Everything goes up .. fuelling fears everything will go down

The “almost everything boom” roared on this week, led by palladium, which hit an all-time high of $US2899 an ounce, iron ore, which cracked a 10-year price ceiling at $US186 a tonne, and gold, which took a peek at $US1800/oz
22nd April 2021
Tim Treadgold

The “almost everything boom” roared on this week, led by palladium, which hit an all-time high of $US2899 an ounce, iron ore, which cracked a 10-year price ceiling at $US186 a tonne, and gold, which took a peek at $US1800/oz -- and might be there by the time you read this.

Soft commodities and financial markets are also booming. Wheat is trading at a seven-year high. Timber in the U.S. is at an all-time high, as are share prices on the New York Stock Exchange.

But, behind the scenes rumblings of doubt are growing as questions are asked about the sustainability of the spectacular recovery in commodity prices and the value of financial assets which, in little more than 12-months, have shaken off the effects of last year’s crash.

Driving everything, as it always does, is the price of money, as measured by interest rates and while they have ticked up marginally in recent weeks, they remain close to all-time lows, buried under mountains of cash created by governments determined to create growth and stave off a recession.

The problem with a surplus of cash is that it tends to encourage irrational investment decisions and the creation of FOMO (fear of missing out) which can be seen in residential property prices, not just in Australia, but around the world, with buyers using government-created stimulus cash to bid prices through the roof.

While few people are brave enough to say that the party must come to an end, there is a growing sense that the balloon of asset prices must eventually pop with everything “correcting” by up to 20%, a potential fall suggested last week by U.S. markets commentator, John Mauldin.

In the meantime, the party rages on, though there is a fair chance that the only people left at the bar are novice investors who subscribe to a theory of prices always rising, something even Bitcoin believers discovered this week is not true.

Palladium, as mentioned, rocketed higher thanks to a supply shortage and strong demand from car makers where it is used as an exhaust gas catalyst in petrol-powered vehicles.

Platinum, a sister metal, also moved up, though at $US1219/oz remains well below its peak because of its major use in the exhausts of less popular diesel engines.

Chalice Mining, the company emerging as Australia’s first significant palladium producer, had a mixed week, initially shrugging off the record palladium price before reacting positively to the latest exploration news which expanded the known mineralisation at its Julimar discovery in WA, though the overall effect was a near-steady share price for the week at $6.42.

Iron ore stocks, despite the 10-year high price for their commodity, were also less than impressive in what could be another sign of investors not quite believing the recent upward surge in prices.

Fortescue Metal, the leading pure-play iron ore producer, added a modest 50c to $21.30 while leading mid-tier producer, Champion Iron, put on 30c to $6.80, closing in on the $7 price target set by Macquarie Bank.

Best performance among the iron ore stocks came from Deterra Royalties which is starting to show the benefits of being exposed to BHP’s biggest mine, South Flank. Over the week, even as BHP slipped 25c lower to $47.20, Deterra added 30c to $4.40.

Tipping the iron ore price trend remains an impossible game thanks to conflicting signals coming from the demand side. China said it is cutting steel production whereas the latest data shows an increase and with shipments from Brazil said to be slow whereas port stocks in China are up 7% since the start of the year.

According to Citi, an investment bank, iron ore stocks in Chinese ports are now at their highest level in two years and stand “just above the long-run average of 32 days of consumption”.

Citi’s comment about abundant port stocks is one of the factors which makes you go “hmmm”, when trying to align the 10-year high iron ore price high with rising port stocks because the two events do not appear to be compatible.

Other big picture events evident in the market this week for investors to consider include:

  • Fresh hints of a profit-damaging outbreak of inflation with mid-tier iron ore miner, Mineral Resources, downgrading its shipment target because of a shortage of truck drivers in WA, and Rio Tinto complaining about the same problem as skilled workers demand (and get) fatter pay packets.
  • Rare earth producer Lynas Corporation being the first miner to complain about the effect on shipping availability in the wake of the Suez Canal blockage while also warning that China is ramping up rare earth production to catch the wave of rising demand, which could become a problem for new entrants into a small market.
  • Another lithium sector deal, with Galaxy and Orocobre merging to create the world’s fifth-biggest producer of the battery metal, following in the footsteps of Independence Group buying a seat at the lithium table through its deal with Tianqi over the big Greenbushes mine in WA, and
  • The need to keep an eagle eye on commodity price disparities as the “balkanisation” of raw material supplies becomes the national security issue seen by Canadian billionaire investor Robert Friedland who is particularly worried about the impact of China as it rushes to secure future energy supplies.

Gold, as mentioned earlier, has moved back to be within sight of the $US1800/oz mark as investors worry about the cash flood and its potential to unleash inflation which could depreciate the value of most assets – except the world’s ultimate currency: gold.

This week’s $US20/oz rise in the gold price (and rising at the deadline) to $US1793/oz takes it back to mid-February levels with a correspondingly positive effect on gold company share prices.

Northern Star, which also led the way with the quarterly reporting flood, added 35c to $11.57, but with most of that coming over the last two days as the gold price moved towards $US1800/oz.

Other market related events during the week included:

  • Rumble Resources made headlines early in the week with a report of encouraging zinc, lead and silver assays from exploration drilling north of Wiluna in central WA. Best hit was a combined assay of 4.22% zinc and lead over 34 metres from a depth of 66m, with a core of 17m at 6.65% zinc and lead. On the market, Rumble rocketed  21c (75%) to an all-time high of 49c.
  • Mineral Resources revealed plans during an analyst site visit to further upgrade its Koolyanobbing iron ore operation, news which helped lift the stock by $1.50 to $44.75 but with Macquarie analysts so impressed with their visit that they upgraded the price target for the stock to $61.
  • Pilbara Minerals reported record production from its Pilgangoora lithium operations and progress on downstream processing with its Korean partner, Posco. Investors appeared to be shy of the expansion plan, with the stock losing 15c to $1.15 over the week.
  • Vulcan was another lithium stock sold down during the week after unveiling plans to spin out surplus copper, nickel and cobalt assets, a move which helped trim 18c off the share price which closed yesterday at $7.23.
  • Nickel Mines expanded its interest in an Indonesia processing facility by 20% through a staged payment system, but saw its shares drop by 7c to $1.25.
  • De Grey Mining continued to expand the footprint of its promising Hemi gold discovery in WA’s Pilbara region with the latest drilling at the Brolga lode returning a best assay of 78m grading 2.8 grams of gold per tonne from 33c. On the market, De Grey added 7c to $1.33, and
  • Anglo Australian Resources reported broad zones of mineralisation during in-fill drilling at its Mandilla gold project near Kalgoorlie in WA with a best hit of 83m assaying 1.47g/t. The stock added 1c to 12c.

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