Soaring silver snatches first place in this week’s precious metals rally as fears of inflation take hold

Silver, the poor-man’s gold, set the pace this week as investors accelerated their flight to safety
24th July 2020
Tim Treadgold

Silver, the poor-man’s gold, set the pace this week as investors accelerated their flight to safety, driven by concern about Covid-19’s ongoing economic damage and the potential for a powerful return of inflation, which can damage the value of financial assets such as cash.

Since the middle of last month, silver has risen by 35% to $US23.14 an ounce, easily outstripping gold’s 9% rise over the same time to a nine-year high of $US1868/oz as the value of the US dollar continued to slide and some US interest rates went deeper into negative territory.

Silver’s run, which is very much a case of catching up to its yellow sister metal, looks even more impressive when measured over the past four months, up 93% from a Covid-19 affected mid-March price of $US12/oz.

The rush into silver is a sign that so-called “mom and pop” investors have started shifting their savings into a precious metal they can afford, as well as a move by professionals to rebalance the gold/silver ratio which had blown out to 125-times (one ounce of gold worth 125 ounces of silver).

If there is a ratio rebalancing underway, then silver could rise further because while the recent surge in silver has reduced the ratio to 80.7, the average of the past 30 years is around 65 which, if applied today, would imply a silver price of $US28.70/oz (or a lower gold price!).

Stocks with silver exposure, and that generally includes zinc and lead producers as the three metals often occur together (think Broken Hill), have all benefited from the silver rush, led by NSW-focussed Silver Mines, which rose by 50% this week to 18c, and Adriatic, an emerging base metals and silver producer, up 16% to $1.87.

Inflationary fears are being stimulated by massive government spending programs and the unleashing of “helicopter” money, such as Australia’s JobKeeper and JobSeeker programs, which are dumping cash on people, whether they need it or not.

The deep-seated concern is that the only way governments will ever recoup the cash they’re magically creating will be by “inflating away the problem” – which means repaying their debts with depreciated money, like Germany in the 1930s or Zimbabwe more recently.

Rampant inflation, which some economists reckon will reach 10% next year, could last for years as governments repair their budgets through a combination of higher taxes and depreciated debt.

Silver and gold were not alone in having a strong week, with higher prices across the commodity complex as China’s powerful economic recovery drove demand for most industrial metals, especially iron ore and copper.

Despite concern that the iron ore boom will soon fade as Brazil boosts exports, the price remains around $111 a tonne, underpinning what will be bumper profits from iron ore miners such as Fortescue Metals, Rio Tinto and BHP  - though not their share prices.

In what could be a pointer to an overdue correction in the share prices of iron ore miners, Fortescue slipped marginally during the week to $16.31.

Fortescue’s weakness might have been influenced by a warning shot from the well-connected investment bank, Morgan Stanley, which reckons iron ore is being driven more by Chinese speculators playing financial games than underlying supply-and-demand fundamentals. The bank is tipping an iron ore price slide to $US80/t by Christmas.

Copper is at a different stage of the price cycle, more likely to rise than fall thanks to China showing evidence of a V-shaped recovery and ongoing economic expansion.

Since hitting a Covid-19 low of $US2.05 a pound in March, copper has risen to $US2.94/lb, its highest since late last year – and a perfect example of a V-shaped recovery which is expected to continue, underpinning local copper mines such as OZ Minerals, which this week hit a nine-year share price high of $13.78 – up $1.21 over the past week. Sandfire followed OZ with a rise of 26c to $5.61.

Gold miners followed the gold price higher, boosted by their appeal as yield plays as the prospect of bumper dividends follows the flow of strong profits.

A hint of what’s to come in profit-reporting season which kicks off next month could be seen in the latest quarterly reports of gold-sector leaders such as Evolution, which reported record operating cash flow of $352 million in the June quarter, and Northern Star, with $218 million in underlying free cash flow.

On the market, Evolution shares rose by 26c to $6.30, taking their rise for the year so far to 77%, while Northern Star added 95c to $15.82, up 42% since the start of the year.

What happens next with gold will be the most closely watched game in financial markets because the metal is now just $US43/oz short of its 2011 all-time high of $US1911/oz – with investment banks such as Macquarie saying there is more to come.

“Gold’s rally has accelerated,” Macquarie said yesterday, “benefitting from a US dollar meltdown and the collapse in US real interest rates with 10-year TIPS (Treasury Inflation Protected Securities) trending towards minus 1%.

“The combination of steady 10-year Treasury yields and incrementally higher inflation break-evens has provided the backdrop for gold’s grind higher, though we see increasing risk of a momentum overshoot … as gold approaches all-time highs above $US1900/oz.”

Apart from the rise towards a record, there were a number of other gold highlights during the week, including:

  • Cardinal Resources rising by 5c to 73c as a bidding war between Russia’s Nordgold and China’s Shandong heated up. The latest shot fired is a 4c increase in Shandong’s offer to 70c, eclipsing Nordgold’s 66c, for now. In mid-March, Cardinal was trading at 25c.
  • De Grey rose by 19c to 81c after reporting more encouraging drill results from its Hemi discovery in WA’s Pilbara region with the best of the new assays being 39 metres at 3.2 grams of gold a tonne.
  • Pantoro reported a high-grade drill hit of 8.1m at 67.29g/t from drilling at its Sailfish prospect near the historic Norseman gold field in WA. On the market, Pantoro added 5c to 28c, and
  • Perseus rose 13c to $1.51 despite a soft June quarter production report and a price which is now 20c above the target set by Credit Suisse earlier this week – a difference which earned Perseus a sell tip, in what could be a guide to some parts of the gold market becoming over-heated.

Lithium’s slow but steady revival continued during the week, but the price is expected to remain under pressure until a surplus of about 50,000 tonnes is absorbed, according to Morgan Stanley after it hosted a conference call with Benchmark Mineral Intelligence.

The improved sentiment towards lithium stocks saw a 5c rise by Pilbara Minerals to 36c and a 43c rise by Orocobre to $3.18.

News that Tesla had generated its fourth consecutive quarterly profit after selling electric cars value at $US6.04 billion boosted the case for lithium stocks.

The capital raising rush continued this week, albeit at a slower pace with a handful of deals that included:

  • Impact Minerals raising $3.25 million to help fund exploration at its copper and platinum project near Broken Hill in NSW.
  • S2 Resources raising $7.75 million to fund exploration and strengthen the company’s balance sheet, and
  • Peel Mining reportedly organising a fund raising to buy joint venture partners out of its base metals projects in NSW.

Other events and stock market moves included:

  • Clean TeQ Holdings rising 6c to 20c after announcing a heads of agreement to sell scandium for 3D printing of rockets.
  • Marenica Energy reporting the discovery of an extensive uranium-rich paleochannel (ancient river bed) in Namibia. On the market, the stock added 2c to 7.7c.
  • Venture Minerals adding 1c to 3.9c after announcing a joint venture with Chalice Gold over tenements in the south-west of WA which might contain mineralisation similar to Chalice’s Julimar palladium discovery, and
  • Agrimin rising by 7c to 60c after saying it aimed to be the world’s lowest cost producer of sulphate of potash at its Lake Mackay project in WA.

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