US Fed’s promise of no rate rises is pure gold for precious metal investors

Just about everything else fell this week but gold reclaimed its star status with a rise of $US50 an ounce after a promise from the US central bank that there will be no increase in official interest rates for at least another two years
12th June 2020
Tim Treadgold

Just about everything else fell this week but gold reclaimed its star status with a rise of $US50 an ounce after a promise from the US central bank that there will be no increase in official interest rates for at least another two years.

The problem with the no-rate increase comments from the Federal Reserve chairman Jay Powell is that while they might be good for gold, they reflect a downbeat outlook for US and global growth.

Near-zero interest rates are perfect for non-interest-bearing gold, which is also benefiting from fresh doubts about the strength of the world’s economy, and disturbing reports of a second wave of Covid-19 infections in the US.

Locally, gold stocks which had been marked down early in the week, stormed higher thanks to the higher US-dollar gold price, plus a modest decline in the value of the Australian dollar, and a flood of encouraging exploration news.

Newcrest, not a stock known for sudden price rises because of its $24 billion market value, was the major factor in a 5.1% increase in the ASX gold index after the stock jumped by 6.8% ($1.95) to $30.37 on Thursday following the release of highly encouraging drill results from two of its development projects.

At the Havieron project in the north of WA, Newcrest reported assays up to 6.3 grams of gold a tonne over a whopping 109 metres from a depth of 668m, with a 55.4m core in that intersection grading 11g/t plus 0.79% copper.

At the Red Chris project in Canada, Newcrest reported a 514m intersection at 0.81g/t of gold plus 0.57% copper from a depth of 66m.

Other eye-catching results and associated gold news in a strong week for explorers included:

  • Bellevue Gold said its first regional step-out test north of its namesake Bellevue Gold Project in WA had hit 17m at 4.2g/t. That news saw the stock add 8c to 98c on Thursday, taking its three-day to 16c. Macquarie Bank put out a fresh research note tipping a future price of $1.20.
  • Musgrave Minerals rocketed 18c (75%) to 42c after reporting near-surface bonanza gold grades from drilling at its Starlight project near Cue in WA with a best hit of 18m at 179.4g/t from a depth of 30m
  • De Grey continued its strong upward move after reporting more encouraging drill results from its Hemi project in the north of WA with the latest assays including 41m at 6.8g/t from a depth of 181m at the Aquila zone. On the market, De Grey added 13c to 62c.
  • Ramelius rose 13c to $1.77 after drilling at its Penny West project returned 4m at 18.06g/t from a depth of 216m, including 2m at 31.63g/t.
  • Tietto Minerals hit a 5m zone assaying 17.22g/t at its Abujar project in Ivory Coast, helping lift the stock by 5c to 42c, and
  • Credit Suisse became the latest investment back to update its gold price forecast and gold company earnings with a new price target of $US1800/oz in the first quarter of next year, a $US200/oz increase on the bank’s last price tip.

Iron ore stocks continued to benefit from uncertainty about future Brazilian output which lifted the benchmark price to $US105 a tonne. Fortescue added 30c to $14.84 and Mineral Resources put on $1.30 to $20.80.

Copper, which is widely seen as the next hot commodity once iron ore fades, attracted increased attention this week, led by analysts at Citi, an investment bank, who upgraded their copper price tip from $US2.40 a pound to $US2.63/lb by the end of the year, and then up to $US2.86 by the end of 2021.

Beneficiaries of the improving copper outlook include OZ Minerals which added 30c to $10.28 this week while Sandfire Resources, which was up 15c early on Thursday, faded to end down 11c at $4.80 despite an optimistic research report from Credit Suisse which sees the stock rising to $5.70.

Metals X, which has struggled to master the Nifty copper project in WA, rose by 3c to 95c after striking a deal with Independence Group on exploration around the troubled mine. Independence lost 14c during the week to $5.14 after reporting that it would spend $32 million over six-and-a-half years to earn 70% in the new joint venture.

While news from the field was mostly positive, that was not the case when it came to forecasts about the future of the broader economy and overheating in some markets,

The latest cautionary comments, which preceded Powell’s latest report on the U.S. economy, included a warning from leading local investor Alex Waislitz who said, ominously, that a “day of reckoning in the next six to 18 months”.

What worries a number of seasoned investors is that financial markets have moved too far ahead of the underlying economy.

Jeremy Grantham, head of the Boston-based GMO fund, said during the week that stock markets had become “lost in one-sided optimism”. Citi, a big U.S. investment bank, said markets were “way ahead of reality”.

The test of the “optimism v pessimism” debate will come in a few weeks when the financial year ends and investors will ask themselves: “what actually happened over the past 12-months?”

A preview of the “what happened” question can be found in key market indices and share prices starting with the ASX all ordinaries which in mid-March had “crashed” by 31% from this time last year but is now down just 8% despite the Covid-19 lockdowns of major economies and the China v U.S. trade war.

What worries people like Waislitz and Grantham is the rapid recovery on stock markets after a sharp collapse in economic activity and a view that issues with Covid-19 have not suddenly disappeared.

While the economy v markets debate will run for some time, the flow of local news will have a more immediate effect on prices, with developments last week that included:

  • Piedmont Lithium raising $29 million to continue work on the namesake lithium project in the U.S. News of the capital increase rubbed 3.1c (23.8%) off the stock’s price which fell to 9.9c.
  • Vimy Resources and Arafura Resources joined the pre-June 30 fund raising rush with share issues to raise $5.5 million and $7 million respectively for their uranium and rare earth projects.
  • Centaurus added 7c to 32c after reporting thick and high-grade nickel sulphide assays from a shallow depth at its Jaguar project in Brazil. Best hit was 40.5m at 1.35% nickel from a depth of 20m, with useful grades of copper and cobalt in the core.
  • Lithium stocks firmed despite a fresh warning from Morgan Stanley that it could see continued price weakness even as volumes traded started to pick up. Galaxy Resources added 11c to $1.06 and Pilbara Minerals put on 4c to 36c.
  • Aurelia Metals reported a maiden zinc, lead and gold resource at its Federation project in NSW but failed to develop much traction on the market, rising by 2c to 49c. Macquarie Bank reckons the stock is heading for 70c, and
  • S2 Resources said it was shifting its focus from gold and nickel in Finland back to where it all began, nickel in WA. The news helped the stock add 1c to 12c. Bell Potter has a 25c price target on S2.

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