources Ltd (ASX:BDR)
- Blackham Resources Ltd (ASX:BLK)
- Perseus Mining Limited (ASX:PRU)
- Resolute Mining Limited (ASX:RSG)
- Catalyst Metals Ltd (ASX:CYL)
- Engenco Ltd (ASX:EGN)
- Explaurum Ltd (ASX:EXU)
- Kin Mining NL (ASX:KIN)
- Pantoro Ltd (ASX:PNR)
- Stonewall FPO (ASX:SWJ)
- Tyranna Resources Ltd (ASX:TYX)
- WPG Resources Ltd (ASX:WPG)
The last three Dawes Points (#63-65) have reinforced a view that US$ gold prices are heading higher in the next major upleg in this powerful Bull Market. The pathway has been volatile, difficult and indeed, more recently, quite mean but the underlying longer term forces are strong and the bulls will prevail.
The pressure now on the six year downtrend from the US$1923 high in Sept 2011 is really building after the last rally to US$1292 and recent history shows US$ gold prices have headed higher after Fed Funds Rate hikes. The continually improving US economy will add to gold demand so be wary of the thought of higher interest rates would send gold lower. Seasonal gold demand suggests a better outlook in the Dec half and gold futures short covering is taking place. The projected short squeeze in gold cannot be far away now.
Asian demand has been robust reflecting rising living standards in China, India and ASEAN whilst MENA and now Africa are also adding to demand. Changing fiscal terms in India together with better monsoon crops should now reignite gold imports after a short hiatus in this extremely important market. This Asian demand is absorbing Western gold inventory and all gold mine production and more.
The strength of Asian equity markets has been notable for a few years now and even more so with the recent breakouts by some of the laggards. This strength is a reflection of the underlying economies with China remaining robust, ASEAN continuing to power ahead and India now accelerating under the reforms being instituted by Prime Minister Modi. Rising equity markets imply rising economic wealth and this is transformed into increasing demand for gold.
This Morgan Stanley Institutional Emerging Markets Portfolio graphic is a good proxy for Asian markets and is just starting to break out upwards. No bear market here!
This expansion of the global bull market in equities is continuing everywhere and is confirming the unfolding Dawes Points Global Economic Boom that will pressure gold to the upside. Easy money conditions, expanding global economic growth, rising property prices and the global bull market in equities are not conducive to sudden economic collapses. Record consumption levels in resources commodities against rising capacity utilisation rates and NO inventory can only mean a one way long term price move for these raw materials. And it won’t be down.
Improving labour markets and low unemployment in the US are likely to bring about inflationary pressures after many years of dormancy so gold might soon become more attractive to Western investors again.
Global bond markets are recognising these shifts in economic activity and are showing renewed weakness as capital moves out of defensive positions and into the equity markets which are making new highs.
The important 10 year US T Note has already broken down from its 2012 high and has recently had another sharp fall.
The 30 year Treasury Bond had an extreme overbought run into the `negative‘ interest rate scare in 2016 that surely ended 33 years of bull market and is now vulnerable to further falls.
The three other important bond markets we follow - Japan, UK and Germany - have also had sharp rises in yields which implies sharp falls in bond prices in the past few months. Some long term (>10 years) down trends have been broken. That low interest rate party game is now OVER.
The emergence of the block chain cryptocurrencies is fascinating and represents a move away from the disgraceful performances of the current political and bureaucratic classes and their engagement with debt and deficits in fiat currencies. Enforced unnaturally low interest rates are a stealth tax and in several years time many bonds will probably be worthless. The availability to governments worldwide of ultra low cost cash as debt won’t last much longer. Failure to attend to these endless deficits and rising sovereign debt can only end unhappily for bond holders throughout the world. Was ever thus.
The emergence of these crypto currencies in ecommerce and in transaction platforms, especially in emerging countries, is a new class of players signalling a requirement of `hard money’ beyond the control (for now) of expanding government controls. The mania currently underway could well be considered a leading indicator for gold and commodities. A view on these instruments will be presented soon because they are becoming a new asset class and they might be only just starting. No advice here yet but we all ignore them at our own peril.
Concerns over further Fed Funds Rate hikes being bearish for gold simply do not bear true against the empirical evidence which clearly shows US$ gold prices have often actually headed higher.
This graphic encapsulates the rates rises and gold price gains but also shows the testing of the 2011 downtrend and the `Good Bye Kiss’ on the 2013 downtrend. A break upwards through US$1300 could well be very strong.
This US$ Gold Price Seasonal Graphic highlights the weakness shown over the past 30 years into June ahead of stronger prices in the December Half. The average is only around 4% so from US$1210 that is only about US$50 but the stakes are much higher in 2017 than most of the past 17 years of the bull market from 2000. Mid year weakness highlighted.
Source: Dimitri Speck
This longer term chart shows the significance of the 2011 downtrend. Three times hit. The fourth test often gives the break through.
This graphic shows major support for gold in this US$200 trading channel of the past four years between US$1100 and US$1300. These types of consolidation patterns often result in subsequent strong price moves.
