Inflation surge sees gold jump US$30 in 3 days, putting US$2000/oz on traders’ radars

The global commodity rush slowed this week as markets prepared for the trading break over Easter but two factors, war and inflation, continued to rattle investor confidence as well as sparking a shift back to the ultimate safe haven, gold.
14th April 2022
Tim Treadgold

ANZ Bank expects gold to remain in favour as other currencies are debased by the highest rates of inflation since the 1980s, tipping on Tuesday that a rise by gold to above $US1960 an ounce “would be a bullish signal”.

That hurdle was cleared a few hours after ANZ published its comments with the gold price moving up to $US1967/oz, a rise of $US30/oz in three days.

The next test for gold will be $US2000/oz, and while that near-record price might be welcomed by gold bugs it will be another pointer to future trouble as investors lose faith in the broader economy and the stamina of the commodity boom.

Local gold producers gained ground over the short pre-Easter trading week, led by Northern Star, which added 60c to $10.82 after reporting the sale of its first mine, Paulsens in WA, and the Western Tanami project to Black Cat Syndicate for $44.5 million. Black Cat went into a trading halt with last trades at 68c.

Other gold stock moves included De Grey Mining up 10c to $1.27 as interest grows in a possible merger proposal from Gold Road (up 10c to $1.61) which is acquiring De Grey’s biggest shareholder, DGO Gold. Sector leader Newcrest added $1.02 to $27.82.

The stronger gold market was best-measured through the Australian stock market’s gold index (XGD) which rose by an eye-catching 6.7%, thanks largely to Newcrest’s rise, while the all-ordinaries index barely moved, up 0.32%.

Mixed signals from financial markets and the complication of Australia’s upcoming election made for choppy trading, especially as the potential for a global recession rises while the Ukraine war drags on and the U.S. central bank accelerates its drive to tame inflation with high interest rates, a trend echoed by New Zealand’s “hawkish” 0.5% rise in its official cash rate to 1.5%, with more to come.

Jose Carlos Martins, a former senior executive at Brazil’s national mining champion, Vale, warned during the week that adjusting trade flows so western countries can avoid buying Russian raw material would take too long to avoid significant global disruption.

Good times today on commodity markets could quickly fade if Martins is right but just to confuse an already murky picture there is the evidence of shortages across the commodity complex including food and critical metals.

Last month’s squeeze on nickel caused by a Chinese trader caught short could spread to other metals as markets try to adjust to missing Russian metal with zinc seen as being the next cab off the short-squeeze rank.

Arguably the most basic of all the base metals, zinc has never been considered a sexy commodity but with the price sitting at an all-time high of $US4452 a tonne, the scene appears to be set for a showdown between producers, consumers, and traders – just as it was in nickel.

A measure of the commodity challenge is the extreme shortage of spare material in the warehouses of the London Metal Exchange, where stockpiles of the main six metals traded, copper, aluminium, zinc, lead, tin and nickel, have fallen to their lowest-ever level, a collective 500,000 tonnes versus six million tonnes in 2010.

The collapse in reserves played into an argument mounted during the week by former Australian Treasury economist Ed Shann who said the commodity boom would not end by September, as implied in the recent federal government budget, but would last a lot longer.

“The next government will be showered with commodity cash and will need a plan to manage it,” Shann said in an opinion column published by the Australian Financial Review.

Shann’s view of high prices for longer adds to a picture of an overheating Australian economy sparked by a rush for the country’s commodities as Russian replacement material adding to the potential for a steep increase in local interest rates soon after next month’s election.

Battery metals performed modestly during the week with lithium dominating news flow thanks to the latest thought bubble from Tesla boss, Elon Musk, who complained about the high price of the metal and said he was thinking about investing directly in lithium mining.

Musk’s comments rubbed some of the gloss of local lithium leaders with Allkem down 50c to $12.92. Pilbara Minerals lost 42c to $2.88 and ACZ was down 4.3c to $1.08 despite announcing a favorable technical opinion on its Manono project in the Democratic Republic of Congo.

Jindalee Resources was the pick to the local lithium players, adding 65c to $4.70 after unveiling a plan to spin off its Australian assets so it can focus on the McDermitt lithium project in the U.S.

Apart from Musk’s threat to develop his own lithium mines, a factor in the weaker share prices could have been reports that the sharp increase in the price of lithium is causing significant problems for electric vehicle (EV) makers with rising vehicle prices sparking buyer EV resistance, especially in China, which is also struggling with city-wide lockdowns.

IGO lifting its takeover price for Western Areas was the major event among nickel stocks with the 15% increase in the offer to $3.87 seemingly assured of success with the target trading slightly below the bid at $3.85.

Lunnon Metals was another nickel stock to attract interest, rising 2c to $1.04, after announcing the acquisition of two more historic mines near Kambalda, the home of Australian nickel.

Mincor, the leader of the Kambalda revival, put on 1c to $2.50, while Indiana Resources said it was in discussion with the government of Tanzania over the mothballed Ntaka nickel project, news which helped the stock add half-a-cent to 6.3c.

Krakatoa Resources was the pick of the rare earth stocks, jumping 4.5c (75%) to 11c after reporting a clay-hosted discovery at Mt Clere in WA’s Gascoyne region. Ionic Rare Earths crept 0.2c higher to 8c after announcing a $30 million placement to fund work on its Makuutu project in Uganda.

Local rare earth leader Lynas shed 42c to $9.59 despite reporting strong production and sales revenue for the March quarter, appearing to fall foul of a Goldman Sachs research report which said the stock was fully valued with a target share price of $9.50.

Other news and market moving events included:

  • Black Canyon added 9.5c to 43c after reporting a significant increase in the manganese resource at its Flanagan Bore project in WA to 10.4 million tonnes at 10.5% manganese for a contained 11 million tonnes of the metal.
  • Peel Mining delivered a fresh round of high-grade copper results from drilling at its Mallee Bull project in NSW with a best hit of 29.15 metres at 7.08% copper from a depth of 509.69m. On the market, Peel added 5c to 27c.
  • CZR Resources added 0.3c (37.5%) to 1.1c as investors took a closer look at its Robe Mesa iron ore project in WA’s Pilbara region where a drilling program has boosted the potential production rate from two million tonnes a year of direct shipping ore to 3m/t.
  • American West Metals said it had successfully produced a direct shipping product grading more than 53% copper after test work using a full-scale sorter at its Storm project in Canada. The stock rose by 1.5c to 18c.
  • Anax reported encouraging sulphide mineralisation over 15m from drilling at its Whim Creek copper and zinc project. The stock rose by 2c to 12c, and
  • Iluka Resources added 56c to $12.63 after reporting a plan to float off its ill-fated Sierra Rutile project in Sierra Leone. The project has been a loser for Iluka since it acquired the troublesome business six years ago.

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