Markets get murky amid increasing talk of inflation and rate rises

Copper up. Gold up. It’s an unusual double-barreled event because rising copper is a pointer to strong future economic activity, while gold is a safe haven for uncertain times, so when both rise at the same time it makes for tricky forecasting.
14th May 2021
Tim Treadgold

Copper up. Gold up. It’s an unusual double-barreled event because rising copper is a pointer to strong future economic activity, while gold is a safe haven for uncertain times, so when both rise at the same time it makes for tricky forecasting.

Layer on top of those two key commodities moving in tandem with rising interest rates and a whiff of inflation, and it is doubtful that there has ever been a more complex brew of conflicting signals.

It gets even more difficult if you listen to the drum beat of another Middle East war, and what that might do to the oil price, and do not forget a worsening China v Australia trade war.

And all that is before getting to iron ore, the mineral which is underpinning the Australian economy and the Federal Government’s expansionary budget designed to aid the Covid-19 recovery and lay the foundations for the next election.

Little wonder that more cautious investors are taking money off the table and parking it in cash. Despite a guaranteed loss of value with bank deposits hovering close to 0%, money in the bank is one way of preserving capital to buy back when the air clears.

Movement on financial markets this week tells the story of confused investors who simply do not believe a lot of the data or are concerned about the inflation and interest rate signals and what they mean for asset values.

Iron ore, for example, hit a remarkable high of $US237 a tonne early this week, up 40% since the start of the year, while the biggest pure-play Australian producer, Fortescue Metals Group, is down 4% at $23.77 over the same time.

FMG’s decline has a lot to do with its curious new policy of investing in renewable energy. But it is not alone in underperforming the iron ore price – every other iron ore miner has  failed to keep pace with the price of the commodity it produces.

Decoded, those steady or falling iron ore producer share prices and a rising iron ore price means that most investors doubt that the ore price can stay high for much longer, a view reinforced by the latest commodity price forecasts from J.P. Morgan, which is tipping a price of $US162/t by the end of the year, $US125/t next year and $US105/t in 2023.

Macquarie Bank has a different view of iron ore based largely on strong global demand and the fact that most producers are operating close to capacity, reflecting a significant underlying supply deficit.

Copper, which is riding high on a mix of industrial and renewable energy demand, as well as supply concerns, opened the week with a blast and a fresh all-time high of $US4.90 a pound on Monday sending stocks such as Sandfire Resources to a 12-month high of $7.72, close to double where it was at this time last year.

Given the background of a powerful and co-ordinated global economic recovery it is hard to see the copper price falling far from where it is today, with a fresh surge higher more likely, particularly if industrial action underway at a number of South American mines turns nasty.

Gold, normally on the other side of an industrial metals boom, cruised back over the $US1800 an ounce barrier last week, reaching $US1840/oz on Monday before easing back to around $US1818/oz, close to where it was at the start of the year but well ahead of the low point reached in late March when the price dipped to $US1683/oz.

Best performers in the gold sector were stocks with positive exploration and discovery news led by:

  • Alto Metals, which rose by 3.5c (36%) to 13c after reporting a four-metre intersection assaying 60.6 grams of gold a tonne from 40m down at its Vanguard project near Sandstone in WA.
  • Lefroy Exploration, up 14c to $1.03 as investor interest grows in the ongoing drilling program at the Burns prospect near Kambalda in WA.
  • Norwest Minerals, up 2c to 9.8c after reporting a 16m intersection assaying 7g/t from 194m at its Bulgera project near the historic Plutonic goldmine in WA,

Another interesting item of gold news was the start of a mine development decline by Newcrest at its promising Havieron gold discovery in WA’s remote Paterson Province, an event which could be the first of several new mines in the area.

Higher commodity prices are starting to be reflected in Chinese factory data which this week revealed a 6.8% year-on-year cost increase in April, the fastest rate of growth in three years.

But what could drive hard commodities even higher is the renewed threat of inflation which could chase investors out of financial assets, especially if the fear of high-profile investors such as Ray Dalio are borne out.

Dalio, the founder of the Bridgewater hedge fund, reckons the U.S. dollar is poised for a big fall as trillions of dollars are created to stimulate growth with those extra dollars triggering an inflation outbreak which is starting to be measured in market interest rates.

During the week, the 30-year U.S. Treasury bond rose to a two-year high of 2.4% and the 10-year note reached a 12-month high of 1.7%. The Australian 10-year bond also resumed its rise after a breather in March and April, returning to 1.75%, up from 1.63% a week ago.

Locally, signs of an inflation outbreak are increasing with the latest warning about “pips squeaking” in the mining world coming from Albemarle Corporation, a big U.S. lithium producer with extensive Australian interests, which warned that an acute labour shortage was delaying completion of two projects.

The solution, of course, is to lift pay rates, a guaranteed way of unleashing inflation in an economy enjoying rapid growth thanks to high commodity prices and government stimulus.

Other news events and interesting market moves, up and down, included:

  • Helix Resources more than doubled from 1.4c to 3.2c after reporting highly encouraging copper mineralisation from drilling at its Canbelego project near Cobar in central NSW. Assays are not yet available but the 29.5m of core extended previously reported intersections.
  • Perenti Global, a mine and drilling services specialist, was sold down sharply when it filed a poor trading update which noted how operations had been Covid-affected, tightness in the Australian labour market and a rising Aussie dollar.
  • Peak Resources rose by 2c to 11c, but later slipped back slightly, after reporting a positive outcome with the government of Tanzania over the proposed development of the Ngualla rare earth project.
  • Adriatic Metals got a boost from Canaccord Genuity which sees the base metals miner rising from its current $2.35 to $3.20 as it makes progress on the Vares project in Bosnia.
  • Iluka Resources reported progress with government approvals for a rare earth refinery at its Eneabba mineral sands project in WA. The stock added adding 10c to $8.62 on the market but Morgan Stanley reckons Iluka is overpriced, setting a price target of $6.
  • Chalice Mining continues to win friends in the banking community as its Julimar palladium discovery in WA expands. Macquarie sees Chalice heading for $9.20, well up on the last sale price of $7.34 which was down 40c for the week.
  • Deep Yellow led a weaker uranium sector with a fall of 12c to 81c after announcing the appointment of form Rio Tinto Iron Ore chief executive, Chris Salisbury as its new chairman.
  • Pilbara Minerals lost 10c to $1.15 despite announcing encouraging discovery news that included 15m of material assaying 2.35% lithium oxide and 18m at 2.01% close to its Pilgangoora plan. Pilbara also announced a joint venture to explore the development of a mid-stream lithium chemicals business, and
  • Neometals lost 7c to 49c after releasing a fresh report on its battery recycling plan which won the approval of Euroz, a stockbroking firm, which sees Neometals rising to $1.03.

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