Whilst the action is in gold, and in silver and platinum these white metals are still probing for price bottoming, one precious metal is very firm and may be providing a future direction for all the precious metals. Palladium is primarily a from Russia supply story ( ~40% of mine production and up to 60% of supply) and a switch away from diesel engines (that use platinum for exhaust catalysts) to petrol (uses palladium).
North American gold stocks are also suggesting the extreme volatility of the past 18 months may now be at last ready for resolution in the compressive wedging. An upward break out would be powerful from this pattern.
Gold stocks against gold bullion have had a rough time for twenty years but a change is underway.
The bullish case is even more encouraged by the very poor sentiment towards gold stocks that is apparent in Nth America.
On ASX the turnover in XGD is seasonally softer but market share is holding around 4%.
But valuations are still in the lower levels of the past 15 years.
The lack of interest and the poor sentiment of the past few months are reminiscent of the June Half of 2003. Low market interest in the June Qtr was shaken off by a very robust gain over 2003/04.
Look at these numbers below and the remarkable periods of gain and loss.
And the remarkable levels of gains and loss. What a coincidence!
ASX XGD performances over the two initial periods of each leg of the current bull market in gold.
*Commencement of ASX Gold Index
(Do note that the ASX XGD was only started in August 2000 so these numbers aren’t quite as meaningful although the Nth American XAU did make its bear market bottom about this same time in 2000.)
Here is the graphic with the 2014-2017 rebased to 1000. Remarkable similarities!
So after 22 months of uptrend there was 10 mths of correction in each case.
Where to next? Much higher I expect.
The performance of gold stocks over the past year has certainly been volatile so this table below is very helpful on relative performance and relative strength of a range of selected stocks.
Pleasingly many of the MPS preferred stocks (CDV, NST, TBR, SBM in the seniors and SWJ, PNR, CYL in the smaller stocks) have been good performers but some of our others have been awful.
Relative strength in soft markets is a good sign for a stock but some real bargains exist amongst the poorest performers as value is created.
MPS has coverage of 69 gold stocks so far (there will be many more to come) to allow proper relative assessment of the sector and provide the best overall opportunities for investment.
The MPS Universe of 20 senior ASX gold stocks (excluding Newcrest ASX.NCM) has the following attributes using the current A$ gold price of A$1596/oz:
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FY16
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FY 17
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FY18
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FY19
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FY20
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FY 17
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FY18
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FY19
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FY20
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Gold output (koz)
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3845
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4559
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5225
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5574
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5855
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+19
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+15
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+7
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+5
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Revenue (A$m)
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6474
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7367
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8443
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9007
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9461
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+14
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+15
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+7
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+5
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Earnings
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1114
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1575
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1912
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2064
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2175
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+41
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+21
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+8
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+5
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PER
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8.4
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7.7
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7.3
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The MPS Universe of 49 emerging ASX gold stocks has the following pre-capital funding figures using the current A$ gold price of A$1596/oz:
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FY16
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FY 17
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FY18
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FY19
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FY20
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FY 17
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FY18
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FY19
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FY20
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Gold output (koz)
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524
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532
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9058
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1883
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2719
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+70
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+108
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+44
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Revenue (A$m)
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575
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860
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1462
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2946
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4265
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+70
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+102
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+45
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Earnings
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-451
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305
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311
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683
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982
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+2
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+119
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+44
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PER
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4.6
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3.0
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2.5
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As pointed out in previous Dawes Points #61-63 the growth in output from these emerging companies has historically provided a major boost to Australian gold production and during the 1985-1997 gold production boom typically exceeded the most optimistic production forecasts.
It is apparent that once the US$ gold price resumes its upswing the gains in this Australian gold sector will be spectacular. The move from late 1985 to April 1987 was a 1,000% increase in the ASX gold index of the time and it provides a good road map for the probable direction of the ASX Gold Sector over the next couple of years.
Dawes Points Gold Portfolio
At times that are considered important turning points in the gold sector Dawes Points has prepared a static portfolio to provide investors with a bench mark on how to play these types of bull markets.
The portfolio approach provides liquidity if required, dividends from the major stocks and the prospects of strong growth from modest exposures in smaller, riskier stocks.
The two previous portfolios, from the important November 2014 low and the pullback into Jan 2016, have done well:-
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Portfolio performance
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XGD performance
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Difference
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1 Dec 2014
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+191%
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+155%
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+36%
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1 Jan 2016
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+69.1
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+65.8
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+3.3%
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Dawes Points now provides a gold portfolio from these 69 stocks covered in the its universe with
- 5 Major stocks for 50% of the portfolio
- 5 Mid size stocks for 24% of the portfolio
- 12 Junior stocks spread for risk with 26% of the portfolio
The 1 July 2017 Portfolio has 22 stocks
Let’s see what is in store for us now.
Contact me to participate.
Barry Dawes BSc F AusIMM MSAFAA
+61-2-9222-9111
bdawes@mpsecurities.com.au
Dawes Points #66
13 July 2017
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Martin Place Securities is Australia's Boutique Resources Investment Firm, specialising in emerging mining, resources and energy companies.
