News - Prospector's Diary

Iron ore, coal and oil ore will be the commodity winners when the financial is ruled off next Wednesday. Gold, however, will end flat when looked at over the full 12-months, while copper and other battery metals continue to shape as next year’s winners.

In a nutshell, that’s where we have been in financial year 2020/21 and where we appear to be headed as financial markets say goodbye to a roller-coaster ride dominated by the Covid-19 pandemic and government spending designed to stave off a depression. By this time next year, a different picture will emerge, probably one dominated by the struggle to reel in the excess cash created in reaction to the pandemic which means inflation and interest rates will be one of big issues to watch, with energy transition another.

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Exploration and discovery news will become more important than ever for investors in Australian resources after this week’s intervention by China in commodity markets followed by another warning from the U.S. that higher interest rates are on the way.

The Chinese plan to sell surplus material from government stockpiles of critical metals such as copper and nickel has had a dampening effect on prices, while the U.S. central bank’s interest rate signal mean that gold faces a tough time. Both of those events at the top of the investment food chain had been widely expected as markets rattled by the Covid-19 pandemic start to normalise, radiating out ripples of uncertainty.

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It gave the world Covid-19 and now it looks like China is giving the world inflation and while some people might not see the connection between Covid and inflation, they are both a threat and an opportunity for investors.

To understand the significance of an inflationary outbreak, you only have to look back 18 months to see how a disease can turn financial markets upside down. Heavy losses at the start and fat profits later. Inflation, if allowed to rise too far, is an equally dangerous infection which destroys the value of certain types of investment (especially cash), but the flipside is that it improves the performance of hard physical assets such as property, gold and other commodities.

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Another whiff of inflation and hint of rising interest rates stirred financial markets this week, along with a warning of greater risks ahead from two big name investors (and a long-dead economist).

Larry Fink and Jeremy Grantham sang from the same gloomy hymn sheet, which is a favorite of grumpy old men who have seen countless market cycles -- and so too would Adam Smith, if he had not died 231 years ago. Fink is the key man in the threesome because he runs BlackRock, the world’s biggest fund manager. He warned that stimulus spending would create an inflation spike which would be a “pretty big shock” for most people, especially novice investors who have little concept of the value-corroding nature of inflation.

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Energy transition and the rise of renewables topped investment topics this week thanks to a controversial report from the International Energy Agency, but it was coal which delivered the biggest price rise.

It isn’t supposed to be like that because coal has become the energy source that no-one talks about for fear of being sent to the naughty corner -- or cancelled. But the return of thermal coal as a star performer with this week’s 10% rise to $US106 a tonne coal has demonstrated that it remains a remarkably popular, if not indispensable, commodity for now. That will change, but in the latest coal price, which is a three-year high and more than double the $US52/t of just nine months ago, can be found several important lessons for investors and governments.

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The post-Covid unravelling of artificially stimulated asset values accelerated this week as interest rates edged higher, inflation fears worsened, and cryptocurrencies plunged during an investment market shift to risk-off mode.

Gold, as noted last week, continued to appeal as a safe haven in volatile times with the price rising to a four-month high, taking some local miners with it but not all as it dawned on some investors that cost inflation was starting to eat profits. Next problem on the horizon, and a reason to play it safe, is the potential for a market shaking “taper tantrum” which is likely to follow when government stimulus is eased, an event which must eventually happen, or inflation really will go through the roof.

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Copper up. Gold up. It’s an unusual double-barreled event because rising copper is a pointer to strong future economic activity, while gold is a safe haven for uncertain times, so when both rise at the same time it makes for tricky forecasting.

Copper up. Gold up. It’s an unusual double-barreled event because rising copper is a pointer to strong future economic activity, while gold is a safe haven for uncertain times, so when both rise at the same time it makes for tricky forecasting. Layer on top of those two key commodities moving in tandem with rising interest rates and a whiff of inflation, and it is doubtful that there has ever been a more complex brew of conflicting signals.

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Macquarie Bank’s headline-grabbing iron ore price forecast last week of $US200 a tonne for later this year has been raised by Citi, a rival bank, which reckons the ore price could stretch out to $US210/t in the September quarter.

Macquarie Bank’s headline-grabbing iron ore price forecast last week of $US200 a tonne for later this year has been raised by Citi, a rival bank, which reckons the ore price could stretch out to $US210/t in the September quarter. “No turn of the iron ore tide just yet,” is how Citi summed up a red-hot commodity even as it eased back below $US190/t this week but which continues to be driven by global economic stimulus spending and the return of consumers armed with trillions of dollars in the U.S.

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