Propelled by very different forces, but gold and iron ore combine to steal the show as bears are trampled

The bulls ran wild this week, driving gold and iron ore to fresh highs while trampling on anyone with a bearish view such as that aired last week by Macquarie Bank, which warned that the gold price was looking stretched.
7th August 2020
Tim Treadgold

The bulls ran wild this week, driving gold and iron ore to fresh highs while trampling on anyone with a bearish view such as that aired last week by Macquarie Bank, which warned that the gold price was looking stretched.

FOMO (fear of missing out) has become an important factor (if not THE factor) in what’s happening as less experienced traders are drawn into commodity markets, though there are genuine reasons for supporting an argument that the market might be stronger for longer.

Covid-19 infection rates and associated lockdowns are putting pressure on most economies and unleashing waves of supportive cash from government and central banks, which is perfect for a rising gold price. Iron ore is being affected by the same virus, which is limiting Brazilian exports.

How long this cocktail of events can continue to drive prices higher against a background of slowing global growth is the $64 trillion question, which has conflicting answers. They are:

  • Nothing lasts forever, especially share-market booms -- a warning for bulls, and
  • “Markets can remain irrational longer than you can remain solvent” – Lord Keynes and a warning for bears.

What happened on the gold market was unquestionably the big event for the week as the price of the metal broke the $US2000 an ounce barrier and set off in pursuit of a once-unimaginable $US3000/oz – a target set by the Canadian bank RBC.

Sceptics doubt that gold can rise that far, but true believers point to the current record high price not actually being a record in real terms.

The World Gold Council reckons the record still belongs to the $US843/oz reached in January 1980, because after allowing for inflation, that price equates now to $US2800/oz, a calculation which supports the case for gold at $US3000/oz.

Shares in local gold producers benefited from this week’s record gold price of $2052/oz and most remained strong even as the price eased back to $US20436oz, a gain for the week of 2.5%.

Australian goldminers outperformed the metal, with the ASX gold index rising over the week by 5.3%. Individual moves included: Newcrest, up $1.65 to $36.70. Evolution, up 23c to $6.18. Northern Star, up 95c to $16.27. Bellevue, up 13c to $1.15, while Saracen was the odd man out, slipping 1c lower to $5.90.

Other gold news and price moves:

  • Resolute added 6c to $1.36 after reporting it had lifted its stake in fellow African gold stock Oklo Resources to 10%. Oklo was steady at 31c.
  • De Grey rose by 11c to 84c after reporting more encouraging assays from its Aquila prospect in WA with a best hit of 16 metres at 3.7 grams of gold a tonne.
  • Calidus put on 4c to 60c after announcing an early start on construction work at its Warrawoona gold project in WA.
  • Caprice Resources, a low-profile explorer, added a sharp 16c to 42c after reporting the acquisition of a high-grade gold project new Cue in central WA.
  • Red 4 said its feasibility study into the King of the Hills gold project would be completed next month, lifting the stock by 4c to 28c, and
  • Matador Mining added 1c to 45c as interest grows in its Canadian gold project while the stockbroking firm of Shaw and Partners forecast a future share price of 80c.

Fund raising and corporate activity picked up speed as miners continued their dash for cash and the hunt for potential merger targets. Noteworthy deals during the week included:

  • Tietto Minerals lost 1c to 62c after reporting that it had received binding commitments for $62.5 million in fresh capital to “propel” its Abujar gold project in Ivory Coast.
  • Strandline added 1c to 25c after receiving firm commitments for $18.5 million to accelerate work on its Coburn titanium minerals project in WA.
  • Pantoro entering a trading halt amid reports that it is seeking $45 million to accelerate exploration at its historically-rich Norseman project in WA. Trading was suspended at 26c when the company asked for a market pause.
  • Ausgold added 0.6c to 4.1c after rising $6.35 million to pay for more drilling at its Katanning gold project in the south of WA.
  • Adriatic Metals moved sharply higher after one of its major shareholders, Sandfire Resources, started legal action over a disputed entitlement to extra shares in Adriatic. The 43c rise to $2.29 had a whiff of takeover action to it, and
  • Drilling and explosive specialist Dynamic Drill and Blast made a hot debut on the ASX with its Thursday listing of shares issued at 20c opening at 50c, a 150% win for stag.

Iron ore stocks continued their powerful upward move thanks to the underlying price for high-grade ore adding $US7 to $US117 a tonne. Fortescue added $1.05 to $18.55, down a fraction on its all-time high of $18.64 reached on Tuesday. Mineral Resources did even better with a rise of $2.57 to $28.16, also down slightly on its all-time high of $28.24 reached in early Thursday trade.

What next for iron ore will be interesting to watch because profit reporting season is about to kick off, led by BHP and Fortescue, with both likely to shower their shareholders with handsome dividend payouts.

But cash streams from massive profit margins of more than 300% on every tonne of iron ore sold are seen by an increasing number of critics as approaching their “best by” dates, with Bell Potter the latest broker to ring a warning bell in a report on Fortescue headed “making more hay, time to harvest”.

Bell Potter reckons right now is as good as it gets for Fortescue (“priced for perfection”) with a sell tip on the stock which it reckons will slide all the way back to $12.50 over the next 12-months, a 33% decline.

Other banks and brokers disagree. Credit Suisse has joined the stronger-for-longer club, telling clients during the week that iron ore can stay above $US100/t “for longer than we think”. Macquarie retains buy tips on all producers of the steek-making material, and Citi says Chinese demand will trump supply-side concerns such as increased Brazilian shipments.

Other news making events and market moves during the week included:

  • Nickel stocks moved higher after the underlying price of the metal hit a seven-month high of $US6.50 a pound. Mincor added 6c to 78c. Western Areas rose by 16c to $2.58 and Poseidon put on 1c to 4.7c.
  • Centaurus joined in the nickel revival with a rise of 6c to 52c after reporting fresh high-grade drill results from its Jaguar project in Brazil with a best hit of 33.7m at 2.2% nickel, plus useful copper and cobalt grades, from a depth of just 45.6m.
  • Salt Lake Potash finalised a $203 million debt package to help fund its Lake Way project in WA with the Australian Government’s Clean Energy Fund participating. On the market, the stock added 4c to 61c, with Macquarie Bank tipping a future price of 99c.
  • Lynas Corporation add 24c to $2.46 after announcing receipt of approval from the Malaysian Government for a permanent disposal facility for its rare-earth residue, and
  • Bannerman Resources gained 0.5c to 3.9c after reporting that a new scoping study improved the outlook for its proposed Etango uranium project in Namibia. Most other uranium stocks slipped lower as the price of fuel retreated from $US34/lb to $US32.10/lb thanks to plans to re-open a big Canadian mine.


Image: lightwise / 123RF Stock Photo - Running of the bulls


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