Gold’s volatile week a sign of what is to come as markets weigh US election and vaccine prospects

20th August 2020
Tim Treadgold

Volatility ruled financial markets this week with gold’s roller-coaster ride a perfect example of what to expect for the rest of the year.

Global politics get messier by the day as the U.S. Presidential election nears and hopes for a quick vaccine fix for Covid-19 rise and fall like the odds on an outsider in the Melbourne Cup – or should that be odds on whether the Cup is run this year.

Macquarie Bank, which three weeks ago raised eyebrows with its perceptive warning that gold had entered “overshoot” territory as the price neared $US2000 an ounce, was back in action on Wednesday with a repeat, saying that “gold remains in overshoot territory”.

That latest comment from Macquarie came after a burst of renewed interest in gold after it was reported that one of the world’s top investors, Warren Buffett, had snapped up a stake in one of the world’s biggest gold producers, Barrick Gold.

It was the Buffett news which helped gold rise from an opening price on Monday of $US1934/oz to a mid-week high of $US2013/oz, but after that it was downhill to around $US1945/oz – up slightly on where it started thanks in part to a neutral set of minutes from the U.S. central bank which offered no guidance on interest rates or economic stimulus.

Macquarie, which got it right with the early “overshoot” call, reckons that the outlook for gold now is for “whippy price action” – code for short, sharp, price movements as investors look for solid guidance.

“For gold to trade sustainably above $US2000/oz, we think real yields need to push lower still,” the bank said, a comment aimed directly at official U.S. rates which are already at historically low levels and, in some cases, in negative territory.

Offsetting Macquarie’s caution are wildly bullish gold bugs such as Switzerland’s Egon von Greyerz who published his latest comments during the week, focusing on what he sees as the biggest reason to stick with gold - soaring global debt. His remarks included this classic:

  • “For those who think gold is going to collapse, the big bad wolf will eat you alive.”

Local gold leaders had a mixed week with strong profit and dividend announcements which set them apart from the broader markets where heavy losses by Covid-19-affected stocks dominated action.

But even the flow of excellent profit and dividend news couldn’t save most gold stocks from losing ground as profit takers moved in and potential buyers clung to the sidelines hoping for a clearer view of the outlook – which might be wishful thinking as U.S. politics and the worsening trade war with China weigh on sentiment.

Key results this week included:

  • Saracen delivering a 173% increase in its underlying net profit to a record $258 million in the year to June 30 from record gold production of 520,414 ounces at an all-in sustaining cost of A$1101/oz. Investors took the result in their stride, rubbing 16c off Saracen’s share price, which drifted down to $5.48.
  • Northern Star lifted its net profit by 69% to $291 million. Shareholders were showered with cash, a final 9.5c a share dividend topped up with a special payout of 10c, a rich return which was not good enough to save the stock from an 8c price decline to $14.14.

As well as lodging their profit results, Saracen and Northern Star unveiled plans for an extension to the life of the jointly-owned Kalgoorlie Superpit mine, which will involve a big dig to access ore which should keep the mine in production into the 2030s.

The title of precious metals star of the week went to Chalice, which rocketed 42c to $1.50 after announcing a significant extension to its Julimar platinum group metals (PGM) discovery north of Perth with a best hit in the latest assays of 31 metres at 3.3 grams a tonne of palladium from a depth of 76 metres.

Adding to interest in the PGM complex of metals was an updated commentary from Citi, an investment bank, which said palladium is heading back to $US2500 an ounce from its current $2165/oz.

While gold struggles to stake a permanent claim above $US2000/oz, iron ore is having no trouble trading above $US120 a tonne, reaching $US125/t on Thursday.

Strength in the iron ore market continues to revitalise the small end of an industry widely regarded as the province of mega-miners such as Rio Tinto and BHP. The latter reported an almost steady net profit during the week with iron ore dominating earnings of $US9 billion.

Mt Gibson, one of the small survivors from the iron ore boom decade which ran from 2004-to-2014, bounced back during the week with a profit of $84 million and a 3c dividend as it moves forward with plans to mine the Shine deposit inland from Geraldton. On the market, the stock added 3c to 75c.

Mineral Resources, a diversified iron ore miner and service provider, reported a 63% increase in profit to a record $334 million and a 127% increase in annual dividends to $1 a share. The big boy of iron ore, Fortescue Metals, reports next week.

In keeping with the volatility and peak price concerns, both Mineral Resources and Fortescue saw their shares weaken slightly during the week.

Other iron ore news included:

  • Fenix Resources raising $15 million to fund the start of its Iron Ridge project in WA’s Mid-West region. The stock initially added 3c to 19c before easing to 16c, and
  • Strike Resources adding 2c to 12c after announcing a native title agreement to pave the way for development of the Paulsens East project in the Pilbara region of WA.

Base metal news was dominated by copper moving back above the $US3 a pound mark for the first time in more than two years, dragging copper miners higher, including Sandfire which added 10c to $5.05. OZ gained $1.05 to $14.85.

Factors in the copper bounce included strong Chinese demand and a cut in production guidance from Rio Tinto, which is having problems at its Kennecott operations in the U.S.

While most price moves during the week were modest, news which might move the market in future weeks included:

  • DevEx reporting a fresh look at the structure in its Sovereign nickel, copper and PGM prospect in the Julimar region of WA where Chalice has made its discovery. DevEx initially rose to a 12-month high of 22c before settling at 21c for a 3c gain.
  • Kingston added 2c to 29c on Tuesday before easing to 28c later in the week after reporting high-grade drill results from its Livingstone gold project in WA with best hits of 12m at 2.63g/t from a depth of 84m and 8m at 4.06m from 49m.
  • Boss Resources added 1c to 8c after reporting reduced capital costs in the optimisation of its Honeymoon uranium project in South Australia.
  • Musgrave Minerals reported the discovery of a 5.6m zone assaying 12.7g/t of gold from a depth of 40m from the latest drilling at its Starlight prospect near Cue in WA. On the market, the stock lost 3c to 59c.
  • Tietto Minerals traded up to 60c on Tuesday before easing to 56c for a gain of 1c over the week after announcing gold assays of up to 5.13g/t from a depth of 385m at its Abujar project in Ivory Coast, and
  • Lynas Corporation lost 10c to $2.47 after announcing it had successfully raised $425 million to fund its front-end rare earth processing facility near Kalgoorlie in WA.

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