Gold shines, cryptos crash and talk of a taper tantrum gets louder

The post-Covid unravelling of artificially stimulated asset values accelerated this week as interest rates edged higher, inflation fears worsened, and cryptocurrencies plunged during an investment market shift to risk-off mode.
21st May 2021
Tim Treadgold

Gold, as noted last week, continued to appeal as a safe haven in volatile times with the price rising to a four-month high, taking some local miners with it but not all as it dawned on some investors that cost inflation was starting to eat profits.

Next problem on the horizon, and a reason to play it safe, is the potential for a market shaking
“taper tantrum” which is likely to follow when government stimulus is eased, an event which must eventually happen, or inflation really will go through the roof.

Cryptocurrencies, arguably the worst asset class since Dutch traders swapped tulip bulbs for thousands of guilders 380 years ago, were whacked by the Peoples Bank of China, which issued a formal warning about the craze – an event which could soon be followed by other central banks.

Bitcoin, leader of the crypto circus, plunged by 33% on Wednesday before rising by 30% as speculators poured in – but if anyone reckons that’s investing and not pure and simple gambling, they’re only fooling themselves.

The best way of looking at the past week is through the three key Australian stock-market indices. The all ordinaries eased back by a modest 0.5%. The metals and mining index fell by 3.3% -- and the gold index rose by 3% as the underlying gold price added $US55 an ounce to $US1875/oz.

Local gold winners included De Grey, up 23c to $1.50. Newcrest, up 83c to $28.13. Silver Lake, up 7c to $1.91, and Bellevue, up 8c to 90c.

Perhaps most informative for investors with an eye on the big picture of inflation, interest rates and costs, was a 33c fall by St Barbara to $1.76 after it confirmed reports of a Covid-caused cost blow-out at its flagship Gwalia mine in WA with costs up and output down.

It is highly unlikely that St Barbara will be an orphan when it comes to the costs challenge with next month likely to see a procession of confessions from other miners ahead of the June 30 balance date.

The gold outlook is not for a one-way upward trade because while fear of inflation is a price booster, the prospect of higher interest rates is the opposite, as Macquarie Bank pointed out in a midweek note which said gold would “struggle” to enter a bull market as Covid-fear fades.

Iron ore surprised everyone by shaking off last week’s slide, rising by $US15 a tonne to stretch back into record territory at $US223/t, but the rise failed to impress local investors who marked down stocks such as Fortescue (down 40c to $22.79), Mt Gibson (down 5c to 90c) and Fenix (down 2c to 32c).

Investors might be wise to remain wary of the iron ore markets even as professional observers offer mixed opinions.

During the week UBS, an investment bank, published the views of Henry Liu, head of iron ore analytics with the Chinese website, Mysteel. He reckons demand remains strong in China. His price tip is for iron ore to remain above $US150/t for the rest of the year before sliding to $US130/t.

But UBS also raised a significant bogeyman earlier in the week when it suggested that China could drive down the iron ore price by banning steel exports, a move which would also cut local steel prices – significant food for thought for Australian investors, though not repeated as a theory by other banks.

Citi, another investment bank, came close to UBS’s wild card export cut thought bubble with an observation that high commodity prices “are now a concern for China and steel production controls seem likely to come later this year”, without suggesting what sort of controls.

Iron ore prices, according to Citi, are likely to slip to around $US160/t by the end of the year, down to $US125/t in the first quarter of next years and then dropping to $US80/t in 2023.

Base metals are Citi’s preferred position for the rest of the year, especially copper, which it believes will rise to an all-time high (in real and nominal terms) of $US12,200/t in the fourth quarter.

“With China tightening money policy and the U.S. easing, we favour base metals over iron ore on a 12-month view,” Citi said.

Compounding the case for copper are the disturbing signals coming from the world’s top copper producing countries, Chile and Peru, where resource nationalism is on full display, either with threats to expropriate assets (Peru) or hike taxes (Chile).

Just how damaging Chile’s tax plan is (and it has passed the lower house of Congress) can be seen in a Morgan Stanley calculation which shows that at a spot copper price of $US4.72 “the weighted average total cash costs of Chile would increase by 86% from $US1.61/lb to $US3/lb.

Morgan Stanley said the tax plan would be more of a blow to investment in Chile and less to copper production, but it would be headache for a number of companies, including BHP and Rio Tinto.

Two copper winners from the return of resource nationalism in South America are local leaders, OZ Minerals and Sandfire Resources, though both were sold down this week in line with the copper price retreat of around US10c/lb in the market’s overall risk off mood.

Macquarie Bank’s best contribution this week to the debate about commodities was to put record prices into perspective, noting that in real terms (after inflation) only palladium is clearly in record territory while iron ore has its nose in front.

For other commodities gold has to scale the “real” high point reached in 1980. Aluminium’s peak was in 1916 (when it was being treated as a precious metal). Zinc’s real peak price was in 1915. Copper in 1916. Nickel in 1969. Silver in 1980 and lead in 1951.

As mentioned earlier, profit downgrades could become a significant issue over the next six weeks with St Barbara Mines and Perenti Global demonstrating what a skills shortage can do to a company’s earnings.

Perenti was the real wake-up call with its warning because it has been winning more drilling work and not increasing profits, a situation once called profitless prosperity. The stock’s 32% share price fall from $1 to 68c demonstrates what can happen in the hothouse of a commodities boom.

Other news events and market moves during the week included:

  • Agrimin moving to the top of the potash hopefuls list with its first binding offtake deal for material produce at Lake Mackay, a deal with a Chinese company which saw the stock rise by 3c to 54c but with Canaccord Genuity lifting its price target from $1.38 to $1.57.
  • Orocobre and Galaxy Resources gained a few cents each during week but also scored a pair of buy tips from J.P. Morgan which reckons Orocobre is on the way up from $6.04 to $7.15 and Galaxy should rise from $3.44 to $4.10.
  • Latitude Consolidated boosted the global resource at its Murchison gold project in WA to 1.15 million ounces, adding1.5c to its share price which reached 7.2c.
  • Galileo added 4c to 31c after announcing that it identified significant palladium targets ready for drilling at its Norseman project in WA.
  • Strandline secured a final offtake agreement for its Coburn titanium minerals and zircon project in WA with a deal to supply zircon to a European ceramics and glass maker. The stock added 1c to 21c but could be on the way to 58c according to Shaw and Partners, and
  • QMines excited supporters after its recent float with a maiden drill result of 13.4% copper and 6.11grams of gold a tonne over 0.75m at the historic Mt Chalmers project in Queensland. That result saw the stock rush up to 66.5c before easing to 42c for a gain of 9c over the week.

Subscribe to the RRS Weekly Wrap

© 2021 Resources Rising Stars All Rights Reserved