Gold set to soar as infections rise and yields slide

“Greenlit” is the new description of gold, which traded this week between the tramlines of $US1710-and-$US1730 an ounce but could soon be heading for $US1900/oz as negative virus and geopolitical news dampened enthusiasm for rival assets
19th June 2020
Tim Treadgold

“Greenlit” is the new description of gold, which traded this week between the tramlines of $US1710-and-$US1730 an ounce but could soon be heading for $US1900/oz as negative virus and geopolitical news dampened enthusiasm for rival assets.

Signs of a second wave of COVID-19 in China and the US destroyed confidence that the worst of the economy-sapping virus had passed.

Australia’s wake-up call came with another infection increase rise in Victoria and the release of the May unemployment rate, which rose to 7.1% in what’s been described as the biggest monthly increase in 30 years.

Layered on top of concern about the economy and the health pandemic was the return of North Korea as a security threat and the potential for India and China, two of Australia’s important trading partners, to wage war on their Himalayan border.

What kept markets from falling under the weight of those worries was more central bank money printing to compensate for slowing economic activity and the promise of interest rates being kept at near zero, or even negative, for the next few years.

If ever there was a time for gold to push past its 2011 all-time high of $US1895/oz, the next few months are it.

Macquarie Bank used the “greenlit” term for gold in a report which noted the inverse correlation between gold and official US interest rates such as Treasury Inflation-Protected Securities (TIPS), an investment product which increases in value with inflation and decreases with deflation.

Ten-year TIPS in the U.S. are currently in negative territory, yielding minus-0.54% − worse than holding cash, but perfect for holding gold.

According to Macquarie’s calculation, if the 10-year TIPS negative-yield falls to minus-1.5%, the gold price should rise to $US1950/oz.

Other analysts are seeing equally interesting situations developing in gold, including Shaw and Partners’ description of a “yawning gap” between the gold price and the share prices of several leading gold mining companies.

Newcrest, according to Shaw, is heading for a price of $41, a handy 37% above last sales of $29.94, and Northern Star is on the way to $18, also 37% up on last sales at $13.13.

Australia’s other star commodity of 2020, iron ore, weakened slightly over the past few days but remains above $US100-a-tonne, a price which is super-charging the earnings of the major producers – not that it showed in this week’s share price movements as the leading pure-play iron ore stock, Fortescue, lost 80c to $14.05.

What worries investors with a taste for iron ore is the primary price driver being a supply shortfall from Brazil rather than demand pull from countries other than China.

Brazil is slowly overcoming its problems with tailings dams and a high rate of COVID-19 infection, and that means iron ore shipments will rise, rubbing the gloss off the price.

Copper is the other commodity being boosted by an outage event rather than demand pull with Chile, the world’s top copper miner, being buffeted by the effect of COVID-19 on mine workers.

ANZ Bank went as far this week to describe the latest copper price of $US2.58 a pound as a “misdiagnosis” by a metal with the nickname of Dr Copper for its close connection to global economic growth.

A copper demand index constructed by ANZ is said to be showing no sign of improvement despite strength in one market, China. The only factor causing tightness in the copper market is concern over supply and that means the price could come under pressure in the future unless there is a demand increase in markets such as the US and Europe.

Local copper stocks traded cautiously during the week thanks to uncertainty in the economic outlook. OZ Minerals added 8c to $10.25 and Sandfire Resources rose by 5c to $4.80.

Energy metals, led by lithium, also had a mixed week with hints of stronger demand for electric vehicles lost in the background negative noise.

Pilbara Minerals managing director Ken Brinsden gave an upbeat talk to the Resources Rising Stars virtual event which helped lift the stock by 1c to 28c before it faded back to 27c, while Galaxy and Orocobre delivered similar flatlining performances.

But away from the Australian lithium market there were encouraging signs detected during a conference call linking the automotive, battery and chemicals analysts of UBS, an investment bank.

The view of the UBS experts is similar to that of Brinsden, that despite the poor global economic backdrop sales of electric vehicles remain strong with European demand expected to soon outstrip China: “contributing to a tightening in the battery cell market and a shift in battery materials demand from east to west,” UBS said in a note to clients.

Other sectors of the market had a mixed week with a few surprise moves including:

  • Uranium-project developer Berkeley Energia hitting a 12-month price high of 51c in early Thursday trade, leading to a speeding inquiry from ASX regulators.
  • Minerals sands developer Strandline also traded up to a 12-month high of 23c thanks to growing interest in its Coburn project in WA, and
  • Musgrave Minerals reached a 12-month high of 47c after last week’s report of bonanza gold grades at its Cue project in WA.

Muted as trading activity was on the Australian stock market this week there were a number of significant moves, largely related to discovery.

Among the stocks which attracted investor attention were:

  • Rox Resources, which doubled to 5.4c after reporting highly encouraging drill results from its Youanmi project in WA with a best intersection of 25m grading 34.79 grams of gold a tonne from a depth of 143m. A 6m core in that section assayed 140.7g/t.
  • Zenith Minerals reported significant results from the first phase of drilling at its Red Mountain project in Queensland which returned assays of up to 12.3g/t over 6m from surface. On the market, Zenith gained 3c to 11c but did reach a 12-month high of 12c on Wednesday.
  • Stavely Minerals added 8c to 62c after reporting a fresh set of excellent drilling results from its Thursday’s Gossan project in Victoria. The latest assays, from the Cayley Lode, included 87m at 1.74% copper, plus 0.57g/t of gold and 20g/t of silver from a depth of 140m.
  • Talga Resources made significant headway with its Vittangi graphite project in Sweden when the government declared the project as a “mineral deposit of national interest”. That news lifted Talga’s share price by 6c to 44.5c.
  • Whitehaven Coal is significantly undervalued according to analysts at the stockbroking firm of Wilsons, who are tipping a 12-month price of $4.75 even as the stock slipped 5c lower to $1.60 this week thanks to anti-coal political pressure.
  • Oklo Resources was another example of the market remaining unimpressed despite the promise of a major gold discovery in the gold-rich country of southern Mali. On the market, the stock was steady at 26c whereas Canaccord Genuity reckons it’s heading for 50c.
  • RareX received strong investor support for its $2.3 million capital raising with the stock rising by half-a-cent to 6.7c thanks to its exposure to the Cummins Range rare earth project in WA and the Trundle copper discovery in NSW, and
  • Breaker Resources added 3c to 26c after reporting strong results from step-out drilling at its Bombora project in WA with hits that included 4.6m at 12.5g/t and a narrow section grading 67.3g/t over 0.4m.

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