Biden’s cash splash gives gold a bump but oil, industrial metals seen as real winners

Gold enjoyed a relief rally this week as the U.S. prepared to pump an extra $US1.9 trillion of paper money into the system
11th March 2021
Resources Rising Stars

Gold enjoyed a relief rally this week as the U.S. prepared to pump an extra $US1.9 trillion of paper money into the system, but the bigger picture of rising interest rates and the potential for faster global growth kept the focus on copper and other industrial materials, including oil.

It wasn’t all plain sailing for industrial materials. It never is, as investors exposed to nickel discovered when China delivered a supply surprise. Iron ore also suffered a setback courtesy of events in China which point to a cutback in steel production.

But in that mix of factors, led by vaccine enhanced growth and a flood of devaluing cash, came a useful research report from Wilson Advisory about what to expect from different market sectors as investment yields rise.

Winner, after considering a range of data, was energy (code for oil) with an average sector-wide rise of around 7% during periods of rising yields. Biggest loser, with a sector wide fall of around 10.5%, are real estate investment trusts (property).

“Cyclical sectors, such as materials, energy and financials (50% of the market) do particularly well when bond yields are rising,” Wilsons said in the March 11 edition of its Australian equities review.

But in what represents an interesting guide for investors, Wilsons took three measurements to arrive at its average of sector performance.

The firm looked at what happened in the “taper tantrum” of 2013 when the U.S. central bank said it was easing its post-GFC market support by reducing bond purchases, an event which saw healthcare stocks outperform while energy and materials were flat or eased marginally.

The last period of synchronised global growth which was five years ago (2016) saw a clear win for materials with energy the second-best sector.

But it’s when you get to forecasts of Covid reflation over 2020 and ’21 that energy stars with a growth rate of 15%. Mining is in second place with a rise of 11% and banks third at 9%.

“The worst performing sectors against rising yields have historically been real estate trusts, utilities and consumer staples because all three have minimal earning leverage to an acceleration of global growth,” Wilsons said.

The Covid reflation trade can best be seen in the share price of Qantas which has been rising since first news of successful vaccine trials. The stock took off again yesterday thanks to Australian Government ticket sales support, adding 13c (2.5%) to $5.30, taking its rise over the past month to 15%.

Copper and gold are also winners from the Covid reflation trade, albeit in different ways. Copper because it will be heavily used in stimulus-funded construction projects. Gold because of investor fear that there will be excess stimulus spending, depreciating the value of paper currencies.

Macquarie Bank said gold’s relief rally, triggered by a fall in a key U.S. interest rate (the Treasury Inflation Protected Security) is not expected to last. A fall in the amount of gold held by exchange-traded funds and an uptick in open interest positions on the U.S. futures market “indicates the addition of active shorts”.

“Without a sustained reversal in yields, a major recovery in gold is unlikely,” Macquarie said, adding that with a forecast that 75% of Americans over 16 could be fully vaccinated by June “we expect yields to keep trending higher”.

Citi, another investment bank, sees gold sliding towards $US1400 an ounce later this year. Credit Suisse is sticking with $US2300/oz, but with a long-term price forecast the same as Citi, $US1400/oz.

Most gold equities responded well to the $US33/oz price rise over the week, ending a period of steep slides. Northern Star bounced back with a rise of 26c to $9.77. Newcrest added $1.16 to $24.32, aided by what looks to be a significant discovery in Canada.

West African rose by 14c to 89c thanks to a forecast of rising gold production. Gold Road put on 7c to $1.14 after unveiling a maiden dividend, and Aston Minerals doubled early in the week to 6.8c after reporting highly encouraging drill results from a Canadian project before easing to 5.8c.

Nickel stocks were sold off, but not savagely, after the big Chinese stainless-steel maker, Tsingshan, said it would substantially boost output and start producing battery-grade nickel at its Indonesian operations.

Nickel metal plunged by 20% to $US16,036 a tonne while some local miners slid lower. Western Areas lost 26c to $2.04, with the fall partly explained by a big capital rising. Mincor went against the trend with a rose of 2c to 99c.

Iron ore stocks fell after China revealed tougher emissions controls on steel smelters which could see a fall in overall Chinese steel production of up to 2.3% a year, reducing the demand for imported raw material. High grade iron ore closed yesterday at $US165 a tonne, down $US10/t but Citi, an investment bank, reckons that the rest of Asia will pick up where China is leaving off with steel and iron ore.

Fortescue Metals, which is also under pressure because of trouble at a new magnetite processing project, dropped another $1.60 to $20.64, taking its fall since early January to 19%. Mineral Resources shed 56c to $38.08 while Champion Iron shrugged off the iron ore fall to add 33c to $5.84.

Copper, as mentioned earlier, is replacing gold as the star of the minerals sector with Macquarie leading the charge into copper stocks despite a modest slide in the price of the metal this week.

A measure of the bullish mood at Macquarie towards copper is a $30 price target for OZ Minerals, up 39.5% on yesterday’s $21.50 and a $9 price target for Sandfire, up 49.7% on yesterday’s $6.01.

Oil stocks weakened modestly this week as the underlying price of Brent-quality crude slipped by $US2 to $US67 a barrel, rubbing 54c off the price of Woodside Petroleum, which closed at $24.67, and 40c off Santos, which eased to $7.19.

Those share price falls by leading oil producers should be seen against a 34% rise in the ASX energy index since last November, roughly the time which vaccine confidence became a key investment pointer.

Other news and market moving events this week included:

  • Evy Hambro, head of resource sector investing for BlackRock, told the annual Prospectors and Developers convention in Canada (PDAC), the world’s biggest mining conference, that environment, social and governance issues would provide consolidation opportunities as poor ESG performers are sold off.
  • Hastings Technology Metals added 2c to 20c after completing a $100 million capital raising which positions it to become Australia’s next rare earth producer. Canaccord Genuity reckons the stock is heading to 35c.
  • ALS Ltd, one of the biggest operators of mineral assay laboratories and other technical services, released an upbeat trading report which lifted the stock by 13c to $9.61, more than double its price of $4.72 at this time last year. Goldman Sachs reckons ALS is heading for a price of $12.
  • Galaxy Resources released a preliminary economic assessment of its James Bay lithium project in Canada with investors added 11c to the company’s share price which closed yesterday at $2.32. Morgan Stanley reckons Galaxy is overpriced with a share price forecast of $1.50.
  • DDH1, a leading Australian mineral exploration drilling company, listed on the ASX during the week after a $150 million capital raising priced at $1.10 a share. It started trading at 91c, fell to 84c and has limped back to 96c, and
  • Peel Mining said it planned to raise $32.2 million for its copper-focussed South Cobar project in NSW. On the market, the stock slipped 4c lower to 27c.


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