Gold glitters amid talk of more central bank buying and hopes for US rate cuts

BHP added to the gloomy mood by flagging the start of job shedding which could become an industry trend as companies cut deeper into their costs.

But humming away in the background was the ultimate tough times commodity which is starting to shine again – gold.

At US$2035 an ounce, gold has reclaimed most of the ground lost in early February after reports of delayed interest rate cuts with fresh hints from multiple sources that it’s on the way to a record high of more than US$2200/oz by the end of the year.

Locally, a fresh fall in the value of the Australian dollar to below US65 cents pulled the A-dollar gold price up to a near record A$3130/oz.

Safe haven buying in China and India by private investors is one factor driving gold but the much bigger influence is central bank activity as the banks make preparations for a U.S. dollar crisis, possibly before the November U.S. presidential election.

The A-dollar price is also being influenced by political considerations as Australia’s hard left government makes life harder and more expensive for business and less attractive for investors, local and foreign.

Two recent reports highlight what’s likely to happen with gold and iron ore with both tipped to rise, albeit for different reasons.

Citi sees iron ore bouncing back from US$119 a tonne to US$130/t tonne after this month’s (March) meeting of China’s rubber-stamp parliament the National People’s Congress, an event which could see “the real test of policy pivot” – code for a potentially massive increase in economic stimulus.

Aiding the expected increase in demand from China is news of a crackdown on iron ore exports from India as that country’s steel industry demands export restrictions to preserve local supply.

Gold is also a supply/demand story with central banks key players because they are the biggest owners of the metal which they treat as a currency, as well as being the biggest gold traders.

Just as central banks caused a gold collapse in the 1990s when they were heavy sellers (it fell to below US$250/oz when the Bank of England dumped most of its gold) now it is the reverse with central banks soaking up 1000 tonnes of gold in each of the last two years.

More importantly, a little-known research report from the Bank for International Settlements (BIS), the central bank for central banks, reckons China, Russia and a large number of lesser countries will be gold buyers until at least 2030.

Demand will be driven by a BIS recommendation that gold should represent 10% of a central bank’s reserves.

Most advanced economies already exceed the 10% rule, the U.S., Germany, France and Italy are over 70%, but China has just 4.3% of its reserves in gold, India has 8.8%, and Saudi Arabia has 4.7%.

Strong central bank buying sits comfortably with a theory championed by billionaire prospector, Mark Creasy, that the best time to buy any asset is when the biggest owners of that asset are buying more – because they best understand the asset and its real value.

In the case of gold, it can be argued that the central banks have the inside running (let’s not call it inside trading) because they set interest rates and it is rates which are gold’s biggest competitors and when they start falling later this year, gold could boom.

Citi, in a note to clients earlier this month, said gold could hit US$3000/oz as rates fall and the U.S. struggles with budget problems, excess debt and a presidential election.

On the market, action was muted across most sectors all week as investors waited for guidance from China and the U.S.

The all ordinaries index performed its yo-yo trick again, up a little and then down a little, ending with a gain for the week of a tiny 0.7%.

The metals index, heavily influence by BHP and Rio Tinto, fell by 0.3% while the gold index defied the gold price with a 2.2% fall, led by the leaders with Northern Star down 7c to $12.92 and Evolution down 3c to $2.96.

At the bottom of the gold sector an interesting event occurred to demonstrate the shift back to gold with lithium explorer New Age announcing the acquisition of a gold tenement in the central Pilbara of WA, a deal which did little for the share price of a corporate minnow which is valued on the market at $7 million but did send an interesting message about trends.

Most other gold moves were modest, either way.

• West African Resources added 3c to 88c after reporting a plan to produce four million ounces of gold over the next 10 years. Barrenjoey believes it can do much better, lifting its price target from $1.40 to $1.80.
• Gold Road’s profit of $249 million for 2023 was less than some investment banks expected but the stock added 6c to $1.49 and Macquarie stuck with a target of $1.60.
• Emerald Resources surprised with a 32% profit increase to $176.7 million but slipped 11c to $2.80.
• Regis weakened by 4c to $1.81 despite reporting a solid operational result from its McPhillamy’s mine in NSW. Goldman Sachs sees Regis rising to $2.15, and
• Genesis slipped 3c lower to $1.53 while UBS saw a future price of $1.75.

Lithium stocks continued to rebound from their thrashing of the past six months thanks to signs of supply cuts starting lift the price of the battery metal and because investors can smell an oversold market and a slower-than-expected increase in future supply as project developers struggle to master the manufacture of lithium chemicals.

Albemarle’s admission that it has significant problems at its lithium hydroxide plant in WA and needs to fly in Chinese technical specialists speaks loudly to the problem, but that news also helped Albemarle post a strong share price rise of 12% to US$132 in New York.

Local moves, all helped by a reset of the lithium sector, included:

• Pilbara Minerals, up 58c to $4.24 back to where it was in September.
• Liontown, up 15c to $1.26, still well short of last year’s high of $3.20.
• Patriot Battery Metals, up 17c to 96c, almost hallway back its peak of $2.07, and
• Arcadium, the old Allkem, up 68c to $7.79 with Bell Potter tipping a price target of $10.40.

Nickel, the very sick man of Australian mining, raised its head a little for the price to trade around US$7.93 a pound, up US$1/lb on the low of US$6.92/lb reached three weeks ago.

The price recovery was not enough to restore interest in most nickel stocks with Lunnon Metals an exception, rising by 2.5c rise to 24c.

Most other nickel stock lost ground. Galileo was down 1c to 24c. Nico also 1c to 17c. Centaurus was down 3.5c to 25c and Cygnus was 1c weaker at 5.8c though Shaw brokers stuck with a buy tip and price target of 50c.

Uranium stocks had a solid week, led by Boss which said it had started commissioning the first ion-exchange unit in its Honeymoon Well processing plant, news which lifted the stock by 36c to $4.96, perhaps in its way to Bell Potter’s target price of $6.41.

Other u-moves included: Aura, up 1c to 24c after announcing a shift in Swedish Government uranium policy which could assist its Haggan project in that country. Paladin gained 9c to $1.23 with Citi tipping a continued rise to $1.45, and Deep Yellow added 2c $1.32 while CG Capital Markets said the stock was heading up to $1.60.

Other news and market moves of interest this week included:

• Adriatic Metals rising by 21c to $3.34 after reporting the production of first metal concentrate at its Vares project in Bosnia.
• Grange Resources added 1c to 44c after announcing that a definitive feasibility study supported the case to developing an underground phase at its open pit Savage River iron ore mine in Tasmania.
• Base Resources dropped by 4c to 11c after reporting net loss of $1.5 million in the December half. CG Capital Markets expects good news on the company’s proposed Toliara project in Madagascar, setting an ambitious price target of 70c for the stock.
• 29Metals continued its recovery with a rise of another 11c to 37c this week. It dropped as low as 19c two weeks ago. Morgan Stanley is tipping a price of 50c – though that is 10c less than the bank’s last tip of 60c, and
• Sandfire Resources added 16c to $7.56 after its latest environmental win for the Black Butte copper project in Montana. The stock is bumping up against the UBS target price of $7.60.