The appeal of gold as a hedge against economic and political uncertainty has never been clearer, supercharged by soaring government debts which must eventually lead to currency devaluations.
Even the U.S. dollar is at risk of a steep fall, which is adding to the appeal of gold for U.S. investors who are said to be “under-invested” in the metal.
The rise-and-rise of gold, which is propelling Australian miners of the metal to new highs, has even earned begrudging acknowledgement in London’s Financial Times newspaper, a perpetual gold-hating publication.
“Barbaric, inert, yieldless and highly profitable” was the annoyed comment about gold by one of its leading investment writers, Robert Armstrong, in a story which also included the observation that “gold keeps rising, dammit”.
Included in that story was a forecast by seasoned Canadian analyst David Rosenberg that gold would rise to US$3000/oz, drawing a direct link to weakening “real” U.S. interest rates (the after inflation rate) which have been falling since earlier this year.
The overdue rate cut by the U.S. central bank is being reflected in the bond market where the yield on the U.S. 10-year note has fallen since late April from 4.7% to 3.8% this week.
ANZ Bank is more cautious than Rosenberg, sticking with its gold-price tip of US$2550/oz by Christmas while also drawing attention to the fact market expectations are for a full 100 basis points (1%) cut in the U.S. federal funds rate this year.
All eyes in financial markets for the past few days (and into next week) have been on the Jackson Hole ski resort in Wyoming where the Federal Reserve Bank of Kansas is holding its annual retreat which attracts central bankers from around the world.
Key man at the gabfest is Jerome Powell, chairman of the U.S. central bank, with his set piece address scheduled for 10.05 on Friday morning New York time, Friday night in Australia.
While everyone waits for Powell to announce the start of official rate cuts, they have already started in some corners of the financial market, as seen in sliding U.S. bond values.
In Australia, the 10-year note is down from 4.6% in April to 3.9% today, a fall which is starting to be reflected in consumer rates where banks have been busy trimming fixed term deposits – something for investors to watch carefully.
While good news for borrowers, the effect of falling rates will, in time, improve the appeal of equities, which have largely shaken off their early August correction to continue a recovery started last October.
Short-term investors have probably not noticed the slow grind up but it is significant that the all-ordinaries index has risen by 18% over the past 12-months, outstripped only by the gold index which is up 32% with both indices well ahead of the general mining index, which is down 7%.
Low iron ore, copper and critical metal prices are the result of weak growth in the Chinese economy and war in Ukraine and the Middle East, where wider conflict remains possible.
In China, government attempts to rescue the country’s collapsed property market are off to a slow start with bottlenecks in the release of fresh funds being reported by investment banks.
The longer it takes to kick-start the Chinese property market, the worse it could be for Australia’s iron ore miners which have been battered by a 30% fall in the ore price this year, which reached US$95 a tonne early this week before a modest bounce to US$99/t.
Next week will be heavy with iron ore financial reports with BHP and Fortescue scheduled to report their results with both expected to be reasonable thanks to a strong opening half which was offset by a poor second half.
On the market, BHP dropped to $39.69 on Monday before recovering strongly to $41.14, while Fortescue clawed back some of its lost ground to trade at $18.27, up 97c for the week.
Deterra Royalties, which has a BHP iron ore royalty as its primary asset, added 15c to $3.89 and is expected to keep rising even as it buys royalties paid on other materials. UBS sees $4.80 as the target price, the same as Barrenjoey. Macquarie is more cautious and reckons its gone as far as it can in the current cycle.
Morningstar, a research house, said the falls this year by iron stocks were justified given the headwinds blowing off China but their latest prices meant the miners were now fairly valued.
That muddied outlook for industrial metals means that gold and goldminers will be the outperformers in the current profit reporting season, as seen in the results of the two leaders, Evolution and Northern Star.
Evolution shares hit a 12-month high of $4.39 early yesterday (Thursday) before easing slightly after reporting a record profit of $482 million and an increased dividend.
Northern Star followed with a rise of $1.06 to $15.37 after reporting a 129% increase in net profit to $689 million and record dividend payout of 40c a share, good enough to earn a quick buy tip from RBC Capital Markets which sees the stock rising to $16.50.
Other gold news and market moves included:
- Regis Resources rising by a surprise 7c to $1.73 even after the Australian Government blocked the development of its McPhillamys project in NSW.
- Westgold Resources rising by 13c to $3.05 after reporting high grade intersections at its Beta Hunt mine in WA with a best hit of 4 metres at 22.45 grams of gold a tonne.
- Dundas Minerals more than doubling to 4.7c after reporting high grade gold results from drilling at its Windanya project in WA, and
- St Barbara rising by 3c to 25c despite reporting a thumping statutory loss (after one-off write-downs) of $429 million in the year to June 30.
Rare earth stocks had an unusual week of bad news and rising share prices, led up by Lynas, which added 60c to $6.82, followed by titanium minerals and rare earth hopeful Iluka which rose by 25c to $5.89 despite a threat to stop work on a rare earth refinery in WA.
The problem at Iluka is a combination of week rare earth prices and rising refinery construction costs which led this week to a call for more government aid, a request which will test the government’s precariously balanced critical metals policy.
Lithium, the element which started the rush into critical metals, remains under pressure as car makers walk (should that be drive) away from the over-promoted electric vehicle sector. Ford this week abandoned plans for a new EV model.
First Lithium was a rare winner, adding 5c (55%) to 14c after reporting thick and high grade assays from drilling at its Blakala project in Mali with a best hit of 41m at 1.91% lithium.
There were a handful of other winners in the lithium space, including Independence which added 18c to $5.28 on speculation that it might be the only lithium producer to pay a dividend this year. Macquarie reckons the stock will rise to $5.60.
Patriot Battery Metals also managed a modest rise of 2c to 54c after reporting an encouraging preliminary economic assessment of its Shaakichiuwaanaan project in Canada.
Other news and share price moves of interest this week included:
- Antimony explorer Larvotto rocketed up by 22c (150%) to 37c as interest builds in the latest mineral to be added to China’s list of banned exports.
- Niobium explorer WA1 Resources resumed its upward run with a rise of $1.43 to $15.67 despite growing concern that Niobium could be the new boom/bust metal given its seemingly abundant supply and limited demand.
- Monadelphous was the services sector star this week with a rise of $1.08 to $13.18 on the strength of a strong order book.
- Perenti, a leading supplier of drilling services, slipped 1c lower to 99c. causing Citi to lower its target from for the stock from $1.30 to $1.15 while maintaining a buy tip, and
- Silver Mines fell by 2.3c to 9.2c after losing a legal challenge to its Bowdens project in NSW.
