Gold – Is This An Important Low #59

December 6, 2016 | Dawes Points |

Key Points

  • Market sentiment at abysmal lows
  • Rising bond yields increase gold attraction
  • Gold’s major drivers still intact
  • Rising gold production in Australia boosting earnings
  • New 19 stock portfolio established (Dec 2014 Portfolio is still up 161%)

The long term bull market in gold is in my view, still in its infancy and the path ahead is long and obvious even if the roadway has twists and turns.  Bull market action generates targets in the distance for true believers to aim for but nothing goes straight up forever and corrections are to be expected. The time scales on market moves are always difficult to assess but the 32 week US$300 rise from US$1073 has almost been matched by the 20 week US$210 pull back.

The bull market has been underway now for almost 17 years and the 2011 peak (after 11 years rising) is now 5 years behind us.  The market character is suggesting we still have at least 15 years to go and probably 25 so don’t lose the plot and get shaken out by short term moves.

The drivers are still the relentlessly growing demand from Asia’s 3300m people and the vast balloon of debt the welfare states of the West have inflated with deficits and Quantitative Easing policies. Whilst the large bank note confiscation in India is a negative, it is clear that gold demand can only increase so none of these drivers are likely to go away anytime soon and it is highly likely that inflation will be seen to be flowing in 2017.

So don’t get despondent on gold when it has made just a 15% pullback that is about 60% of the recent 2016 gain.

This graphic shows that US$1170-80 is a very important technical support/resistance over the past 6 years so we should expect at least a bounce and very possibly this level providing the final pull back low before the next upleg.

My preferred view is that we are completing the five month Wave 2 of this leg after Wave 1 took us from US$1050 to US$1380 in eight months.

The sentiment gauges are very intriguing.  Wave 1 is Disbelief and Wave 2 is Pessimism.

This gauge is certainly Pessimistic and at a level similar to December 2014.

This was shown in Dawes Points #56 and whilst I do not know the actual mechanics of this sentiment indicator it certainly is showing a misery level of gold expectations.

Ideal for a major low.

What will drive a sharp rally from here?  Can’t tell just yet but do keep in mind that short cover rallies almost always provide the impetus and the big players recently covered short positions after picking $170 down from the Trump rally US$1340.

Maybe the Italian referendum result will play a large role.  It is difficult to get a proper view on this but it is likely to be negative for the Euro.  Note that gold and the US$ rose in tandem in the June Half of this year.

Inflationary pressures are building and the renewed strength in oil may be the driver for an upmove in the CRB Index.

Oil is looking better here after the OPEC November meeting decision to restrain oil output.

The long term for gold stocks appears robust.

This graphic from Barons gives the 75 year uptrend from where we had an excellent bounce and now the pull back is on to the 1980 downtrend line.

The US$ gold price is back into support around US$1170-80 and this view below looks a reasonable point for a reversal.

In A$ the 17 Year uptrend is still firmly in place and suggesting accumulation.  It is off a bit from the highs but is still around the six year average of A$1560.

The ASX XGD Gold Index is seems to be back to support as well at around 3800.

The gold price is at a good level and likely to be moving higher soon but of greater significance is the operating progress made by the MPS Universe of 30 important gold stocks over the past few years and the likely outcome of the next few years.

Gold production for this universe is forecast to rise 87% above the levels of FY2014 and provide considerable earnings growth based on today’s A$ gold price.  Earnings will follow as will dividends.

 MPS Gold Producer Universe

 

June Year

2014A

2015A

2016A

2017E

2018E

Gold  koz

2858

3207

4123

4843

5349

Index (FY2014=100)

100

112

144

169

187

Net Earnings A$m

-814

-448

1043

2107

2254

As pointed out previously I have another 30 or so emerging companies that will be joining this universe of producers in an expanded version in 2017.

The Gold Sector became `mainstream’ again in 2016 as the XGD regained its 4-6% XAO market share of turnover.   Institutional investors have re-entered the market and November 2016 XGD monthly turnover was almost as high as the A$6.3bn in July 2016 when US$ gold peaked. This is encouraging.

I have selected another December Portfolio 2016 and it will be interesting to see how its performs against the Dec 2014 Gold Stock Portfolio that is up 163% over the past 24 months (vs the XGD up 128%) and peaking in July 2016 at +293%.

The new portfolio has 12 stocks that are in the XGD with 7 outside.

Barry Dawes 
BSc FAusIMM MSAA

4 December 2016

# 59

I own or control holdings of most of these stocks in portfolios.

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