But Dan Denning in The Daily Reckoning Australia sees two threats on the horizon that could derail Australia’s commodities boom. One possibility is that Australia’s boom will end where America’s depression begins. The other, more likely, scenario is an inflationary melt up.

The extent of the boom was underlined yesterday by an Australian government report predicting export earnings from commodities would rise a whopping 40% $201bn in the financial year to June 2009, led by a 48% surge in mineral exports to A$178bn — the biggest rise in four decades. This from the Financial Times:

If these figures are achieved, commodity exports will have more than doubled in value terms since 2003-04 when the current commodity supercycle started.

The forecast, in Abare’s quarterly review, is 10 percentage points higher than its prediction issued just three months ago and comes in spite of the continuing strength of the Australian dollar and weakness in the US economy. It highlights the breadth of the global commodities boom.

While the sharp rises in oil and food prices are firmly on the global agenda, Abare predicted that world prices for metallurgical coal would be three times higher in 2008-09 compared with this year.

The Future of the Australian Resource Market, Two Ways the Boom Could End

By Dan Denning

Australia is about the luckiest country on the planet when it comes to the resource boom. Gold to India. Coal to Korea and Japan. Iron ore to China. And windfall earnings for the Australians involved in digging up pieces of this country and shipping it off overseas.

Yesterday we mentioned the big increase in the value of Aussie exports announced by the Australian Bureau of Agricultural and Resource Economics (ABARE). But let’s take a look at the glorious details, shall we?

In total, ABARE reckons that minerals, metals, and agricultural exports will grow by $61 billion in the next year. The total export haul for the fat of this lucky land is $212.3 billion. Energy earnings will grow by 81%. Minerals and energy earnings combined will be up 48%.

Even that figure might be low, depending on the contract price for iron ore. That price, as you know, has still not been set (although Rio Tinto (ASX: RIO) seems to have reached an agreement with Baosteel…more on that below). BHP Billiton (ASX: BHP) and Rio drew their line in the red dirt of the Pilbara. They want at least an 85% increase over last year’s price. It looks like they may get it, and then some.

Iron ore isn’t even the biggest contributor to the Australian resource market. That distinction belongs to coking coal (sometimes referred to as metallurgical coal). The world’s steel boom (steel prices are soaring, along with all those new skyscrapers in China and the Middle East) is fuelling the demand for the high quality black coal from Queensland’s Bowen Basin.

ABARE estimates that the country will export $39.1 billion in coking coal in the next fiscal year. Let’s call it $40 billion. That’s a 123% increase in the value of the exports over last year.

But keep in mind the chronic infrastructure bottlenecks along the Eastern Coast mean that the volume of coal exports will only increase by 7%. The big kicker is the 206% increase in coal prices earlier this year. You can make up on price what you lose on volume. Oh to be lucky.

Iron ore will deliver nearly $36 billion into the coffers of the ore titans of the Pilbara (and some of the minnows too). Today’s Financial Review reports that Rio Tinto has secured an 85% rise in next year’s iron ore contract price. The agreement was reached with China’s Baosteel, China’s representative during eight months of entertaining and sometimes cranky negotiations.

Thermal coal-the kind you burn to generate electricity-will deliver $15.9 billion in exports, mainly on the back of a 74% increase in thermal coal prices. And thanks to the soaring oil price, Australian crude exports will generate around $15.3 billion. That should benefit Woodside Petroleum (ASX: WPL) and BHP.

Good news for Aussie gold production, too. It’s headed up after declining the year before. The rising gold price will account for most of the 14% increase in gold export earnings. But if the gold price moves higher in the next 12 months-a whole other story about money and the dollar-some new Aussie projects should benefit.

AngloGold Ashanti (NYSE: AU) and Independence Group (ASX: IGO) are set to bring their Tropicana joint venture on line by 2010. It’s considered one of the biggest gold finds in Western Australia in the last ten years. In 2009, Newmont and AngloGold will begin production at the Boddington mine expansion.

