Flow of big money points to start of commodities boom

“Follow the money.” What better time to remind investors of that advice than when a U.S. President heads for the exit and financial “flows” appear to be priming the world for a fresh commodity boom.
15th January 2021
Tim Treadgold

“Follow the money.” What better time to remind investors of that advice than when a U.S. President heads for the exit and financial “flows” appear to be priming the world for a fresh commodity boom.

Back in 1972 it was Richard Nixon departing, aided by that famous “follow the money” comment attributed (perhaps incorrectly) to Deep Throat, the source of leaks against him published in the Washington Post newspaper.

Today, it’s Donald Trump leaving, but the importance of following the money remains the best way of explaining why some of the world’s top professional investors believe we are in the foothills of the next commodity boom.

Citi, an investment bank, and Bloomberg, a financial news service, are certainly excited by what they see in the flow of funds into commodities.

Bloomberg noted in a recent report that record bets were being placed on all sorts of commodities raging from minerals and metals to oil and crops in the belief that a weaker U.S. dollar would boost demand, with a whiff of inflation adding to the case for commodities.

Citi research provided a measure of how much money is flowing into commodities with December seeing a 7% increase which took the total of assets under management in commodity-linked funds at the end of 2020 to a record $US640 billion – up $US118 billion on 12-months earlier.

The rush to buy a slice of the latest resources boom can be seen in almost every commodity, with prices for base metals such as copper and nickel at multi-year highs, iron ore hanging on to a sky high $US171 a tonne while gold is feeling the pressure of rising interest rates as governments around the world continue to stimulate the economic growth, which is driving demand for industrial metals.

Since the start of 2021, the gold price has scampered to a peak on January 4 of $US1943/oz and fallen to a low of $US1824/oz a week later (January 11) with the roller-coaster ride settling late this week at around $US1840/oz, roughly where it was in the middle of last year and more than $US200/oz below the all-time high of $US2067/oz reached last August.

Despite the overall weaker trend in the price over the last six months, gold remains an essential component of most investment portfolios, with the latest data from the World Gold Council showing that a record 877 tonnes of the metal valued at $US47.9 billion flowed into exchange traded funds in 2020 – with ETFs now holding 3752 tonnes of gold, up 33% on a year earlier.

On the market, most gold stocks lost ground over the week, though falls were modest. Northern Star slipped 30c to $12.82. Silver Lake was 12c weaker at $1.72. Kirkland Lake warned that production from its prolific Fosterville mine in Victoria was nearing a peak, news which knocked the share price down by $2.76 to $53.30. Dacian Gold eased back by 6c to 48c despite solid December quarter production and perhaps weighed down by a negative research report from Macquarie Bank which reckons the stock is heading for 34c.

Newcrest, the local gold sector leader, lost 42c to $26.72 despite management approving the development of a decline at the promising Havieron project in WA’s remote Paterson Province. Morgan Stanley, an investment bank, reckons Havieron will be a big factor in Newcrest’s share price rising to $33.40 over the next 12-months.

Battery metals have performed well since the start of the year, but not so well this week as profit takers took some money off the table.

Nickel, which rose by 8.5% from $US7.50 a pound to a two-year high of $US8.15/lb in the first days of January has settled back to around $US8/lb – US65c higher than the latest nickel price forecast from Macquarie in a sign that some metal prices might be running too hot.

In a warning note for nickel bulls, Citi said it expects a price correction in the second half of the year thanks to the pressure of abundant supply from Indonesian and Chinese nickel pig iron (NPI) producers.

The nickel price pull back and price warnings rubbed a few cents off most nickel stocks. Western Areas lost 10c to $2.80 over the past week but is still 50c up on where it was in early December. Mincor eased back by 2c to $1.17, three-times the price of last March.

Lithium started the year with a bang as the price of the key battery metal surged above $US8000 a tonne for lithium carbonate in China, almost certainly as a result of battery makers stockpiling ahead of an expected increase in demand for electric vehicles (EVs)

Citi reckons lithium is heading for its target price of $US9000/t, a level which should act as an incentive for mothballed lithium mines to resume production.

One of the biggest winners in the lithium space is Pilbara Minerals which has seen its share price rocket up from 13c at the height of the Covid-19 pandemic in March (and the depth of the lithium price crash) to last trades at $1.16, cementing its place as a top-150 stock with a market value of $3.15 billion.

Much of the rush into lithium stocks has occurred over the past two months as support for EVs grew stronger. Pilbara, for example was trading at 39c in early November. Orocobre, which added 24c this week to $5.23 was less than half that price at $2.45 two months ago, and Galaxy, down 12c this week to $2.74 was trading at $1.33 in early November.

Liontown, an 8c stock at this time last year, traded up to an all-time high of 48c on Monday after reporting the start of a definitive feasibility study into its company-making Kathleen Valley lithium and tantalum project. Later in the week the stock faded to 43c.

Other market news and price moves of interest this week were:

  • Most iron ore stocks faded despite the price remaining elevated. Sector leader Fortescue eased back by 67c to $24.82. Mineral Resources lost $1.75 to $38.80. Champion Iron went against the trend with a 24c rise to $5.18.
  • Iluka Resources added 8c to $6.78 and received a buy tip from Goldman Sachs and target price of $7.20 as the numbers around its rare earths production plans firm up. Goldman reckons Iluka could supply 10% of the world’s rare earths from treating monazite ore currently stockpiled because of high levels of uranium and thorium, and
  • ASX regulators flexed their muscles during the week with the rapid-fire issuing of price and volume queries, perhaps a sign that there’s a new team in charge keen to show who’s running the market. Recipients of “speeding” inquiries (generally seen as a badge of honour) included Trigg Mining, Arafura Resources, Helix Resources, New Talisman Gold, Cobalt Blue, Admiralty Resources, Hexagon Energy Minerals and Galileo Mining.

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