More talk of recessions and rate cuts drive investors back to gold – but palladium has been the real winner

The risk-chickens came home to roost this week as the compounding effect of trade war jitters were magnified by the start of a debilitating US Presidential impeachment process
4th October 2019
Tim Treadgold

The risk-chickens came home to roost this week as the compounding effect of trade war jitters were magnified by the start of a debilitating US Presidential impeachment process, leaving gold as the only clear winner – but with another precious metal tailing along.

Palladium, a sister of platinum but not a mainstream commodity, has emerged as the star of the year, though there are very few entry points for Australian investors unless they’re prepared to look to South Africa or Russia – where entirely new levels of risk abound.

Since the start of the year, palladium, which is the preferred catalyst in the exhaust systems of petroleum-powered vehicles, has risen by 32% to a record $US1691 an ounce, easily outperforming gold (up 15%) and platinum (up 10%).

The palladium price is now so high (double that of platinum) that theft of catalytic converters from cars such as the Toyota Prius have reached epidemic levels in London, where that particular car is popular with Uber drivers. In the first six months of the year, 2900 catalytic converters have been prised off electric cars, 1674 more than in all of last year.

What’s driving palladium is a combination of rising sales of cars with petrol engines, including hybrid electric vehicles, and a decline in sales of diesel vehicles where platinum is preferred.

Interesting as that might be, the easiest way of gaining exposure to palladium is to buy a stake in Norilsk Nickel, Russia’s metal champion, which is up 30% this year on the Moscow stock exchange thanks to its cocktail of metals – and the best of luck to you!

Gold is the easiest and most obvious entry point into the local commodity sector, while also gaining exposure to currency protection given its status as the world’s ultimate and longest- standing form of money.

But even in a rising gold market ,which we’ve been enjoying all year, it’s worth keeping an eye on the risk factors, not least this week’s stampede by investors fleeing other parts of the market into the safe haven which is gold, which points to some gold stocks being over-valued.

Morgan Stanley, a leading US investment bank, reiterated its warning about gold stocks this week, pointing out that the leading Australian gold stocks were factoring in a gold price of $US2100 an ounce, or $3100/oz in Australian dollars.

Gold might get to those levels if the current instability obvious in the markets of Europe (where Brexit and recession news dominates), and the US, where the economy is weakening and the politics becoming ever-murkier.

Perhaps the most powerful reason to remain optimistic about gold is the downward trend in US interest rates, gold’s greatest rival. As rates fall, non-interest-bearing gold rises.

In Australia, the interest rate issue is becoming a more important factor after this week’s cut in official rates, the expectation of more cuts to come and an alarming report on the Australian economy from Goldman Sachs, which sees the potential for negative rates.

Commenting on the Reserve Bank’s latest model of the Australian economy, Goldman Sachs said it was striking that “the RBA would need to implement a -1% cash rate if it wants to achieve its unemployment and inflation forecasts over its two-to-three year forecast horizon”.

Nothing makes gold more appealing that negative returns on other investments.

The rush into gold mining stocks could be measured by Thursday’s 2.6% surge in the ASX gold index, which followed a much more modest increase in the gold price, which rose by 1% to reclaim the $US1500/oz level.

Over the course of the week, the ASX gold index has risen by 6% whereas the gold price is up by 2% - a clear sign of investors stampeding gold miners as they dump stocks exposed to other sectors, including banks, which are significant losers from declining interest rates.

Macquarie was another bank to roll out its crystal ball this week, posing a question about how well the miners will manage what looks like the start of widespread downturn in the commodity cycle as global manufacturing wilts under the heat of the trade war.

Not too bad is the answer, with an expectation that from the recent peak in the mining sector to the expected trough the return on invested capital is likely to fall by 6%, a negative result but infinitely better than the 20% fall from peak-to-trough in the previous down leg.

“After six years of cutting back on capital expenditure and giving cash back to shareholders, we think the sector is in a much better position to handle a cyclical downturn,” Macquarie said.

Despite the down week, there was a steady flow of interesting news, though not many stocks outside the gold sector gained ground, with moves that included:

  • Staveley Minerals continued to attract investor attention after last week’s stunning drill results from its Thursday’s Gossan copper project in Victoria, shaking off mid-week profit takers to close at 96c, down on its all-time high of $1.22 reached last Friday but up on Tuesday’s low of 84c.
  • Northern Star was the pick of the local gold producers with a rise of 78c to $11.67, as well as being recipient of an optimistic research report from Citi which tipped a 12-month share price of $13.70 thanks largely to plans for the expansion of the Pogo mine in Alaska.
  • Mader Group performed well after its $1 shares peaked at $1.25 following a midweek listing. The heavy equipment maintenance and labour services provider eased to around $1.14, a strong performance for an IPO in a weak market.
  • Battery metal stocks drifted lower, including Galan Lithium, which slipped 2c to 19c despite reporting a high-grade maiden resource at its Candelas project in Argentina. Other lithium falls included Orocobre, down 5c to $2.50, and Galaxy, down 9c to $99c.
  • Azure Minerals and Black Cat Syndicate picked a bad week to raise capital and while Azure got $4 million from a placement at 17c and Black Cat got $5 million at 43c both saw their shares fall, Azure by 7c to 19c and Black Cat by 4c to 44c.
  • Tietto Minerals was a winner among the gold explorers with a 2c rise to 25c after reporting a strong drill hit at its Abujar gold project in Ivory Coast with a best assay of 14.8 grams a tonne over 20m from a depth of 42cm, and
  • Dacian Gold was steady at $1.48 after reporting a maiden mineral resource of 125,000 ounces at its Phoenix Ridge discovery at the Mt Morgans gold project.

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