Risk on, risk off, risk back on, Daniel son, as trade tensions ease slightly

Just as one swallow does not a summer make, according to an old proverb, neither does one week of falling gold and rising copper signal a sea-change in investment markets
13th September 2019
Tim Treadgold

Just as one swallow does not a summer make, according to an old proverb, neither does one week of falling gold and rising copper signal a sea-change in investment markets – but it could, and that’s interesting.

The switch, so modest that not many people noticed, saw gold slip by $64 an ounce to around $US1491/oz and copper rise by US10 cents a pound to $US2.62/lb.

In percentage terms, those moves look a little more thought-provoking because they are both roughly 4% - gold down by 4%, copper up by 4%.

The precise cause of the up/down moves is not fully understood but appears to be related to a slight easing in trade tensions and less confrontational stance by US President Donald Trump, who sacked his war-mongering security adviser, John Bolton.

There has also been a marked pick-up in interest rates with the US 30-year Treasury Bond moving back up over 2.2%, which could be a sign of faster global economic growth.

In financial terms, the shift away from the safe haven of gold to industrial metals such as copper is a version of the “risk-on risk-off” shift in markets which has seen significant investor mood-swings from one of taking more risk (buy copper and other industrial metals because the global economy looks healthier) to no risk thanks, we’ll stick to gold.

Morgan Stanley, a U.S. investment bank, was quick to seize on the rising copper price with a research report titled: “Copper, signs of life”.

“Last week’s risk-on rally could be followed by a more sustainable price lift as demand emerges from the doldrums,” Morgan Stanley said – adding that a secondary price driver was constrained mine supply.

On the Australian stock market, the two local copper leaders, OZ Minerals and Sandfire Resources, enjoyed a pick-up in investor support over the past few days with OZ adding 23c to $9.55 and Sandfire rising by 13c to $6.41.

Another copper stock to catch the eye of investors, and stock-exchange regulators, was Hot Chili, which copped a speeding “fine” on Tuesday after a 30% price rise from 3c to 3.9c followed by a drill-results report yesterday which featured a whopping 848 metres at 0.4% copper plus 0.2 grams of gold per tonne at its Cortadera project in Chile.

As ever, it’s not time to write-off gold which retains its status of being an investment class independent of political and economic antics, as well as being a beneficiary of the China v US trade war, which might have cooled a degree or two but is far from over.

Citi, another US investment bank, was bitten by the gold bug during the week, tipping a price of $US2000/oz “within the next two years”, thanks to a slowing US economy and a fresh round of interest rate cuts.

UBS weighed into the gold debate with a revised set of price tips and investment recommendations, including an uplift in the bank’s long-term price forecast from $US1300/oz to $US1500/oz and upgrades for Northern Star from sell to neutral and Regis from sell to buy.

Northern Star’s price target from UBS is $11.50, up 90c on the stock’s last sales at $10.60. The target for Regis is $5.30, up 77c on last sales at $4.53.

Features of the past week, positive and negative, included another round of successful capital raisings by explorers, which is sign of reasonable risk appetite, a steady flow of encouraging exploration results which confirms the importance of investors keeping an eye on drill results and a continuation of the tough times among battery-metal stocks with graphite in the sin bin.

Capital raisings included: Silver Mines hauling in $10 million from a placement to institutions at 10c a share, down 2c on the ruling market. Centaurus also raised $10 million at 1c a share. Sheffield received commitments for $18 million at 39c a share. Blackham raised $4 million and is seeking another $3 million and Paladin is in the hunt for $30 million.

Syrah was the bad news graphite story of the week, announcing a cutback in production after a sharp decline in demand from customers in China who are preferring to source their raw material locally thanks to a fall in the value of the Chinese currency – an event which every commodity exporter will need to watch carefully.

On the market, Syrah fell 17c to 54c over the week but did trade as low as 47c. The stock retained some friends, most noticeably analysts at Credit Suisse who maintained a buy tip and a price target of $2.30 – though it’s worth noting that the same bank has ridden Syrah all the way down from a time  in 2017 when the price target was $7.80 to earlier this year when it was $5.50.

Discovery and development news, as mentioned, was generally positive (with a few negatives). Reports and market moves which stood out included:

  • Alkane Resources added 15c to 59c after reporting significant copper and gold assays from drilling at its Boda prospect in NSW with a best hit of 502m at 0.48g/t of gold and 0.2% copper from a depth of 211m.
  • Magmatic Resources was quick to play the nearology card with an announcement that it held ground “very close” to Alkane’s discovery, good enough to double Magmatic’s share price to 3.6c.
  • Bellevue Gold shook off the effects of a falling gold price with a rise of 6c to 64c after reporting drilling results from its Deacon and Mavis Lodes which are part of the Bellevue project in WA. Best hits included 4.4m at 62.4g/t and 2.2m at 38g/t.
  • Staveley Minerals added 5c to 22c after a fresh set of encouraging drill results from its Thursday’s Gossan copper and gold prospect in Victoria. The latest program is focussed on shallow targets and came up with an immediate 14.6m zone of massive to semi-massive sulphides from a depth of 79m. The core is being sent to Adelaide for analysis.
  • St George put on 2c to 22c after reporting thick nickel and copper intersections from drilling at its Stricklands project in WA. A 4m zone from 88m deep featured a reading of 3.5% nickel and 1.2% copper using a hand-held device. Laboratory assays are pending.
  • Newcrest confirmed the potential of its Havieron gold project in WA’s remote Paterson Range with a fresh set of drill results that included 43m at 7.9g/t of gold and 0.83% copper. On the market, the stock dropped by $2.48 to $34.38 largely because of the lower gold price.
  • Duketon Mining added 4c to a 12-month high of 24c after reporting hand-held field work readings of up to 5.84% nickel from exploration at its Somerset prospect near Laverton in WA, and
  • PolarX traded up to a 12-month high of 12c on Monday as interest grows in its Saturn base metals target in Alaska, before easing back to 10c for gain over the week of 1.6c.

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