Prospects of a lower US dollar fuel hopes for strong commodity prices in 2020

Welcome back to Prospector’s Diary after a Christmas break that saw a number of significant developments...
17th January 2020
Tim Treadgold

Welcome back to Prospector’s Diary after a Christmas break that saw a number of significant developments, and while a trade-war truce might seem to be most important, there are other contenders, including a fall in the value of the US dollar and the overdue return of inflation.

Taken collectively, it’s hard to not see 2020 being a good year for resources with a glimpse of what’s to come to be found in a stronger-than-expected price for iron ore, a rising copper price, heavy-duty support for gold and a record high for leading indices which track the Australian stock market.

The starting point for this first look at the year ahead should be the trade war, but since that’s such an on/off event which revolves around the daily mood of the US President, Donald Trump, trade is best left in the “unpredictable” basket while noting that optimism currently outweighs pessimism.

Gold, and its close associate the US dollar, are both more predictable and interesting because they tend to move in opposite directions and if the US dollar does fall, as most big-name investment banks such as Morgan Stanley reckon it will, then all commodity prices rise.

In a report written in its Global Insights Day in New York on Wednesday, Morgan Stanley said: “The US dollar has turned, driven by a turn in relative US versus rest-of-the-word growth and yield differentials” – which, decoded, means the US dollar is over-valued and the rest of the world is playing catch-up.

The significance of a lower US dollar cannot be over-stated because most commodities are traded in that currency and if gets cheaper, then consumers in other countries, including China and Europe, can buy more of whatever they want, from base and precious metals to wheat and wool.

Gold, which is an economic bellwether along with copper, has reacted quickly to the changing mood, which was best illustrated by comments from the co-chief investment officer at the world’s biggest fund manager, Bridgewater Associates.

Greg Jensen said earlier this week that gold could rise by 30% from its current $US1557 an ounce, a tip which would see gold trade around an all-time high of $US2025/oz.

But underlying Jensen’s forecast (and he is a man helping oversee the management of $US160 billion) was his view on inflation, which is expected to finally put in an appearance after a decade missing in action.

Central Banks, Jensen said, would: “allow inflation to run hot for a while”, a forecast which is as important as an expectation that the US dollar will fall, because rising inflation boosts demand for hard assets, such as commodities (and property).

Interest rates, the enemy of gold, are also expected to stay low in 2020, reflecting comments from the chairman of the US central bank, Jay Powell, who said late last month that: “In order to move (interest) rates up, I would want to see inflation that’s persistent, and that’s significant”.

The views of other leading investment banks are as interesting as those from Morgan Stanley, including:

  • Citi said the December quarter reports which started flowing this week would provide a first look at the Superpit gold mine in Kalgoorlie under the control of Saracen and Northern Star and look at progress on the Carrapateena copper project of OZ Minerals.
  • Goldman Sachs said of bulk commodities that “robust” Chinese steel demand would drive iron ore and coking coal higher. It was also bullish on copper but negative on alumina and aluminium.
  • RBC Capital Markets noted that nickel was the worst performing metal in the December quarter as the removal of electric vehicle subsidies in China weighed on the price, as it did for lithium. Iron ore was moving higher as concerns return about supply, this time because of cyclones off the WA coast.
  • JP Morgan said it expects economic growth to accelerate through 2020, especially in Asia. “This bodes well for commodity demand”.
  • Shaw and Partners sees nickel “grinding up” over 2020 as part of a thematic investment advisory note which said buy industrial metals, especially copper.
  • UBS expects BHP to deliver a stronger quarter when it reports next Tuesday along with Rio Tinto when it reports later today (Friday), and
  • Macquarie sees strong price support for iron ore though shipments have slowed over the past week as China ends its re-stocking period ahead of New Year celebrations.

News flow this week has been slow, which is to be expected after the Christmas break, but some of the more interesting reports and share prices moves included:

  • Kalamazoo Resources rocketing 22c to 54c in re-action to two well-connected investors, Novo Resources and Eric Sprott, subscribing for 10 million shares each Kalamazoo at a price of 40c. The fresh funds will help Kalamazoo explore the historic Castlemaine gold project in Victoria which could deliver results similar to those which have made Kirkland Lake a star performer.
  • Chalice Gold added 5c to 29c after reporting the extension of the Karri prospect near Bendigo in Victoria. Karri is part of Chalice’s Pyramid Hill project.
  • Adriatic Metals continued its strong run with high-grade gold, silver and base metal intercepts at the southern and of its Rupice project in Bosnia. Best assays were 11.3 metres at 4.37 grams of gold a tonne plus 406g/t of silver, 16.1% zinc and 9.8% copper from a depth of 244.7m. On the market, Adriatic added 14c to $1.78.
  • Emerald Resources added 0.2c to 4.4c after reporting fresh assays from drilling at its Okvau gold project in Cambodia with best hits of 5m at 9.26g/t from a depth of 5m and 9m at 3.83g/t from surface.
  • Whitehaven Coal surprised investors with a 4c rise to $2.58 in a week when coal was on the nose thanks to the east coast bushfires, but even more surprising was a buy tip on Whitehaven from Morgans which reckons the coal producer is on the way back to $3.46 thanks to solid production forecasts. Bell Potter is even more optimistic with a price tip on Whitehaven of $4.
  • Evolution Mining staged a strong recovery after being sold off following a production glitch at its Mt Carlton mine in Queensland. A fall of 20c last week was reversed this week leaving the stock at $3.84 which is where it was before Christmas, and
  • Superpit twins Northern Star and Saracen continued a pre-Christmas price recovery as investors digested the gold price and the prospects for extracting value from the old mine. Northern Star rose by 51c this week to $11.91. Saracen was up by 5c to $3.64.

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