Case for investing in commodities rarely been better, says Goldmans

4th May 2018
Tim Treadgold

Resources stocks in Australia trended up over the past week, at least that’s how I saw the market from afar with this edition of Prospector’s Diary being filed from New York where interest in commodities is growing rapidly.

Goldman Sachs, arguably the top investment bank in the world, reinforced its optimistic view of commodities during my visit with a report that said there had rarely been a stronger case for investing in oil, metals or agricultural products.

For Australian investors that is good news because basic raw materials are the backbone of the Australian economy and the Australian stock market and could be measured in a modest 1% rise this week in the ASX metals and mining index at the time of writing yesterday.

Gold, which did not have a good week in US dollars, did better in Australian dollars thanks to the currency effect, and could be much better later in the year if the latest gold and currency forecasts prove to be correct.

Battery metals, the leading asset class for many Australian investors, are a surprisingly unimportant topic in the US, perhaps because the government here is encouraging its oil and gas industry, as well as lowering emissions standards on conventional cars to aid local car makers, a trend which deadens the appeal of electric vehicles.

The other strong theme evident from a few days in the US is the potential for a continued rise in the value of the US dollar as the country’s central bank pushes ahead with its plan to ratchet interest rates higher over the rest of 2018.

What’s driving the Federal Reserve is confirmation that inflation has reached its target of 2 per cent, and with an economy continuing to generate abundant jobs, the bank sees a need to give the economic brakes a light touch by lifting the cost of money.

For Australian gold miners, that represents a double-edged sword because higher US interest rates puts pressure on gold, but from an Australian perspective a stronger US dollar trims the Australian currency, a trend which was obvious again this week as US-dollar gold fell by around $US15 an ounce to $US1309/oz while creeping up by $A5/oz to A$1745.

Goldman Sachs, in its commodity research, noted that commodities have been the best-performing asset class of 2018, setting new multi-year highs returning average of 7 per cent in 2018 so far, outperforming shares by 8 per cent.

"We believe the macro backdrop for commodities is as good as we have seen in years, suggesting large allocations to the sector to benefit from such returns," Goldman Sachs said.

Strategists at the investment bank have been overweight commodities since 2016, but they see a solid backdrop for gains to continue as inventories decline and demand grows.

"Robust late-cycle growth is depleting global supply chains," they wrote. "As the business cycle deepens and inflationary concerns push interest rates higher, cross-asset correlations with commodities decline and the diversification benefits of owning commodities rises with higher rates."

Commodity price tips include a forecast that copper could hit $US3.65 a pound by the end of the year compared with its current $US3.07/lb, while oil could continue its remarkable recovery, trading up to $US82.50 by mid-year. Aluminium, which is being driven by U.S. Government sanctions on Russia, is on its way up to $US1.13/lb.

Gold, which has been weakened by rising US interest rates, is expected to rebound by the end of the year, potentially hitting $US1450/oz, a prediction would could have a profound impact on Australian gold miners if the Aussie dollar keeps falling to a forecast target of US72 cents.

If gold does rise to $US1450/oz, and if the Australian dollar does falls to US72c then the Australian gold price will hit an all-time high of more $A2000/oz, an event which would electrify Australian gold stocks.

Price movements and market news has not been easy to follow while travelling and those mentioned here will be a day old by the time you get this report. But, with that apology, here are a few of the moves of interest, including:

  • Dacian Gold added 13c to $2.89 (Wednesday close) as interest grows in the stock which poured first gold at its Mt Morgans project in WA in late March and has set a production target for next year of between 180,000-and-210,000 ounces.
  • Northern Star filed a strong March quarter report which pointed to annual gold production of 600,000oz at an all-in sustaining cost of $A1075 – a number which looks particularly interesting alongside the possibility of gold topping $A2000/oz by the end of the year.
  • Mineral Resources signalled its intention to expand in the battery metals sector by first selling down a portion of its Wodgina lithium project and then moving to bring in a partner to develop a value-added lithium processing plant, moves which help lift the stock by $2.20 to $19.80.
  • Altura announced plans to duplicate its Pilgangoora lithium project in WA’s Pilbara region, effectively adding another 400,000 tonnes of 6% spodumene to its annual output. On the market, the news helped Altura add 1c to 37c.
  • King Island Scheelite, a boom stock from another era, moved up by four tenths of a cent to 4.4c as it looks for ways to push ahead with its Dolphin project on King Island in Bass Strait. Scheelite is an ore of tungsten, and
  • Toro Energy had its best week for some time, adding three tenths of a cent to 3c, but largely because it is making more progress with a gold project than it has been able to with uranium.

 

Image credit: Commodity Trade Mantra

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