If it all seems too good to be true, well maybe it’s worth wondering what could derail the Australian resource market. What could derail the biggest export boom in Australian history? There are two answers. But only one of them can be right.

One answer is that Australia’s boom ends when America’s depression begins. This argument is based on America’s economic situation getting much, much worse as the housing bust deepens. In this argument, Australia is the first link in the global chain of consumer demand. The middle link is Chinese manufacturing, which turns Australian raw materials into finished goods. The final link is the American consumer, who buys what China builds.

If the final link is broken – if the American consumer is on the edge of his own private bear market – then eventually it will work its way back to Chinese demand for Aussie resources. No final demand, no initial demand. Bust goes the boom.

The reason this argument is bogus, in our humble opinion, is that it overstates the role of American consumption in the future demand for Australian resources. A thorough (and slightly mind-numbing) survey of the ABARE export data show that Korea, Japan, and other Asian countries are also big consumers of Aussie resources.

These are all large, developed, industrialised (or industrialising) economies. They all export to America. But they will not go in the tank of America slows down.

And in any event, if you want to know what we really think, we think the world is witnessing a slow realignment. The entire global model has favoured American consumers. Entire nations designed their economy to produce cheap things for Americans to buy. America had the world’s reserve currency. And American stocks, bonds, and real estate were considered the most attractive and safest on the planet.

All that is slowly, inexorably, but undeniably changing. By sheer weight of numbers, the markets of Asia are bigger. On a purchasing power basis, they are getting stronger year-by-year. Per capita incomes are rising. Savings rates are higher. And capital investment by the business sector sows the seeds for future income growth.

With higher incomes, Eastern consumers will drive global tastes. Producers will cater to what kind of hand bag middle class housewives in Shanghai want (hint: it will probably still be Yves St. Laurent). Maybe General Motors will become a Red Chip. China’s boom could end up swallowing a lot of global brands, or producing new ones.

That brings us to the second and more likely of the risks to Australia’s boom: an inflationary melt up. All economic cycles end with rising prices. Already we see high food and energy prices causing economic and political problems all over the world.

The real risk to Australia’s boom is that soaring energy and food prices slam the brakes on Asia’s emergence as the world’s economic engine. Growth can be awkward and destabilising too. Just watch a bunch of teenagers at the high school prom and you’ll see what we mean.

Taking 3 billion people from subsistence incomes to even a modest level of surplus in just a few generations is no easy task. It causes massive social and economic change. That change can be destabilizing. Food riots. Fuel riots. Or just riots because you have millions of young men with no jobs and no wives.

But in the big picture, it’s hard to see the role of the Australian resource market in Asia’s emergence changing or diminishing. If resource prices go too high, commodity consumers will look for cheaper substitutes. Is that a threat to Queensland’s coal and the Pilbara’s iron ore?

Even when substitution is desirable, it’s not always possible. For example, China played its own iron ore card in the last eight months. It claimed that it could feed local steel mills with local iron ore. And in terms of total production, the Chinese iron ore industry is a lot more formidable than just five years ago.

The trouble is, China’s ore industry is fragmented into dozens of smaller producers. And China’s iron ore grades are generally much lower that what Australia is endowed with in the Pilbara. BHP and Rio have enormous economies of scale on their side. There’s lot’s of high grade ore in one place. That makes it easy to produce in the volumes required by China’s steel industry. That is also why, though rocky, the marriage of Aussie ore and Chinese steel will probably be a long one.

As with ore, so with other things. There’s lots of high grade everything in this place, come to think of it. Copper, gold, LNG, lithium, tantalum, coal, molybdenum, bauxite, rare earth elements…the list is very long. If Australia ever developed the capacity to build finished goods, it would be a formidable manufacturing giant.

The labour dynamics of globalisation have set the country on a different but lucrative course. It will provide resources for the foreseeable future. For investors, it’s great news.

