Return of Indian, Chinese gold customers helps put floor under gold price as instos soak up battery metals

Gold tried to rise this week, with limited success, leaving the best gains to energy in its many forms,
16th April 2021
Tim Treadgold

Gold tried to rise this week, with limited success, leaving the best gains to energy in its many forms, led by oil but with lithium and other members of the battery-metal family (including copper) not far behind.

Because so many Australian investors are exposed to gold it’s worth having a look at the changing dynamics of the gold market. These could put a floor under its price, which has dropped by 16% over the past nine months to latest trades at $US1738/oz.

The big shift in gold is the return of retail buyers in countries which traditionally drive physical gold demand, especially India and China, where small buyers are returning to snap up the material being offloaded by gold-backed investment funds.

At the same time as the Asian jewellery trade has returned in the wake of the gold-price fall, so too have a number of central banks taken advantage of the price decline, with India, Colombia, Kazakhstan and Uzbekistan collectively buying 8.8 tonnes of gold in February.

What that means for gold, which is also being supported by vaccine worries, is the likely creation of a base which should prevent a wholesale collapse and lay the groundwork for the next upward move – which will almost certainly be when (not if) inflation picks up and investors seek safe havens for their cash.

Among ASX gold stocks this week, there was a noticeable upward trend even as the price stagnated. Sector leader Newcrest added 40c to $26.94. Northern Star rose by 12c to $11.01. De Grey put on 8c to $1.26. Resolute bounced back after the return of its Bibiani lease in Ghana, rising 5c to 53c while Bellevue gained 2c to 89c after reporting an increase in the global gold resource at its namesake project in WA.

Biggest gold loser of the week was Regis, sold down following its high-priced purchase of a 30% stake in the Tropicana gold mine followed by a big share issue, which contributed to a 52c (16%) price fall to $2.71 when trading resumed yesterday.

Energy, as mentioned, was the big story of the week, reinforcing a point made in this column recently that if the world is really going to enjoy a post-Covid bounce, then it will burn more oil and will use more lithium.

According to the monthly report of the International Energy Agency, demand for oil is accelerating, making up for a steep decline last year. The IEA report flowed directly into the oil price, with Brent quality crude adding $US4 a barrel during the week to reach $US66/bbl to be back where it was a month ago.

Oil sector leaders Woodside, Santos, Oil Search and Beach all managed modest share-price increases while Strike Energy took advantage of the growing appetite among investors for oil and gas stocks by raising $75 million for its WA gas production plans.

Lithium and copper led the battery metals while nickel held its ground after last month’s sharp fall.

Macquarie Bank fell into line with other banks by revising up sharply its price forecasts for lithium and lithium miners. An example of how badly Macquarie had missed the lithium recovery which started late last year is the bank’s latest $7.10 price tip for Orocobre. In late February, the bank said the stock was heading for $2.90. It closed yesterday at $6.26.

Embarrassing as it might be for Macquarie to arrive late at the lithium party, the bank’s acknowledgement of strong and growing demand for the metal is confirmation of the battery-metals investment theme.

Copper, which is almost as important as lithium in the battery business, got a boost from coverage of the CRU world copper conference in Chile, an event which provided high profile copper bull, Robert Friedland, with a podium to push his case for the metal.

It is never easy to disagree with Friedland, especially to his face, but when the great man speaks, a lot of investors listen and his latest claim is that copper and other raw materials are becoming a national security issue as supply chains are “balkanised”.

What Friedland means is that China has staked a claim (and bribed its way) into control of commodities produced in Africa, leaving the rest of the world to chase supplies elsewhere, which is good news for first-world mining countries such as Australia and Canada.

Goldman Sachs used the CRU copper event in Santiago to roll out a fresh set of copper forecasts, including a price rise from its current $US4.12 a pound to $US5/lb over the next 12-months and then up to a record $US6.80/lb by 2025.

The bank also rivalled Friedland for the prize of exaggeration of week, describing copper as “the new oil”, conveniently forgetting that lithium earned the title of “the new petroleum” about five years ago.

Top pick on the Goldman Sachs copper list is Sandfire Resources, currently trading around $5.80 but said by the bank to be heading for $7.60. Venturex added 2c yesterday trade at 47c after releasing an update on plans for its Sulphur Springs copper and zinc project in WA. OZ Minerals, on the other hand, has run too far ahead of the copper price and is a neutral tip at $24.

Citi, another U.S. bank, is also a copper bull with U.S. demand likely to be a significant factor because of an expected increase in “copper intensity” in economic activity as stimulus spending focusses on infrastructure projects.

Iron ore slipped fractionally to $US172 a tonne but remains on the watch list of most banks as Chinese demand for steel shows signs of peaking later this year.

A key iron ore number which emerged during the week was 200 million tonnes, China’s target for iron ore imports from suppliers other than Australia and Brazil.

Not a number plucked out of the air, it came from Li Xinchuang, chairman and chief engineer of the China Metallurgy Industry Planning and Research Institute (now that’s a mouthful) in an interview with analysts from the investment bank, Morgan Stanley.

Unsaid was how quickly China can get to its non-Australian and non-Brazilian iron ore target, though 2025 is a rough guide – and a useful date for investors in stocks such as Fortescue Metals which eased back by 27c to $20.60 this week and earned a sell tip from Goldman Sachs which sees $18.90 as the next stop for the stock.

Other news events and market moves of note included:

 

  • Uranium stocks, which earned top spot in this column two weeks ago, taking a battering when Canada’s uranium leader, Cameco, said it was restarting its mothballed Cigar Lake ahead of schedule to catch a rising uranium price. Deep Yellow was the hardest hit U-stock on the ASX, losing 10c to 63c. Boss fell by 3c to 14c.

 

  • Walkabout was the pick of the graphite stocks, which shared in the battery metal revival. The stock added 2c to 18c after reporting a debt-funding deal with an African bank for its Lindi Jumbo graphite project in Tanzania.

 

  • Vulcan Energy, the European lithium project developer backed by Australian iron ore billionaire, Gina Rinehart, rose by $1 to $7.30 after reporting that a pilot plant at its Upper Rhine Valley project was operational.

 

  • Antipa Minerals rose by a modest 0.2c to 5c after Rio Tinto, its partner in the promising Citadel copper and gold project in WA’s Paterson Province, said it was increasing spending from a planned $13.8 million to $24.5 million, and

 

  • Tietto Minerals received a fresh buy tip from Canaccord Genuity after releasing its pre-feasibility study into the 200,000 ounce a year Abujar project in Ivory Coast. However, the tip came with a reduced price target of 75c versus an earlier 80c. On the market, Tietto slipped 2c lower to 31c.

 

 

 

 

 

 

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