Talk of higher US inflation target fuels gold and base metals alike

Interest rates lower for longer. Inflation higher for longer. That’s what the U.S. central bank wants, and it’s an unwise investor who bets against the most powerful bank in the world.
28th August 2020
Tim Treadgold

Interest rates lower for longer. Inflation higher for longer. That’s what the U.S. central bank wants, and it’s an unwise investor who bets against the most powerful bank in the world.

Details of what could be a significant change in Federal Reserve policy will become clearer over the next few days but a glimpse of what might be coming could be seen on Australian markets ahead of a key speech by the bank’s chairman, Jerome Powell.

Gold, which had been sold off early in the week, bounced higher, taking local miners with it as investors factored in the prospect of official U.S. interest rates staying close to 0% for the next five years – perfect conditions for gold.

Copper and nickel, the two most widely traded base metals, also moved high thanks to the potential for the higher inflation target sparking a sustainable recovery in the U.S. economy, and other economies outside China, which has been doing all the heavy lifting this year.

It’s against this background of the latest central bank attempts to stimulate growth (and inflation) that the other two big issues of the week weighed on markets, the Covid-19 pandemic and the U.S. Presidential election.

Rarely has there been a cocktail of competing forces which could lead to a period of strong growth (and higher share prices), or a correction to rival all the others which seem to occur around this time of the year, including 1987 and 2008.

Gold first, because it’s price moves are one of the best measures of global investment sentiment.

After a poor start to the week, when the price of the metal dropped by $US32 an ounce to $US1908/oz, the Powell bounce kicked in as speculation grew about what he will say at the virtual Jackson Hole conference which started on Thursday night (Australian time).

Reports of Powell setting new targets for interest rates and inflation saw gold quickly add $US46/oz taking it back to $1943/oz, albeit with a weakening trend evident.

Just before the Powell speculation started, UBS, a leading investment bank, weighed in with a boost to its gold price forecasts for the next two years, lifting its price tip for 2021 from $US1850/oz to $US2100/oz and its 2022 price tip from $US1750/oz to $US2000/oz.

Local gold stocks, which had been trending down all week, reacted quickly but most did not fully make up lost ground.

Sector leader Newcrest fell by 60c to $32.22, though at one stage on Wednesday the stock was down $1.29 at $31.67. Saracen repeated the down/up move with a loss for the week of 17c at $5.22 which was better than being down 37c, where it was midweek. Northern Star was 38c weaker at $13.69 but was off 64c at one stage.

Exploration news also helped boost the gold sector after its sluggish start to the week with De Grey Mining leading the way           after reporting exceptional results from the latest drilling at its Crow prospect in the wider Hemi project, with a best hit of 64 metres at 13.4 grams of gold a tonne from a depth of 141m. On the market, De Grey added 18c to 98c.

Nickel and copper stocks also had an interesting week as China’s economic recovery started to spread into other economies, boosting demand for base metals.

At almost $US7 a pound, nickel is effectively back to where it was at the end of last year while copper at $US3/lb is closing in on a three-year high.

Local nickel stocks had a mixed week. Mincor added 2c to 76c while Western Areas was sold off, losing 17c to $2.25 thanks in part to a series of negative investment bank reports, including UBS lowering its price target from $2.60 to $2.35 and Bell Potter dropping its target price from $2.54 to $2.13.

Copper stocks showed the early signs of benefitting from the brightening outlook for the metal. OZ Minerals added 25c to $14.47 while Sandfire Resources, which reported a solid profit for the year to June 30, rose by 3c to $4.80.

Iron ore this week showed the first signs of fading after its rise from $US85 a tonne earlier this year to sales up $US126/t, a price which looks like the peak in this cycle with latest trades in China at $US120.90/t.

Despite what looks like the start of an easing trend, local iron ore stocks barreled higher as yield-hungry investors chase sector leaders such as Fortescue, which added $1.27 to an all-time high of $19.43. Mineral Resources followed Fortescue with a rise of $1.58 to $29.82.

Investment banks remain bullish about iron ore as demand from the rest of the world starting to pick up. UBS lifted its forecast average price for 2020 from $US91/t to $US98/t, and Macquarie raised its price for the December quarter to $US120/t, before the start of a slide to $US95/t by the end of 2021.

The challenge for investors is to find an entry point in what is a sector that has exceeded all expectations and now looks fully priced, especially if the latest downward trend in the ore price continues.

Fund raising was another highlight of the week with the success of a series of share issues a sign that investor appetite for resource stocks remains strong.

New capital was raised by Australian Mines ($5.2 million), Minotaur ($4 million), Lake Resources ($2.55 million), Hastings ($14.6 million), Kingwest ($3.3 million) and Alice Queen ($7 million).

Service companies shared in the strong outlook for resources. Seven Group’s earthmoving and mine services business helped the company deliver a 42% increase in annual profit to $116 million, which lifted the stock by 57c to $19.23.

Other news and market moving events produced limited reaction from investors who were distracted by the flood of annual reports and political events in Australia and in the U.S., leaving only a handful worth noting, such as:

  • Legend Mining added 2c to 16c after reporting an encouraging electromagnetic reading from survey work at the Mawsons prospect within its Rockford nickel project of WA’s Fraser Range. Drilling is scheduled to start soon.
  • Mineral Commodities reported a big increase in the resource in the western strandline of its Tormin sands project in South Africa which is now estimated to contain 13 million tonnes of heavy minerals. On the market, the stock added 2c to 25c.
  • St George Mining reported the intersection of a thick ultramafic rock unit containing indications of nickel and copper below the Investigators target in its flagship Mt Alexander project in WA. On the market, the stock added 1c to 9.5c.
  • Mithril Resources added 0.7c to 4.5c after reporting the intersection of high-grade mineralisation in the first holes at its Copalquin project in Mexico, including 3m at 34.72g/t of gold plus 3129g/t of silver.
  • Bryah Resources rose by 0.3c to 5.3c after reporting a 30m section of core assaying 33.6% manganese from a depth of 21m at its Brumby Creek project in WA.
  • Vimy Resources added 0.1c to 3.6c after releasing an improved definitive feasibility study into its Mulga Rock uranium project in WA, and
  • Kalium Lakes was steady at 15c after reporting a significant increase in the potash resource at Lake Sunshine which is part of its Beyondie project in WA.

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