While the indexes (and mostly the banks) will be dragged down or sideways by ongoing credit worries, the fundamental demand for Australia’s minerals, energy, and farm products doesn’t look like it’s going to get much weaker any time soon. With earnings set to rise, the Australian resource market is a stock picker’s delight.

Dan Denning
The Daily Reckoning Australia

Source: The Future of the Australian Resource Market, Two Ways the Boom Could End

–Gold to India. Coal to Korea and Japan. Iron ore to China. And windfall earnings for the Australians involved in digging up pieces of this country and shipping it off overseas. That’s the short version of what we learned late yesterday.

–The longer version is impressive, too. Yesterday we mentioned the big increase in the value of Aussie exports announced by ABARE. But let’s take a look at the glorious details, shall we?

–In total, ABARE reckons that minerals, metals, and agricultural exports will grow by $61 billion in the next year. The total export haul for the fat of this lucky land is $212.3 billion. Energy earnings will grow by 81%. Minerals and energy earnings combined will be up 48%.

–Even that figure might be low, depending on the contract price for iron ore. That price, as you know, has still not been set (although Rio Tinto (ASX: RIO) seems to have reached an agreement with Baosteel…more on that below). BHP Billiton (ASX: BHP) and Rio drew their line in the red dirt of the Pilbara. They want at least an 85% increase over last year’s price. It looks like they may get it, and then some.

–Iron ore isn’t even the biggest contributor to the nation’s resource treasure chest. That distinction belongs to coking coal (sometimes referred to as metallurgical coal). The world’s steel boom (steel prices are soaring, along with all those new skyscrapers in China and the Middle East) is fuelling the demand for the high quality black coal from Queensland’s Bowen Basin.

–ABARE reckons that the country will export $39.1 billion in coking coal in the next fiscal year. Let’s call it $40 billion. That’s a 123% increase in the value of the exports over last year.

–But keep in mind the chronic infrastructure bottlenecks along the Eastern Coast mean that the volume of coal exports will only increase by 7%. The big kicker is the 206% increase in coal prices earlier this year. You can make up on price what you lose on volume. Oh to be lucky.

–Iron ore will deliver nearly $36 billion into the coffers of the ore titans of the Pilbara (and some of the minnows too). Today’s Financial Review reports that Rio Tinto has secured an 85% rise in next year’s iron ore contract price. The agreement was reached with China’s Baosteel, China’s representative during eight months of entertaining and sometimes cranky negotiations.

–Thermal coal-the kind you burn to generate electricity-will deliver $15.9 billion in exports, mainly on the back of a 74% increase in thermal coal prices. And thanks to the soaring oil price, Australian crude exports will generate around $15.3 billion. That should benefit Woodside Petroleum (ASX: WPL) and BHP.

–Good news for Aussie gold production, too. It’s headed up after declining the year before. The rising gold price will account for most of the 14% increase in gold export earnings. But if the gold price moves higher in the next 12 months-a whole other story about money and the dollar-some new Aussie projects should benefit.

–AngloGold Ashanti (NYSE: AU) and Independence Group (ASX: IGO) are set to bring their Tropicana joint venture on line by 2010. It’s considered one of the biggest gold finds in Western Australia in the last ten years. In 2009, Newmont and AngloGold will begin production at the Boddington mine expansion.

–If it all seems too good to be true, well maybe it’s worth wondering what could derail the resource express. What could derail the biggest export boom in Australian history? There are two answers. But only one of them can be right.

–One answer is that Australia’s boom ends when America’s depression begins. This argument is based on America’s economic situation getting much, much worse as the housing bust deepens. In this argument, Australia is the first link in the global chain of consumer demand. The middle link is Chinese manufacturing, which turns Australian raw materials into finished goods. The final link is the American consumer, who buys what China builds.

–If the final link is broken-if the American consumer is on the edge of his own private bear market-then eventually it will work its way back to Chinese demand for Aussie resources. No final demand, no initial demand. Bust goes the boom.

