Battered gold bounces back while iron ore’s stronger-for-longer case wins more supporters

Gold’s overdue price correction hit the wallets of investors this week and bruised a few egos, but while that predictable event was occurring something more remarkable was happening in iron ore
14th August 2020
Tim Treadgold

Gold’s overdue price correction hit the wallets of investors this week and bruised a few egos, but while that predictable event was occurring something more remarkable was happening in iron ore, where a seven-year boom might have started.

The 9.3% fall in gold from a peak $US2068 an ounce last week to a low of $US1875/oz on Wednesday has been blamed on multiple factors, ranging from Russia’s claim to have developed a successful Covid-19 vaccine, to signs of an improvement in the U.S. economy, which could point to a stronger U.S. dollar.

Bundled together and what you have been watching in gold this week is what you read here on July 31 when Macquarie Bank warned that the metal had entered “overshoot” territory after rising by 16.5% in seven weeks.

That timely warning about what happens after a short, sharp, upward rush in the price of anything was taken seriously by some investors but not by everyone as a FOMO rally (fear of missing out) continued into last week.

But the real test for gold, and the level of ongoing interest in the metal as a hedge against uncertainty, could be seen in the quick bounce back to $US1950/oz and a steady pattern forming around $US1940/oz --- with those prices not far off the $US1958/oz at the time we reported Macquarie’s overshoot warning two weeks ago.

Gold stocks, not surprisingly, took a solid whack during the week, but were also showing signs of a recovery after the initial shock. Northern Star dropped by $1.91 to $14.25 on Tuesday before moving back up to $14.50, the same price as a month ago. Saracen lost 71c to $5.23 before moving back up to $5.41, where it was at the end of June.

International events, especially the increasing volatility in the U.S. and Covid-19 vaccine news flow, will cause gold to bounce around for the rest of the year. But the underlying positive forces behind gold are intact, especially currency devaluations from excess printing of paper money.

While gold has been bruised, iron ore goes from strength to strength and might hang on to its hugely profitable price of around $US120 a tonne for some time, and perhaps for the next five-to-seven years, according to the latest analysis by the leading investment bank, J.P. Morgan.

Chinese steel demand is the primary cause of that remarkably optimistic observation, but a secondary factor is that supply has hit the ceiling with Australian iron ore mines running at capacity and Brazil struggling to restore full output, and even when Brazil is back to its guidance levels there could be a shortfall.

J.P. Morgan sees iron ore starting 2021 at $US110/t and averaging $US100/t all of next year, which means the fat profits to be reported next week by BHP and Fortescue Metals might not be the end of the boom.

“We struggle to see what releases the current pricing tension heading into next year,” J.P. Morgan said. “Chinese steel output has accelerated all year, with the rest of the world likely to follow into 2021.”

But that’s not the end of the positive news because the bank believes prices will remain elevated until the proposed Simandou mine in the West African country of Guinea comes on line and that will not be until 2025, at the earliest.

“We are starting to think prices could remain well above cost curve support levels until Simandou comes to market, which could be five-to-seven years away,” J.P. Morgan said.

Local iron ore stocks started the week strongly before fading. Fortescue Metals hit an all-time high of $18.84 on Tuesday but closed yesterday at $18.06, where is started. Mineral Resources also traded to an all-time high of $27.74 before slipping back to $27.48, down 13c over the week.

The significance of J.P. Morgan’s iron ore observations is that the bank is not alone. Other banks have spotted the same market-moving event developing later this year and that is a post-Covid-19 revival in countries other than China.

Credit Suisse and Citi saw the emerging importance of the rest of the world, as did UBS and Macquarie, which repeated the idea this week, and while it might be a case of the bank not wanting to be have a different view to their rivals (herd behaviour), it is more likely that they’re reading the same signals to arrive at the same conclusion – iron ore is hot and is likely to stay that way.

Yesterday’s research from the banks reinforced the case for iron ore, with Credit Suisse revisiting its earlier comments to add that its assessment of Chinese port stocks pointed to a depletion of iron ore fines, especially Australian material preferred by steel mills, a discovery with potential political overtones considering there haven’t been any fresh threats from China recently about cutting Australian imports.

Zinc led the base metal sector this week, with the price stretching out to $US1.08 a pound before easing marginally to $US1.07/lb, sparking an interesting debate about the trend given that most zinc is consumed in galvanising steel, the material behind iron ore’s rise.

Morgan Stanley reckons there is a risk of zinc fading because of excess supply in the market. Citi reckons there’s a case for a higher zinc price as the metal plays catch up with other commodities.

Copper too is moving higher thanks to China’s lead in consumption and the rest of the world chiming in as Covid-19 fades as a demand killer. On the ASX, leading copper stocks were buffeted by the lower price for gold, their major by-product. OZ lost 80c from its midweek high to close at $13.66 and Sandfire slipped 21c lower to $5.05.

Other developments and market moves during a topsy-turvy week included:

  • Evolution Mining bounced back from a mid-week gold-price sell-off after reporting a record profit of $301.6 million for the year to June 30, plus and a 50% dividend boost. From a low of $5.41 on Wednesday, the stock added 35c to close at $5.76, still down 42c on where it was at the end of last week but trending up.
  • Australian Strategic Materials added 20c to $1.12 after reporting the successful production of titanium metal through a new electro-winning process which could add value to its long-delayed Dubbo zirconia and rare earths project in NSW.
  • Sheffield Resources suffered a sell-off after confirming the sale of a 50% interest in its emerging Thunderbird titanium minerals project near Derby in the north of WA though the share price fall of 4c to 29c needs to be seen against the 14c price a month ago.
  • De Grey Mining lost 4c to 78c despite reporting an extension of gold mineralisation at its Aquila project in the north of WA. The closing price can also be seen as a 10c rise from a mid-week low of 68c which followed the gold-price fall.
  • Trigg Mining added 2c to 12c after reporting encouraging drill results from its Lake Throssell sulphate of potash project in central WA. At one stage on Wednesday the stock was trading at a high for the year of 16c, and
  • Canaccord Genuity shrugged off the gold price correction by publishing a list of its five favorite gold explorer/developers with share price forecasts: Breaker Resources currently 24c is tipped to reach 55c. Kingston at 26c is said to be heading for 80c. Matador at 42c is on its way to 90c. Musgrave at 64c should reach 75c, and Oklo at 34c is said to be in track for a future price of 50c.

 

Image credit: Singapore Bullion Market Assoc.

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