Better buying could lie ahead as the turmoil created by the co-called “bondcano” (a sharp
jump in interest rates) is supercharged by the Ukraine war and the price of oil, which are the
keys to a bruising outbreak of inflation.
Two over-used cliches sum up where we are today; don’t try to catch a falling knife, and wait
for the second shoe to drop with the next shoe being a realisation that the fight against
inflation could lead to recession, a collapse in corporate earnings and reduced demand for
basic industrial commodities, including iron ore, copper, aluminium, and other metals.
Smart share traders recognised the problem of returning too soon to the scene of the stock
market wreck with yesterday’s 1% rise in early trade fading into a tiny loss of 0.31% for the
day – hardly measurable, but a loss, nevertheless.
If there is value in the market after the sell-off, which actually started in late April (not last
week), it lies in the art of intelligence gathering because there is no doubt that quite a few
high-quality stocks are being tossed out with the dross.
Energy-linked companies are the stand out sector to acquire while they’re down (but not out)
because the world, including Australia, has made such a dreadful mess of its energy
requirements, rushing to embrace renewables before they’re fit for purpose and dumping oil,
gas and coal before their use-by date.
Two particularly interesting energy events this week were BHP opting to work its NSW
energy coal assets to death because there’s more money to be made by staying in production
than selling at a discount, and Jefferies, a big U.S. investment bank, refreshing its “king coal”
analysis with a forecast that coal prices will stay higher for longer because of under-
investment in the sector and recognition that it’s the only readily available energy source.
“Coal exports from Australia, Indonesia and the U.S. are rising in response to high prices, but
risk to supply from Russia (Ukraine war), South Africa (rail capacity issues) and Colombia
(political issues) is to the downside,” Jefferies said. “We expect seaborne thermal coal
demand to exceed supply in the near term.”
On commodity markets, thermal coal traded around US$386 a tonne, down US10/t over the
week but still up US233/t (144%) on the US$161/t at the start of 2002, and US336/t (670%)
higher than the US$50/t of two years ago.
Another commodity doing better than most (or, less worse to be correct) is gold which
steadied after being caught in the erupting Bondcano triggered in the U.S. but washing up
around the world with the Australian Government’s 10-year bond rate hitting an eight year
high this week of 4.17% (up 470%) on the 0.73% of 18-months ago.
That latest 10-year bond rate raises a critical question: why would anyone take the risks
associated with equities when they can get more than 4% on a government bond or 0% on
gold in its bullion form?
The realisation that the world of money has changed dramatically since central banks woke
from a 12-month slumber to unleash an attack on the inflation they helped cause knocked
US$50 an ounce off the gold price on Monday, though the fall to US$1818/oz was steadily
reversed with gold recovering to US$1831/oz.
Perhaps more interesting for Australian investors is that currency values have come back into
play with the Aussie currency sliding from a high last week of US72.5c to US69.06c on
Wednesday, a fall linked to the bondcano which delivered an upward kick to the local gold
price.
While U.S. gold was dropping sharply, the Australian gold price fall was lessened by the
currency effect which reduced the slide over the past week to A$20/oz, good enough to cling
to a price of A$2608/oz.
Most gold stocks fell when looked at on a weekly basis but recovered some of the lost ground
on Thursday. Gold Road, for example, was down 11c to $1.22 for the week but added 2.5c
yesterday after declaring unconditional its takeover offer for DGO.
Other gold moves included Newcrest, down 29c over the week at $23.91 (but up 66c
yesterday). Northern Star, down 58c over the week to $8.14 (but up 15c yesterday), and
Evolution, down 27c to $3.44 over the week (up 5.5c yesterday).
Gold will remain under pressure as the interest rate rising cycle continues until central banks
are confident that inflation is under control but there is a rival asset class under more pressure
than gold and that’s make-believe currencies such as Bitcoin, which is down 28.5% over the
week, to be down 55% since the start of the year.
If there is any good news in the inflation and bond market outlook, it can be found in the
words of former U.S. central bank boss, Ben Bernanke, who said in an opinion column
published by the New York Times that inflation is not going back to the 1970s.
Bernanke’s view is that the 70s were an inflationary disaster because politicians interfered
with the work of the central banks, prolonging the pain of a deep recession. This time, the
cure of higher interest rates could deliver a short, sharp, jolt, followed by a recovery next
year.
In the sectors, it was lithium and copper which did best in the modest end-of-week recovery.
Among the lithium stocks, Pilbara Minerals added 13c yesterday to $2.18 (reducing its fall
for the week to 23c). Allkem rose by 26c yesterday to $10.39 (reducing its fall for the week
to $1.18).
Macquarie Bank maintained its faith in lithium with a mid-week report which said demand
for the battery metal was recovering in China which is why it had Pilbara and Allkem as a
buys with price targets of $4 and $17.70 respectively.
Greentech, which only joined the market in January, was the star of the copper sector with a
report of strong assays from drilling at the historic Whundo project in the north of WA,
including an eye-catching 32 metres at 2.43% copper from a depth of 90m, good enough for
Greentech to add 20c to 35c yesterday, a one-day rise of 146% before trading was suspended.
Iron ore stocks were sold off early in the week after their commodity dropped another US$4 a
tonne to US$132.50, rubbing $1.75 off the price of Fortescue Metals, which fell to $19.91,
while Minerals Resources shed $6.38 to $53.78.
Uranium stocks, which have received multiple positive reports thanks to growing interest in
the metal as an energy transition fuel, had a mixed week with 92Energy the best performer,
but that was with a truly modest share price rise of half-a-cent to 53c after reporting the
successful raising of $8.7 million for its Gemini project in Canada.
Local uranium leaders Boss Energy and Paladin Energy had a tougher time. Boss lost 53c to
$2.01 while Paladin was down 15c to 66c. Deep Yellow, another uranium favourite, was off
14c at 65c.
Other news and market moves of interest included:
– Lynas Rare Earths said it would get US$120 million in U.S. Government funding for
its proposed processing facility in Texas but saw its shares slip 56c to $8.94.
– Hastings Technology Metals reported progress on its Yangibana rare earths project in
WA but was also caught up in the market-wide sell-off, shedding 2.8c to 22c but with
Macquarie maintaining the faith with a buy tip and target price of 40c.
– Kingsland Minerals suffered the fate of most initial public offerings which hit the
market at the wrong time with its 20c shares opening at 15c, falling to 13.7c, before
recovering to 16c.
– Predictive Discovery swam against the outgoing tide (just) with a 1c rise to 20c after
reporting encouraging drill results from its Bankan gold project in Guinea with a best
hit of 24m at 5.5 grams a tonne from a depth of 630m, and
– Matador Mining slipped 1.5c lower to 17c despite reporting fresh sampling results
from its Cape Ray gold project in Canada with drilling set to start in the June quarter,
enough for Shaw and Partners to get excited with a buy tip on the stock and a price
target of 55c.