–The reason this argument is bogus, in our humble opinion, is that it overstates the role of American consumption in the future demand for Australian resources. A thorough (and slightly mind-numbing) survey of the ABARE export data show that Korea, Japan, and other Asian countries are also big consumers of Aussie resources.

–These are all large, developed, industrialised (or industrializing) economies. They all export to America. But they will not go in the tank of America slows down.

–And in any event, if you want to know what we really think, we think the world is witnessing a slow realignment. The entire global model has favoured American consumers. Entire nations designed their economy to produce cheap things for Americans to buy. America had the world’s reserve currency. And American stocks, bonds, and real estate were considered the most attractive and safest on the planet.

–All that is slowly, inexorably, but undeniably changing. By sheer weight of numbers, the markets of Asia are bigger. On a purchasing power basis, they are getting stronger year-by-year. Per capita incomes are rising. Savings rates are higher. And capital investment by the business sector sows the seeds for future income growth.

–With higher incomes, Eastern consumers will drive global tastes. Producers will cater to what kind of hand bag middle class housewives in Shanghai want (hint: it will probably still be Yves St. Laurent). Maybe General Motors will become a Red Chip. China’s boom could end up swallowing a lot of global brands, or producing new ones.

–That brings us to the second and more likely of the risks to Australia’s boom: an inflationary melt up. All economic cycles end with rising prices. Already we see high food and energy prices causing economic and political problems all over the world.

–The real risk to Australia’s boom is that soaring energy and food prices slam the brakes on Asia’s emergence as the world’s economic engine. Growth can be awkward and destabilizing too. Just watch a bunch of teenagers at the high school prom and you’ll see what we mean.

–Taking 3 billion people from subsistence incomes to even a modest level of surplus in just a few generations is no easy task. It causes massive social and economic change. That change can be destabilizing. Food riots. Fuel riots. Or just riots because you have millions of young men with no jobs and no wives.

–But in the big picture, it’s hard to see the role of Australia in Asia’s emergence changing or diminishing. If resource prices go too high, commodity consumers will look for cheaper substitutes. Is that a threat to Queensland’s coal and the Pilbara’s iron ore?

–Even when substitution is desirable, it’s not always possible. For example, China played its own iron ore card in the last eight months. It claimed that it could feed local steel mills with local iron ore. And in terms of total production, the Chinese iron ore industry is a lot more formidable than just five years ago.

–The trouble is, China’s ore industry is fragmented into dozens of smaller producers. And China’s iron ore grades are generally much lower that what Australia is endowed with in the Pilbara. BHP and Rio have enormous economies of scale on their side. There’s lot’s of high grade ore in one place. That makes it easy to produce in the volumes required by China’s steel industry. That is also why, though rocky, the marriage of Aussie ore and Chinese steel will probably be a long one.

–As with ore, so with other things. There’s lots of high grade everything in this place, come to think of it. Copper, gold, LNG, lithium, tantalum, coal, molybdenum, bauxite, rare earth elements…the list is very long. If Australia ever developed the capacity to build finished goods, it would be a formidable manufacturing giant.

–The labour dynamics of globalisation have set the country on a different but lucrative course. It will provide resources for the foreseeable future. For investors, it’s great news.

–While the indexes (and mostly the banks) will be dragged down or sideways by ongoing credit worries, the fundamental demand for Australia’s minerals, energy, and farm products doesn’t look like it’s going to get much weaker any time soon. With earnings set to rise, this market is a stock picker’s delight.

Source: Stock Markets in Flight 

Global consumption is growing almost twice as fast as for oil, it is the cleanest-burning of the fossil fuels, and it is comparatively cheap: it currently trades at about half the cost of crude oil on an energy-equivalent basis.

In an energy-hungry world, it’s therefore not surprising that there’s now a mad scramble to procure long-term supplies and bring them to market.

