It’s an early call, but the return of inflation to an annualised 4% means that Australia is heading in a different direction to its major trading partners where inflation, and interest rates, are starting to fall.

The gap can be measured in interest rates on a common benchmark, 10-year government bonds, which jumped in Australia yesterday from 4.24% to 4.47% well ahead of moves in other countries.

In the U.S., the 10-year rose from 4.26% to 4.34%, driven by concern in some quarters that the U.S. might also have to lift rather than cut rates because of its own inflation concerns.

Australia’s 10-year bond is signalling an expectation that the Reserve Bank will have to raise rates in August, or sooner, to dampen the inflation outbreak, which is being largely driven by government spending and social welfare handouts to combat the rising cost of living.

The Australian newspaper summed up the situation perfectly yesterday, describing what’s happening domestically as “the cost of giving” but which could also be called a “doom loop” as bad decisions worsen a precarious situation.

For investors, what’s just happened is effectively a step backwards unless they have plenty of cash parked on the sidelines or exposure to international markets to offset a poor local outlook and an almost certain future slide in the value of the Australian dollar which rose yesterday but is down from US70 cents at the start of last year to around US66c today.

The currency effect has added A$200 an ounce to the value of gold in Australian dollars over the last 12-months, which highlights the case for gold as an inflation hedge and a safe haven as the world rushes towards a series of potentially destabilising elections in Europe and the U.S.

Markets this week were heavily influenced by the return of inflation fears, driving the all-ordinaries index moving back below 8000, a level where it has been stuck for the past month with a reading of around 7963, taking it back to where it was in February.

Looked at another way, to further make the case of mining and oil stocks, the ASX all ordinaries index was down 0.7% yesterday (Thursday) whereas the metals and mining index was down 0.3% — still down but at a slower rate to stocks largely exposed to the local economy.

What’s happening on the bond market, and its effects on other markets, stifled the debate about the new financial year starting on Monday, with forecasts never more divided as a cloud of political change and the rumblings of wars make predictions diabolically difficult.

Morgan Stanley, an investment bank, advised in its latest quarterly review of the commodities sector that investors should become more selective in their preferences with battery metals such as lithium and cobalt at the bottom thanks to sluggish sales of electric vehicles and excess battery production in China.

Gold, copper, iron ore, aluminium and hard coking (steel making) coal topped the bank’s commodity thermometer thanks to their exposure to an expected global economic recovery next year.

But it’s the over-arching view of Morgan Stanley which should be of most interest to investors because it’s summed up in one-word; murky.

Mixed demand signals from China are a worry whereas base metal indicators are strong, the bank said. Rising barriers against excess Chinese manufactured goods are a worry whereas India seems set for strong economic growth of 6.8% next year and 6.5% in ’26.

Macquarie Bank agreed with Morgan Stanley that lithium’s rough ride would continue but disagreed on iron ore, not because of a significant fall in demand, more because of rising supply from new mines such as Rio Tinto’s part owned Simandou project in Africa and the Onslow project of Mineral Resources in WA.

Gold, unsurprisingly, was on the neutral to bullish list of both banks as uncertainty remains a dominant consideration in most economies and in the planning of investors.

Morgan Stanley sees gold rising to US$2450 an ounce by the September quarter and US$2600/oz by the end of the year before easing back to US$2538/oz by the middle of next year. Macquarie has US$2425/oz pencilled in for next year and US$2200/oz in ’26.

Copper, which boomed earlier this year, has pulled back but is expected to rally again as a forecast 530,000-tonne supply shortfall starts to influence the market.

It’s the combination of copper and gold which could be an investor’s best friend in the new financial year but could also be uncomfortable for the broader economy.

London-based gold specialist Ross Norman from Metals Daily dredged up an old recession pointer during the week when he said how rare it was for copper and gold to trade uniformly, rising and falling at roughly the same time, or “highly correlated” to use his term.

“Taking a longer term view, gold and copper very rarely correlate to such a great extent,” he said. “In fact, we have only been at the current level (of correlation) three times in the past 55 years, 1978, 1998 and 2006.

“Coincidence or not, each ratio peak was about two years before three major recessions, the 1980 crash, the 2000 dot-com crash and the 2008 global financial crisis. Just saying.”

Among the sectors this week, lithium stocks were watched carefully after the release of a third investment bank report, this one from Citi, which described the battery metal as being in freefall with a 15% drop in the carbonate price in China to US$12,000 a tonne to be followed soon by another 15%-to-20% drop to US$10,000/t.

Local lithium stocks were mixed but overall they held up remarkably well given the negative tone in the market. Independence added 16c to $5.87 and Arcadium was up 20c at $5.14. Liontown lost 5c to 92c and Wildcat was steady at 33c.

Pilbara, the early newsmaker with its plans to more than double production, did best with a rise over the week of 14c to $3.27.

Uranium stocks continued to fade as the price of the nuclear fuel slipped a little lower to US$83.30 a pound, down 8% over the past month but still up 48% over the last 12 months.

Paladin Resources was the uranium newsmaker with a plan to merge with Canada’s Fission Uranium, creating a $5 billion globally-significant uranium producer, a plan which failed to enthuse investors, who rubbed $1.30 off Paladin’s share price, taking it back to $12.39.

Other U-moves of interest included Everest Metals which rose by 1.2c to 13c after securing control of the Mukinbudin uranium project in WA and Boss Energy slipping 21c lower to $3.99 after reporting that the Gould’s Dam project in South Australia was shaping up as a satellite development for its Honeymoon project.

Niobium stocks continued to attract speculators with this week’s star being Encounter Resources which added a sharp 27c to 61c after reporting encouraging assays from drilling at its Crean carbonatite project in the West Arunta region of WA. WA1, the niobium leader. Lost $1.68 to $17.76.

Fun as it is to watch the niobium rush there are questions starting to be asked about the level of demand for an exotic metal which is well supplied from Brazil, and the cost of developing a mine in one of the most remote places on the planet.

Other news and market moves of interest in the last week of a forgettable financial year included:

  • Ramelius slipped 6c lower to $1.86 after it reported the acquisition of an 8.9% stake in fellow gold producer Spartan Resources, which went the other way with a 6c rise to 89c.
  • West African Resources added 12c to $1.60 after reporting a high-grade gold hit of 15.25 grams a tonne over 10.5 metres outside the reserve at its M1S mine in Burkina Faso.
  • Lynas Rare Earths lost 13c to $5.94 after reporting that it was planning to produce two separate heavy rare earths (terbium and dysprosium) from next year at its Malaysian processing facility, and.
  • Sheffield Resources put on 5c to 37c after reporting solid production numbers at its Thunderbird mineral sands project in WA.

Happy new financial year for Monday, it’s gotta be better than this year.