A virus and a banker were a toxic combination on financial markets this week as the latest Covid strain rattled investor confidence and Jerome Powell, head of the U.S. central bank, warned that the punch bowl of free money could be removed sooner rather than later.
The net result was red ink across most sectors with gold equities hit hardest as measured by a 5.5% fall in the ASX gold index, a drop significantly higher than what turned out to be a modest $US15 an ounce slide in the gold price over the week.
Gold took another warning shot as interest rates edged higher, but iron ore staged a useful China-driven recovery while zinc, tin and copper benefited from outages and political interference.
New Zealand’s central bank punched well above its weight with a second 0.25 percentage point increase in its cash rate to 0.75%, effectively laying the foundation for other countries to follow, though Australia’s Reserve Bank says it will stay on the sidelines for at least another 12-months.
Gold edged back towards $US1,900 an ounce this week, but the more important development was cost inflation and a timely warning from a leading investment bank that some Australian iron ore producers are sailing into stormy weather.
Morgan Stanley, in its weekly Data Dig report, singled out Mineral Resources and Fortescue Metals as iron ore miners with cost and quality challenges which could affect their profitability and dividend-paying potential.
According to the bank, the mines of Mineral Resources are currently unprofitable based on an iron ore price of $US90-a-tonne for high-grade ore and then applying a discount for the company’s low-grade material, which indicates implied costs for the company of $US101/t.
Gold, Gonneville, and Glasgow dominated news flow this week but hovering over everything was the inflation genie who burst out of her bottle to send a shudder through global financial markets.
The gold price, which is a distillation of multiple events, rose to a six-month high of $US1862 an ounce before slipping back to around $US1846/oz.
A surprise 13.5% increase in official Chinese producer prices for the month of October was the spark for the inflation alert, which is expected to bring forward central bank interest rate increases and an end to the era of super-cheap money.
Energy, as expected, was the big news on financial markets this week as the Glasgow climate change conference dragged on, but there was another event which kept investors on their toes - a fresh indication that official U.S. interest rates will be heading higher next year.
A $US20 an ounce fall in the gold price on Wednesday was the most obvious reaction to the unveiling of a plan by the U.S. central bank to phasing down its bond buying, which has been pumping cash into the economy.
Energy (ancient and modern) dominated news flow this week in the lead up to next week’s climate change gabfest in Glasgow, and while important from a long-range perspective, it was another whiff of rising interest rates which affected short-term trading.
Nickel led the way this week with its price at a seven-year high, followed by fresh moves in a takeover duel pitting BHP against Andrew Forrest, but the more important development was news the house prices in China fallen for the first time in seven years
While not directly affecting Australian investors, yet, falling home values add to China’s problems of soaring energy costs and the potential collapse of a big property developer.
Those events will be making Chinese consumers feel poorer and therefore less liable to spend which will have an effect on companies selling material to China, while rising costs in its manufacturing industry will see China start to “export” inflation.
The global energy crisis dominated headlines this week with fossil fuels defying the rush into renewables, feeding fear of an inflationary spiral which, in turn, sparked a jump in the price of gold.
A move back towards $US1800 an ounce by gold was a measure of the uncertainty in financial markets as government start to unwind post-pandemic economic stimulus spending just as the climate change debate heats up.The net result is a cocktail of confusion, and perfect conditions for gold to shine even if part of the stimulus unwinding is an increase in official U.S. interest rates.