Let’s take a look at some of the current major developments…

Pipelines. Russia, which has the world’s biggest reserves of natural gas, is building a direct link to Germany beneath the Baltic Sea, and planning others to China and Italy. These are enormous undertakings. The 3,000km Italian link, for example, is expected to cost $15bn.

Elsewhere, the ConocoPhillips-BP pipeline to bring North Slope gas from Alaska to Canada’s oil sands industry and the lower 48 US states will be the largest private-sector construction project in North America. And the pipeline China is building from Turkmenistan in Central Asia to Shanghai will stretch for 9,000 kms.

Liquefaction. An alternative means of moving gas is to liquefy it by freezing, ship the liquids across oceans, then turn it back into gas. The technology is not new, but LNG (Liquified Natural Gas) facilities are hugely expensive. For years this limited its transportation to countries not accessible by pipeline, mainly Japan.

But high energy prices have now made LNG viable on a large scale. And there are other advantages. European nations, for example, nervous about their increasing dependence on Russian gas, are looking to alternative sources such as North Africa, using LNG. China signed a $60bn deal with Qatar last month to buy three million tons of LNG a year over 25 years from 2011.

With its volumes growing 7% a year, LNG is the fastest growing of the fossil-fuel industries. Because of the massive investments required, it is dominated by a handful of very large multinationals.

New Reserves. Oil majors are boosting efforts to find and tap hydrocarbon deposits that are primarily gas, with oil as a side-product.

The newly-discovered Sugar Loaf field under the Atlantic off Brazil, claimed to be one of the world’s biggest, is primarily a natural gas resource. The Shtokman development in the Barents Sea off Russia’s Arctic coast, and several projects off the coast of north-west Australia, focus on production of gas, not oil.

There is also increasing interest in exploiting hard-rock resources that have been neglected in the past because it’s difficult to tap their gas. On the western slopes of the US Rockies, Exxon Mobil is starting to employ an explosive fracturing technique three times more effective than conventional technology to unlock the riches of the Piceance Basin.

Coal-bed Methane. The “fire-damp” found in coal deposits – the curse of miners throughout the ages – is almost pure methane and an excellent substitute for natural gas, which is about three-quarters methane. It may be recovered from worked-out collieries or from coal deposits left unexploited because they are so gassy they are too dangerous to mine, and already accounts for a tenth of natural gas production in the US.

BG Group, the global specialist in the discovery, extraction and supply of natural gas, plans to build the world’s first plant to produce LNG from coal-bed methane piped 400km from fields in the interior of Queensland, Australia.

Liquid fuels. Although currently used as gas to fuel central heating, industrial furnaces and power stations, natural gas can be converted into liquid fuels. In Qatar, which has the world’s third largest gas reserves, they’re building plants to do just that.

Worldwide demand for natural gas has been growing at an average rate of nearly 3% a year, compared to oil’s 1.7%. China’s gas consumption is forecast to triple over the next 12 years, India’s to double. Yet between them they have less than 2% of global reserves, so they will be forced to look to imports from the Mideast, Russia and Australia.

Investing in natural gas: major role in power stations

The strongest demand growth area for natural gas is in electricity generation. Dirk Beeusaert, chief executive of Suez, the world’s biggest operator in the field, says the investment cost per kilowatt of power from gas turbines is “half that of a coal plant, and a third of that from a nuclear plant of the same capacity.”

Gas power stations can be built quickly, are flexible in operation, reduce dependence on other resources such as coal, oil and nuclear – and have particular attractions in these times of ecomania. Not only do they produce less greenhouse gases than other fossil fuel, but they can be used efficiently to generate intermittent power, to fill the gaps when turbines driven by wind and water shut down because of calms or droughts.

A couple of decades ago, gas accounted for little of the world’s electricity generation; now it fuels almost one-fifth.

Although the oil majors are giving increasing attention to finding and producing natural gas, most of the world’s resources are closed to them, or are politically high-risk. Russia seeks to use its gas supplies as a strategic weapon in its dealings with Europe and is squeezing out foreign companies. Iran is a different kind of political minefield. Qatar is happy to partner international oil firms, but is also right in the middle of the potentially explosive Middle East.

