Rising oil price, falling gold price speak volumes about investors’ growth expectations for 2021

Uncertainty rules as investors struggle to accept that after 11 months of Covid-caused chaos, financial markets are back to where they started.
27th November 2020
Tim Treadgold

Uncertainty rules as investors struggle to accept that after 11 months of Covid-caused chaos, financial markets are back to where they started. But there are two commodities that offer opportunities for bulls and bears -- oil and gold.

Oil, a politically incorrect fuel second only to coal, has been an investment star this month, rising 30% to $US48 a barrel as a flow of positive vaccine news boosts confidence in 2021 being a strong year for economic growth thanks to government spending and growing consumer confidence.

Gold, as warned in this column several times since early August, has rolled over to now be down 12.5% since hitting its all-time high of $US2067 an ounce in August and is poised precariously at $US1811/oz.

Big name banks are slowly waking to the change. Macquarie warned in a note to clients yesterday that gold was edging towards “systematic selling” and Bank of America dropped its $US3000/oz price tip, reverting to $US2063/oz.

The challenge for investors who prefer gold is to try and pick the bottom before a recovery which will come when the market recognises the enormous challenge of dealing with Covid-created debt.

One price forecast for gold from the Swiss bank, Lombard Odier, is that gold will find a floor at $US1600 an ounce before a resurgence. ANZ sees the price stabilising around where it is today before rising back to $US1900/oz and then upward to $US2100/oz next year.

The difference in the performance of oil and gold, which could be providing an early look at market trends in 2021, is best seen through share-price comparisons.

Top gold stocks such as Newcrest and Evolution are down 10% since the start of November. Top oil and gas stocks such as Woodside Petroleum and Santos are up 35%.

What those price differences show is money being rotated out of assets best able to ride out the Covid-crisis into assets best able to participate in the recovery which appears to be taking hold. Energy in its many forms will be a big winner from an economic growth spurt as will base metals.

Copper and nickel, for example, are trading at multi-year highs and likely to keep rising as industrial metals return as a growth category.

A measure of where we are on the cycle of shifting values is to consider this number: 6888, because that was the all ordinaries index at the start of trading on the Australian stock market yesterday, almost a dead-ringer for the reading of 6889 on the same day last year.

The 1-point difference in the all-ordinaries prompts a critical question; what on earth happened over the past 12 months, was it a wild roller-coaster ride or did nothing happen?

If there is a message in the latest turn of events, which include a new U.S. President, successful Covid vaccines and hints of China taking its foot off Australia’s throat, it can be found in oil, an unloved commodity but one poised for a few good years even as new energy solutions provided by renewables and batteries are developed.

Lithium, a sector which crashed and burned two years ago, is riding on the same recovery wave as oil with widespread expectations that the price of the key battery metal has bottomed and a sustainable price recovery can be expected next year.

Galaxy, one of the early movers in the Australian lithium industry, moved this week to capture future market share, raising $161 million in an issue of fresh equity which will be used to finalise work at its Sala de Vida project in Argentina and undertake additional work at its James Bay project in Canada. On the market this week, Galaxy added 17c to $1.99.

Other lithium stocks have also been moving up. Pilbara Minerals added 11c to 72c but did reach a 12-month high of 74c on Tuesday (a rise of 400% on its low in March of 14c). Orocobre put on 54c to $4 and ioneer added 4c to 28c.

Iron ore continues to defy forecasts of a substantial price correction, returning to its 12-month high of $US127 a tonne as optimism about a synchronised global recovery in a post-Covid economy drives investors back to basic commodities.

Fortescue Metals, which was sold down to $16.98 at the end of last week, bounced back to $18.52, a 9% rise in four trading days. Mineral Resources, which unveiled a major iron ore growth push, added $1.94 to $31.85, down slightly on an all-time high reached yesterday of $32.25.

The shift away from safe havens such as gold and the U.S. dollar is becoming a powerful force in all markets as a global rotation of risk exposure drives the value of everything, including currencies and interest rates.

U.S. rates have been climbing for the past three months and the higher they go, the tougher it gets for gold. Currency shifts are also becoming an issue for Australian exporters with Westpac tipping a rise in the Aussie dollar to US77c next year, a country mile higher than the US55c rate in mid-March at the height of the pandemic.

For Australian investors, there are several wild cards in the pack of economic cards which are in the process of being shuffled. Issues to consider include:

  • Managing exposure to energy stocks because energy will be a big recovery story next year with both old energy (oil and coal) likely to win, along with new energy (lithium, nickel, rare earths and cobalt).
  • The changing face of China which appears to be offering Australian exporters an olive branch after nine-months of nastiness – though trusting China will always be a risk while it remains a communist dictatorship.
  • Watching cost blow outs in your favourite stocks with labour and equipment shortages emerging in several mining jurisdictions.
  • Being prepared for a surge in merger and acquisition (M&A) activity in 2021 as strong economic growth drives optimism to fresh heights, and
  • Whether to participate in the surge of capital raisings which this week saw Galaxy’s big share issue (mentioned earlier), Nova Minerals seek $21 million, Greenland raise $30 million, Strike Resources raise $4 million, Clean TeQ raise $19 million and DevEx raise $8.4 million.

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

  • Lynas Corporation continuing to attract international investor interest with its world-class Mt Weld rare earth project getting a double uplift during the week courtesy of deep drilling results which show the orebody continues at depth and an upgrade from UBS which lifted its price target from $3.40 to $4.05. On the market, Lynas added 30c this week to trade at $3.66.
  • Chalice also continued to attract investors courtesy of Australia’s first significant palladium discovery near Perth. Fresh assay results pleased investment analysts such as those at Bell Potter who went a little overboard describing the Gonneville intrusive as “literally having palladium everywhere” which is definitely not a description you’ll find in the JORC code for discoveries. On the market, Chalice rose 14c this week to $3.88 but Bell Potter reckons its heading to $5.35 – a remarkable upgrade on the last price forecast of $2.55.
  • Cardinal Resources traded up to a new high of $1.07 after a third bidder, a Ghana based company, entered the race being run by a Russian and Chinese suitor with everyone now offering $1.05. The stock was trading at 25c in mid-March.
  • De Grey paid a price for its pure gold exposure in a falling gold market with a 18c drop to 99c despite a fresh batch of encouraging gold assays from its Hemi project in WA.
  • Highfield Resources, an almost forgotten potash player, staged a comeback with a 6c rise to 70c after Canaccord Genuity dusted off its research with a note saying the stock is heading for 97c, and
  • New World Resources reported thick and high-grade copper and zinc intersections from the latest drilling at its Antler project in the U.S. including 23.1 metres at 2.56% copper and 5.57% zinc, plus other metals to produce a copper equivalent reading of 4.5%. On the market, New World was steady at 5.5c.

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