Gold regains glitter as global economy shows signs of getting stuck in the sewage canal

Gold regained some of its appeal this week as the global economic growth story hit a rocky patch best illustrated by images of a fully-loaded container ship blocking the Suez Canal – a metaphor of how the broader economic picture has taken a turn for the
26th March 2021
Tim Treadgold

Gold regained some of its appeal this week as the global economic growth story hit a rocky patch best illustrated by images of a fully-loaded container ship blocking the Suez Canal – a metaphor of how the broader economic picture has taken a turn for the worse.

Whether it has been threats from the European Union to withhold Covid-19 vaccine from export or a series of confidence-sapping surprises in a number of commodity markets, the score by last night was gold 1, rest of the market nil.

Much of the credit for the Australian gold sector gaining ground, while just about everything else was flat or falling, can be attributed to a significant drop in the exchange rate, with the local dollar tumbling from US78.2 cents at the end of last week to latest trades at US75.95c.

That currency shift highlighted gold’s status as both a commodity and a currency because while the U.S. dollar gold price actually fell by $US10 an ounce over the course of the week, the Australian dollar gold price rose by $A27/oz.

The local rise can be seen in the ASX gold index, which was up 2.5% this week as the overall market, as measured by the all ordinaries index, added a modest 0.8% and the metals and mining index, which includes iron ore and copper, fell by 1.6%.

Price gains by top gold stocks included Newcrest, up by $1.05 to $25.40. Northern Star putting on 90c to $10.32, and Evolution rising by 27c to $4.40.

Offsetting those rises were falls by most non-gold mining stocks including BHP, which lost 25c to $44.71, a seemingly modest fall but one which takes the overall decline over the past four weeks to $6.20 (12%).

Fortescue Metals, the favorite for investors with an interest in iron ore, lost 71c this week to $19.36, taking its loss since the start of the year to $7.06 (26.7%).

Concern that the economic recovery which started in China roughly 12-months ago has run aground was the focus of a research report by Citi, an investment bank, which questioned whether the near-boom conditions of late last year were “an aberration”.

“Many clients have expressed concern that the fourth quarter of 2020 was an overshoot, in particular for consumer goods consumption,” Citi said.

Worries along those lines can also be seen in the 15% fall in the Chinese stock market over the past three months largely as a result of investors heading for the sidelines as government stimulus spending dries up – a trend which is expected to become a universal feature.

Doubts about global growth, and a container ship blocking the world’s most important trade route, was not the only surprise to rattle investor confidence in a week when the Australian Government lurched from crisis to crisis, most of its own making.

Other value-sapping surprises included:

  • Australia’s east coast floods dampening economic activity even if delivering a bonus for coal miners, who are watching the price of thermal coal move back over $US100 a tonne, double what it was six months ago.
  • China’s crackdown on emissions at its steel-making centre of Tangshan, a development which threatens to hit iron ore demand, especially for lower quality material, and
  • Another environment, social and governance (ESG) shock with the government of Ghana unilaterally terminating the lease covering the Bibiani gold mine of ASX-listed Resolute Mining.

Exactly what happened to Resolute has not been fully explained and management is seeking an urgent conference with the government of Ghana, but the result is plain to see, a 26% (18c) fall in the company’s share price yesterday to 47c.

Resolute’s setback in Ghana is the latest in what looks like a rising tide of ESG risks for resource sector investors, never quite knowing what trick government or environmental activists have up their sleeves.

Apart from gold firming as other market sectors faltered, there were occasional flashes of good news, such as:

  • Molybdenum, a steel toughening metal often found in association with copper, continuing its spectacular rebound that has seen it rise by 60% over the past six months from around $US7.50 pound to $12/lb.
  • Tin, another of the lesser metals, hanging on to a nine-year price high of $US28,000/t thanks to demand in the semi-conductor industry where it is used as a solder, and
  • Trafigura, a major European-based commodities trader, tipping a copper price over the next 10-years of $US15,000/t, up 66% on latest trades at $9000/t as demand explodes for the red metal in green technologies.

With confidence at a low ebb, especially compared with conditions at the end of last year and early this year, there was a limited investor response to news flow this week, no matter how encouraging.

Two examples of positive local developments being over-powered by international market trends were:

  • Mineral Resources proudly announcing first iron ore from its controversial Wonmunna project in WA’s Pilbara region after a lightning-fast construction period of just five months, only for the stock to fall by $3.10 fall to $36.16, and
  • Salt Lake Potash suffering a 3c share price fall to 47c after announcing the start of commissioning at its Lake Way project, with the latest price an eye-catching 30c below the 77c target for the stock set by Macquarie bank.

Other news events produced a similar lacklustre response on the market with most share price mover modest, up or down. Examples included:

  • Piedmont Lithium being the newsmaker in the battery metals space with a $159 million capital raising for its U.S. projects. On the market the stock lost 15c to 96c. Other lithium stocks suffered a similar fate, perhaps a result of slowing global trade (not helped by the Suez blockage). Pilbara Minerals was down 14c to 95c and Galaxy lost 26c to $2.28.
  • Graphite stocks followed their lithium cousins into the red. Syrah reported progress at its Vidalia project in the U.S. but lost 16c to $1.03 while Ecograf was 6c weaker at 63c and Talga gave up 18c to $1.23.
  • Chalice Mining slipped 24c lower to $4.61 despite reporting fresh exploration targets north of its Gonneville palladium and nickel discovery on the outskirts of Perth. Caravel Minerals, which is riding on the coattails of Chalice through a nearby exploration project had less news but did cop a speeding ticket from the ASX after a 5c share price rise to 24c before easing to close yesterday at 22c.
  • De Grey Mining retained its status as a gold exploration favorite as positive results continue to flow from its Hemi project in WA, though not good enough this week to prevent a 4c price fall to $1.10 and despite an updated Canaccord Genuity price forecast of $1.50.
  • Calidus said it was raising $12.5 million to acquire the historic Blue Spec goldmine in WA and to then fold its high-grade ore into the nearby Warrawoona project. On the market, Calidus lost 2c to 43c.
  • Rex Minerals was a rare winner this week adding 3c to 23c after reporting a sizeable increase from 1.4 million ounces to 2.2M/oz in the gold resource at its Hog Range project in the U.S, and
  • Peel Mining attracted the attention of analysts at Canaccord who like the copper appeal of the company’s Cobar assets in NSW. Peel was steady this week at 26c but Canaccord has a future price target for the stock of 55c.

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