One country that is benefiting from all this is Australia, which has reserves almost as large as those of the US, production that is likely to continue expanding for the next quarter-century, and a business-friendly environment. Chevron’s Gorgon project alone, which got its go-ahead from regulators a few months ago, expects to produce more than a trillion cubic metres of gas over its 60-year life.

Curious. How could that be?

It’s an interesting story. Glad you asked.

Saudi Arabia runs its oil operations like a family Italian restaurant. In theory, everyone owns a bit of the business. There aren’t private interests like Santos (ASX:STO) or Woodside (ASX:WPL). Aramco is Arabia’s oil producer. The profits from oil then go to the government.

Of course the last link in the chain, where the government transfers money to its people, is usually missing.

But Saudi Arabia is a lot richer than it used to be. As we said in a previous Money Morning, at US$130 it pulls in revenues of well over a billion dollars a day. And that means it has spare liquidity to pour into investments. Those investments will, of course, be the source of its income when oil eventually runs out.

One of them is Australian. Bemax Resources (ASX:BMX) recently received a takeover offer from Arabian National Titanium Dioxide Company. Bemax burrows around in Australia’s vast mineral sand resource. Among other things, it produces minerals containing titanium and zircon.

As Dan Denning notes in a recent Australian Small-Cap Investigator, these metals are getting a lot of demand from ceramics industries. He’s put a magnifying glass to the whole sector. It doesn’t seem like anyone else has heard of the potential here. We’d thought you’d be interested. Foresight here could be very profitable indeed.

So Arabian National Titanium put up a AU$300 million takeover offer. Bemax is already up 35% this week. It’s one way Saudi Arabia is expanding and diversifying its economy to prepare for post oil-boom times.

Sinosteel Regroups for Another Billion-Dollar Iron Bid

It’s often how a person acts, not what they say, that shapes your opinion of them.

The politician who promises to lower taxes? He’s too busy splurging on an electoral campaign. The fellow in the pub who tells you he’s “sober as a judge”? A judicial authority is rarely found sprawled upside-down under a bar stool, attempting to woo a disgusted member of the opposite sex.

Actions talk. Talking doesn’t always mean action.

As you saw yesterday, Murchison and Midwest look set to wed in corporate matrimony. But let’s consider the actions involved. How did China’s Sinosteel respond?

It went straight to the Foreign Investment Review Board.

Why?

To argue that it wouldn’t have to re-apply for approval, now that its target will probably become a new entity. There’s only one reason it would keep that option open. It plans to make another bid.

This time, the stakes have risen. Murchison just announced five-fold growth in its iron mineral resource. Add in Midwest’s resource. The company now controls over 600 million tonnes of iron, in various forms. It’s all quite close to important shipping ports.

To China, this means more iron under one roof. So it has popped down to the realty to see if this new house is for sale.

We’re surprised it found the time. Sinosteel has been very busy working on a stake in Fortescue (ASX:FMG) lately. The iron-hungry steel maker has been soliciting Harbinger Capital for its 8% stake in FMG. Fortescue leapt 7% yesterday. It’s now a AU$27 billion company.

We don’t need to spell this out. Sinosteel wants to own an Australian iron exporter, one way or another. We have a feeling it’ll get its way.

ABB Grain Adds 80% to Profits

ABB Grain (ASX:ABB) just unleashed some déjà vu upon us. A week ago AWB (ASX:AWB) announced a 90% boom in profit growth. Yesterday ABB did a good impersonation, revealing an 80% boom in earnings. The company’s share price added 8%.

Wasn’t the market expecting something along these lines? Grain prices soared earlier in the year. It’s been a good growing season. Maybe people are only just starting to wake up to the agricultural boom.

If that’s the case, you might be interested to know that Graincorp (ASX:GNC) is yet to announce any new profit guidance for this year. Maybe it’s next in line. The company expanded its grain marketing operations in 2006-07. And as you can see below, its share price hasn’t curved up in the recent past.

