Gold starts its comeback as markets eye rising inflation, interest rates and oil prices

It’s not yet the hurricane forecast by Jamie Dimon but the first gusts of wind from a darkening global outlook started to buffet Australia this week, rattling investor confidence and waking interest in safe havens, including gold.
9th June 2022
Tim Treadgold

Dimon, chief executive of the big U.S. bank JP Morgan Chase, delivered his hurricane prediction earlier this month when warning that the combination of rising interest rates, war in Ukraine and oil, possibly heading up to a record US$175 a barrel, was an ominous combination.

On cue, Australia’s central bank followed with a bigger-then-expected 0.5% interest rate increase with a similar move tipped for next month.

No-one could claim they weren’t prepared for rates to increase, but they might have been surprised by the size of this week’s rise and the potential for a series of similar upward moves as concern about inflation rising to an annualised 8% sparks a rates rush in Australia and overseas.

Gold, which had been sidelined since its March rally to more than $US2000 an ounce at the start of the Ukraine war, edged back this week to around $US1850/oz, up $US60/oz on its May low of $1790/oz.

Most Australian gold stocks weakened slightly even as the gold price edged higher though this edition of Prospector’s Diary will not provide price detail as it is being written at Heathrow airport as I begin the long-haul home after working for a month in London.

Always an interesting city, London today is being shaken by the political uncertainties associated with a Prime Minister in trouble with his own party, and a bolshy union movement which delivered a warning shot of wholesale industrial action by shutting the all-important underground rail service on Monday, with the threat of more to come.

A collapse in confidence can be seen in the struggle to raise capital for initial public offerings (floats) with the value of IPOs falling by 90% in Europe and the U.S. so far this year compared with the first five months of 2021.

The reluctance of investors to commit capital to new share issues is also being seen in Australia with a number of recent capital raisings falling well short of the mark, such as Reedy Lagoon attracting less than 10% of its $3 million target.

Another noticeable investment theme emerging in London is concern about the lack of investment in energy, in its many forms, ranging from fashionable renewables and reliable fossil fuels such as coal, oil and gas.

For Australian investors it is quite clear that energy is a critical component of a portfolio able to ride out Dimon’s hurricane.

The oil price is the obvious starting point for an analysis of the energy sector and at the latest price for Brent-quality crude of $US121 a barrel, the profits of oil producers are staggering, but the high prices are also becoming part of the destruction in confidence and the lowering of economic demand seen by Dimon and others.

Citi, a rival investment bank to Dimon’s JP Morgan, said in a midweek research note that oil-demand destruction was already evident in Europe, China and Russia as high prices bite local industry and households.

The energy-price induced slowdown seen by Citi will flow into demand for Australia’s commodity exports with one number best telling the story – Europe will have to pay an extra $US1.2 trillion for energy this year.

Declining demand and rising production prompted Citi to forecast a retreat in the oil price into a range of $US100-to-$US110/bbl by the end of the year.

High energy prices have also sparked the first signs of a fightback against tough environment, social and governance (ESG) regulations which have stymied a number of resource developments.

In a remarkable comment column by Gillian Tett, a leading Financial Times journalist, it was suggested that ESG rules had gone too far and needed to be revised to accommodate energy security and other “people-focussed” issues such as poverty reduction.

Tett quoted the Anne Simpson, former head of sustainability at Calpers, the Californian Public Employees’ Retirement System, who said: “it’s time to RIP ESG. We need a broader, human-centred approach”.

 

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