Market nerves start finding their way into highly-priced gold stocks despite banks tipping further gains for the yellow metal

Global financial wobbles reinforced the case for gold this week
16th August 2019
Tim Treadgold

Global financial wobbles reinforced the case for gold this week but the uncertainty factor caused by the US sharemarket shake-out put a dampener on most sectors of the market and only a handful of gold miners managed to post gains while just about everything else fell.

Surprise star of the week was Dacian Gold, a stock that some investors had written off weeks ago after operational problems at its Mt Morgans mine. It added 14c to $1.26, taking its gain since early June to 87c and putting it within sight of its pre-sell off price of $1.59.

The road back for Dacian, welcome as it is, could not dispel the reality of a nervous investment climate with crashing interest rates and an inverted bond yield pointing to the potential for a global recession next year – which should keep gold in the headlines.

The difference between gold and the rest of the market was easy to see yesterday.

As Australian investors were digesting the 3% fall on Wall Street and a 2.7% fall by the ASX all ordinaries index, the gold index rose by 0.7% -- though that rise needs to be seen against a fall in the gold index of 5% when looked at over the week because most gold miners have been sharply repriced after getting too far ahead of their metal.

In theory, the spectacular interest-rate collapse into negative territory reinforces the case for gold (and parts of the property market) but it could also have a distorting effect on investor behaviour because of the potential for extreme government economic stimulus and a worldwide retreat behind ever-higher tariff barriers.

Even gold-focussed investment banks have grown wary. RBC Capital Markets advised caution in its latest gold report titled “have some fear” in which it tipped three possible gold-price scenarios ranging from a high in the first quarter next year of $US1604 an ounce to a low of $US1446/oz, and a mid-range of $US1547/oz.

Macquarie, in a report tiled “Rally, what rally”, compared the current gold-market situation with previous high points for the metal, especially the 2009-to-2012 period when gold hit its all-time peak of $US1900/oz.

But even Macquarie has its doubts about gold topping that record because of the historical tie which links gold to US interest rates. To match the previous peak, after allowing for inflation, would require a price of $US2350/oz and that, in turn, could see official US interest rates as measured by inflation-protected Treasury Bonds falling to -3.8% (negative 3.8%), an almost unimaginable level.

UBS sees the gold price moving higher and base metals moving lower as the effects of the China v US trade war worsens and Brexit threatens to create deeper confusion in Europe, not to mention troubles in Hong Kong, North Korea and Iran.

A fresh UBS study tips a rise in the gold price to $US1600/oz next year, a lower copper price and a higher nickel price thanks to the potential for an Indonesian ban on the export of unprocessed ore.

Best of the gold stocks, according to UBS, is Alacer, a low-cost ASX-listed producer with its best assets in Turkey while the pick of the Australian-based gold companies is Evolution, a point reinforced by the company filing a strong profit result yesterday which almost wiped out the share price fall earlier in the week, leaving Evolution down 18c instead of being down 40c at $5.25.

Despite the air of uncertainty in financial markets, a number of local miners successfully completed fund raisings, a sign that investors see the current state of the market as being more of a correction than a crash.

Capricorn’s $65 million placement was the biggest of the raising with the 16c price on new shares leaving applicants in the money with the stock moving up over the week by 3c to 22c, well ahead of the 8c of early June when the company was flopping about.

Calidus was another gold stock to take advantage of the strong interest in gold, raising a fresh $9 million. Golden Rim followed with a $5.3 million raising and rare earth player, Northern Minerals, pulled in $20 million.

A sideline issue with Capricorn, which should now be in the clear to develop its stalled Karlawinda project, is a hefty hedge book covering 200,000oz at a handsome $A2249/oz which is expected to provide protection over the first two years of production.,

Hedging, which has as many supporters as detractors, is seen by Macquarie and RBC as becoming a significant negative for gold despite the insurance inherent in hedging holding considerable appeal for some miners.

A ramp up in hedging, according to Macquarie: “could quickly put a short-term cap on (gold) prices”.

RBC described hedging as a “sleeper” issue, particularly for North American investors who hate up because it removes the potential upside from a rising gold price. It reckons Australian gold miners have already hedged between 10%-and-50% of the coming year’s production at average prices between $US1150/oz and $US1250/oz – which means an awful lot of money has been left on the table.

Other than gold a sector to deliver a surprise rebound was iron ore, with China’s steel industry showing no sign of slowing down as the government of that country doubles-down on economic stimulus to counter the effects of higher US tariffs.

Fortescue Metals reacted to the iron ore news with a 24c share price rise to $7.50 even after a 6c fall during Thursday’s trading. Mt Gibson slipped 7c lower to 72c, but was trending up higher on Thursday.

Other news-making and price moving events over the past week included:

  • Pilbara Minerals was the best of the battery-metal stocks, but only because it held its ground at 48c while everything else was falling. Rival lithium stocks to lose ground including Galaxy, down 18c to $1.16 and Orocobre down 55c to $2.45 as the host country for its lithium project, Argentina, teetered towards a fresh political/financial crisis. Alita Resources went into a voluntary trading suspension to try to deal with issues it is facing.
  • Ardea Resources added 4c to 54c after reporting encouraging gold assays from surface chip samples collected at its Gundagai project in NSW with a rest result of 37.9 grams a tonne.
  • Nickel Mines said it had boosted ownership of the Ranger processing project in Indonesia to 60% but like most nickel stocks lost ground with a 3c fall to 56c. Other nickel moves included Mincor, down 2c to 54c and Western Areas, down 10c to $2.36.
  • Investigator Resources almost doubled to 3c and enjoyed the spotlight of a stock exchange query about the rise which the company said might be related to promising results from work at its Paris silver project on South Australia’s Eyre Peninsula, and
  • Bardoc Gold slipped half-a-cent to 9c despite reporting more encouraging assays from drilling at its South Castlereagh gold project in WA with a best hit of 16.4 metres at 2.81g/t from a depth of 93m.

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