That’s probably because the stock is bidding for Ridley Corporation (ASX:RIC). The market may have overlooked this one.

If you’re not exposed to rising agricultural earnings yet, it might be time. And if none of the companies above suit you, we have two even better suggestions.

We know you might prefer to sample something before committing to it. Fair enough; we’re the same way. So we’ve twisted our boss’s arm a little. Diggers and Drillers is now offering a 3-month trial subscription. Take a look at the link for our top two picks in the Ag sector, plus all our currents “buys” in metals, coal, iron, oil and gas. If you don’t like what you see, no problems. It’s only a trial. The next issue comes out later today.

We’ll be looking at others soon. Until then…

Al Robinson
The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Saudi Arabia Pours Oil Investment into Australia

BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), Woodside (ASX: WPL)… some of Australia’s biggest resource stocks made 52-week highs yesterday. Both BHP and Rio gave investment presentations in London yesterday, highlighting their various degrees of exposure to China’s urbanisation.

“In the face of global uncertainty and embedded inflation, Australia’s resources market will become a haven for a tidal wave of funds from China, India, and developed economies,” reports Patrick Durkin in today’s Financial Review.

He was actually paraphrasing former Goldman Sachs Vice President Kenneth Courtis. Courtis told Australian investors at a conference, “China wants everything you’ve got, everything. And we still can’t fathom the demand that China is going to generate in the years to come… Imagine another 250 million people urbanising China over the next 20 years. What do you think that does to copper prices, iron ore prices, even given the levels they are at today?”

Let’s assume that question is rhetorical. Curtis answers it anyway, “Over the next two, three, four years, Australia could become really hot. You could see your stock market move a little bit like the Japanese market did in the 1980s or like the tech market did in the 1990s.”

Well that’s no good. That means the ASX is a bubble in the making. And we know how all bubbles end. Splat!

Source: http://www.decisionpoint.com

This theme of perpetual prosperity from China-driven demand is beginning to sound like a drum beat. We’ve been tapping our toes too, adding to the rhythm. But it’s worth remembering that markets always move in cycles, from scarcity to abundance, from caution to excess, from fear to greed and back again.

Source: http://www.decisionpoint.com

The current cycle-or super cycle if you prefer-is still a cycle. But just how long might it last and how high might it take Aussie stocks? Well, judging by the chart above, the All Ords does not yet have that vertical look, where the slope is at a virtual right angle to the x-axis. But you get the feeling we’re approaching liftoff, don’t you?

If Aussie resource stocks become a global inflation haven, the next four or five years may be the best four or five years you’ll ever see to make money in resource stocks. “We are in for a generation of growth led by China and India which is unstoppable, unbridled, and unrivalled. In 2020, we will look back with wonder, shock, and awe at the growth we have seen,” said Oxiana’s Owen Hegarty.

Hey, we like Oxiana as much as the next resource newsletter. But this kind of enthusiasm makes us a little nervous. When everyone starts to read from the same investment prayer book, that’s when you usually get some act of God that no one saw coming. That is, there’s no such thing as a sure thing in investment markets. You never know what may be lurking around the corner. It could be an earth quake, a war, or a revolution.

Still, you’d have to be a real Danny Downer to rain on this resource parade. About the only disappointing player on the whole resource bench is the one that should be the star: gold. Its recent 18% correction has a lot of new gold investors concerned about its relative underperformance.

There’s not much to add to the case for gold that we haven’t already said before. But for what it’s worth: higher highs followed by periods of profit taking and consolidation are normal in any bull market. Gold is biding its time during the most recent mini-rally in the U.S. dollar. But unless the U.S. government is suddenly serious about a strong dollar policy-highly unlikely with a nation full of debtors-it is hard to see the dollar rallying a lot higher, or gold falling below $800.

Dan Denning
The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: The ASX Bubble, Fueled by China