Gold unleashed as a re-run of 1980s inflation looms

Threats to launch a criminal case against Federal Reserve chairman Jerome Powell can be directly connected to a spike in U.S. government bond rates and a corresponding hike in the price of gold this week to US$4597 an ounce and silver to US$93.60/oz.

Over the past 12-months, as inflation fears have grown, gold has risen by 70% and silver is up 194%. But what’s more interesting is that the rate of growth by both precious metals, along with platinum and palladium, is not slowing.

Gold rose 3% this week. Silver, the so-called “poor man’s gold”, is up 15% (in a week), a sign that inflation anxiety is reaching down to the “man in the street” who has recognised that leaving his money in the bank could be a mistake as inflation eats its value.

Physical assets such a precious metals and property are what survives an outbreak of inflation, fiat currency (government paper) is discounted, as can already be seen in the 11% fall over the last 12-months in the value of the U.S. dollar, an event which has, in turn, lifted commodity prices which are traded in U.S. dollars, and that means just about everything.

The alleged case against Powell reeks of political interference in the running of the world’s most important bank by the U.S. President Donald Trump, a former property developer who is demanding a deep cut in rates ahead of November’s mid-term U.S. elections.

If Trump gets his rates cut, and inflation accelerates, it becomes easy to understand why normally conservative analysts see gold soon topping US$5000/oz, which Citi did during this week, and veteran gold-watcher, Cameron Judd from Victor Smorgan Group, suggested a price of US$7000/oz by the end of this year, if the 1980s experience is repeated.

Older investors (and journalists) remember that astonishing time and while history never repeats exactly there is an eerie sense of having been here before, not that anyone wants reminding of a time when a 10.5% inflation rate was followed by a 17.5% home loan rate and banks were ordered to ration lending.

Crushing inflation is devilishly difficult and can lead to a serious economic downturn which is what happened at the end of the 1980s when Australia experienced “the recession we had to have”, according to the Treasurer at the time, Paul Keating, who oversaw an era of sky-high rates which eventually (and painfully) killed inflation.

Gold and silver mining stocks are riding the boom in the price of their metals which has triggered a flood of cash, some of which will find its way out in the form of higher dividends later this year.

Northern Star, the sector leader, has bounced back from a sell-off earlier this month after it reported operational problems. The recovery has seen the stock rise by $2.81 (11.5%) to $27.25 since hitting a low of $24.23 on January 2.

Macquarie sees Northern Star continuing its revival, with $31 the bank’s target price as a series of catalysts spark investor interest, including a revised study into the emerging Hemi project in WA and commissioning of a mill expansion at the flagship Kalgoorlie mine.

Other significant gold stock moves this week included:

• Ballard Mining, up 13c to 80c after reporting the restart of drilling at its promising Mt Ida gold project in WA.

• Dateline Resources, up 10c to 39c after reporting thick, but low-grade assays from the latest drilling at its Colosseum project in California, including 295.64 metres at 1.04 grams a tonne.

• Sun Silver, up 38c at $2.24 after reporting thick and high grade silver and gold mineralisation at its Maverick Springs project in Nevada including 123.94m at 81.8g/t silver equivalent.

• Tesoro Gold, up 7c to $1.29 thanks to growing interest in its El Zorro project n Chile. Morgans has a buy tip and price target of $4.88 on the stock, and

• Kingsgate Consolidated, up 21c at $6.15 after reporting a strong accumulation of cash from mining in Thailand. The company, which was trading at $1.24 at this time last year, said it was sitting on cash and bullion valued at $179 million.

Gold and silver were not the only good news sectors on the Australian stock market this week with early signs of a feeding frenzy developing as the rush for physical assets grows with the planned merger of Rio Tinto and Glencore expected to embolden other corporate dealers.

If completed, and there is a long way to go, GlenRio (or whatever the name after the merger) will be spitting out a pile of surplus assets, accelerating a process launched before Christmas by Rio Tinto.

BHP, a sideline observer so far, to the merger mania at the top end of the industry, is said to be mulling intervention with its own bid for either Rio Tinto or Glencore to get access to their copper assets.

 Lithium continued its stellar recovery with spodumene rising above US$2000 a tonne for the first time in more than two years, and iron or refusing to fall below US$107/t despite intense Chinese pressure for lower prices.

Driving lithium is a combination of China’s “anti-involution” policy which is essentially an attack on over-production and uncompetitive pricing and continued strong demand from battery makers who now have two growth markets, electric vehicles (EVs), and battery energy storage systems (BESS).

PLS Group (formerly Pilbara Minerals) led the way up with a rise of 16c this week to $4.89, storming past a price target of $4.55 set by Bell Potter on Tuesday.

Other lithium moves, up and down, included:

• Liontown, up 13c to $2.19, a price which means the stock has risen by 276% over the last 12-months, and

• Vulcan Energy, down 28c at $4.51, a decline which could reflect investor concern about the company’s heavy borrowing to build its lithium and geothermal energy project in Germany.

Iron ore, the commodity which refuses to lie down, appears to be heading for a clash between producers and customers as China ramps up pressure on miners not only demanding price cuts but for future payment in Chinese currency (renminbi), another powerful comment on fading faith in the U.S. dollar.

Iron ore leader Fortescue rose by 11c to $22.78, but the newsmaker was Mineral Resources (MinRes), a business with a toe in lithium but widely seen as an iron ore stock.

MinRes rose by $4.96 to $61.86 and is on the buy list of Bell Potter which has a price target of $68 on the stock, which is wildly more optimistic than long-term MinRes critics at Jarden which is sticking with a sell recommendation and a price target of $20 (yes, $20!).

Nickel’s revival continued this week with the price of the battery and stainless steel metal back up to US$18,372/t thanks to a promise of an Indonesian crack down on over-production, taking the metal’s increase over the past four weeks to 30%.

The nickel rebound could help BHP sell its unwanted NickelWest business and First Quantum dispose of its 70% stake in the mothballed Ravensthorpe project, as well as continue to lift the few remaining small nickel stocks such as Ardea which added 1c to 68c over week, taking its gain since this time last year to 36c (112%).

Other news and market moves of interest this week included:

• Sandfire Resources, up 50c at $19.24 thanks to continues strength in the copper price which cleared US$6 a pound this week before settling at US$5.95/lb.

• Chalice Mining, down 19c at $2.32 despite a buy recommendation from Morgans which has a$4.50 price target on the palladium-heavy polymetallic project developer.

• VBX added 2c to 58c as global demand for bauxite rises and Guinea limits exports. Morgan has a $2.10 price target.

• Metals X rose by 7c to $1.26 thanks to its exposure to tin which has emerged as a star commodity, up 66% over the last 12-months, and

• Lynas Rare Earths, up 95c at $15.72 after announcing the retirement of long-serving chief executive Amanda Lacaze.