Gold still the big game in 2019 as global investors scramble to safety
18th January 2019
Gold started 2019 in the way it finished 2018, as the only investment to be treated with confidence, but if that’s the case then the rest of the market still has a lot to worry about because when gold rises almost everything else falls.
The strength of gold – which is poised to move back above $US1300 an ounce – is a direct reaction to the economic troubles unleashed by the China v US trade war and the uncertainties stirring in Europe as Britain tries to find the exit, France burns, and Italy slumps.
Another way of looking at gold is through its role as trusted global currency and that’s when the picture gets more interesting because, according to the London gold-trading specialist Sharps Pixley, gold is already at a record high in 72 different currencies.
In other words, investors in close to half the countries of the world have turned to gold as a hedge against uncertainty, including Australia – where gold hit an all-time high of $A1847/oz earlier this month and is still trading above $A1800/oz.
Whether gold can continue its upward move is a question starting to worry some analysts because when any investment is at a record high it gets harder to keep rising as a sort of “value gravity” takes hold with no-one wanting to be the peak buyer.
Despite concerns about the gold-price trend, some big-name investment banks reckon gold has further to go in this up-cycle. Goldman Sachs for example reckons gold will hit $US1425/oz this year, and if that’s right then the Australian gold price will be knocking on the door of A$2000/oz.
Set against that optimistic outlook are signs investors should not ignore, including the potential for a burst of value-destroying merger and acquisition activity as seen in past up-cycles, with a few smart players in the game taking some of their money off the gold table.
The M&A genie was unleashed from its bottle when US-based Newmont said it would pay $US10 billion for Canada’s Goldcorp, apparently because it doesn’t like playing second fiddle to Barrick Gold, which has merged with Randgold.
Whether either monster merger makes financial sense is a question worrying seasoned observers who sense that now might be time to treat gold with caution.
Media and industrial equipment billionaire, Kerry Stokes, appears to see a gold-price peak, selling down a portion of his stake in Saracen Mineral Holdings.
The Stokes sell-down was well-timed because Saracen was one of several Australian gold stocks to slip lower this week even as the gold price moved higher – a sign that other investors share his view that it might be time to take a profit.
Saracen, over the past five trading days, eased back by 15c to $2.89. Dacian slipped 8c lower to $2.42 and St Barbara was 8c weaker at $4.72.
Other leading gold stocks moved up, but none convincingly. Newcrest gained 20c to $23.70. Evolution was up 13c to $3.85. Millennium added 1c to 20c, while Northern Star was steady at $9.37.
If gold is going to pause for breath, and the overall economic outlook isn’t as worrying as it might appear, then the optimism of Citi, a leading investment bank, is easier to understand.
In a classic piece of counter-cyclical research, Citi reckons better times will break over the broader mining sector in the February/March period with metal prices “turning higher sustainably”.
A series of “signposts” are seen by Citi as pointers to an overall improvement:
- Chinese economic stimulus will boost commodity demand and easier monetary policy will boost available credit.
- A US and China trade deal will be confirmed on, or before, March 1, and
- Increasing demand for copper, the most important of the industrial metals, will lift all commodities as the pace of copper consumption growth returns to its long-term average of 3.1% a year, eclipsing last year’s lacklustre consumption growth rate of just of 1.5%.
Other sectors of the market this week were as mixed as gold with economic and political worries weighing on confidence. If the international outlook isn’t enough to make the sidelines look comfortable, there is the prospect of a new government in Canberra later this year.
Lithium stocks were flat or down. Pilbara Minerals was steady at 71c while Galaxy slipped 10c lower to $2.22. Alliance Mineral Assets also lost ground, down 4c to 21c, but with the broking firm Canaccord tipping it as a buy with a 45c price target.
Other news and market events in a quiet week included:
- Syrah Resources declaring commercial production at its Balama graphite project in Mozambique, which boosted the stock by 18c to $1.92 but with some analysts expecting much more, including those at Baillieu who issued a fresh buy tip and a price target for Syrah of $5.50.
- Kasbah Resources, which is developing a tin project in Morocco, was another clear winner, adding an impressive 3.5c (41%) to 12c after reporting that the tin price on the London Metal Exchange had risen by 11% to $20,180 a tonne since late last year.
- Nickel stocks were mixed despite the metal hitting a two-month high of $US5.27 a pound early in the week. Western Areas added 6c $2.13. Independence lost 3c to $3.97, and Mincor slipped 1c lower to 37c.
- Orion Minerals added 0.3c to 2.3c after reporting encouraging assays from drilling at its Ayoba prospect, which is close to the re-emerging Prieska zinc and copper mine in South Africa. Best hit was 1.5 metres at 4.98% zinc and 0.89% copper.
- Metals X showed encouraging signs of recovery at its Nifty copper mine and Renison tin mine, news which lifted the stock by 3c to 43c, well down on the $1.16 at this time last year but heading towards the 80c price target seen by Macquarie Bank, and
- Tando Resources added 1.3c to 10c after reporting encouraging assay results from its SPD vanadium project in South Africa with a best intersection of 20m at 1.2% vanadium from a depth of 86m.
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