Guy on Rocks: “Panic” Could Boost Gold Price To US $ 3,000 / oz, And Beyond
“Guy on Rocks” is a Stockhead series that examines important events in the resource market each week. Former geologist and seasoned stockbroker Guy Le Page, director and senior executive at Perth-based financial services provider RM Corporate Finance, shares his strong views on the market and “stocks to watch”.
Gold has lost 4% in the past two weeks, closing at US $ 1,752 (four week low) on the back of a stronger US dollar.
Platinum ended up 2% for the week at US $ 897 / ounce and palladium hit a two-year low at US $ 1,772.
Copper also lost 4% to US $ 4.15 / lb due to poor Chinese economic data; the red metal, however, remains in strong contango.
Uranium went against the grain and closed up US $ 5 for the week to end at US $ 44 / lb.
Last week there was a Precious Metals Summit in Beaver Creek Colorado attended by Dan Oliver, founder of Myrmikan Capital.
His view is that gold is still good for US $ 10,000 an ounce (at any given time) due to a falling US dollar in conjunction with soaring 5% inflation (which he sees as being really at 10-12%) and finally, a credit collapse.
Apparently, Federal Reserve Governors have met various companies all of whom are complaining about rising input prices.
The big question is who will be the buyers of US Treasuries once the tapering takes effect? Probably no one!
Add to that negative real wage growth coupled with the fact that most small and medium-sized businesses in the United States believe they will go out of business next year.
While cryptocurrencies are a possible alternative, Oliver considers that they lack the stability of assets such as gold to be a longer term alternative investment proposition.
He also highlighted the shift from grain to silver to gold over thousands of years demonstrating its long history as a currency.
So what will drive the gold from here?
“What would really take gold to the next level, the $ 3,000 level, would be a panic … and then the Fed shows up and says ‘hey, $ 120 trillion, make it $ 500 trillion’ , or a billion a month – whatever the next QE or some other new policy they haven’t even announced, ”he said.
A tough week in metals markets as China announced it would release more metal reserves to alleviate supply shortages.
This includes copper, aluminum and zinc from state reserves, in order to “overcome the disparities between supply and demand,” according to Li Hui of the National Development and Reform Commission.
Government interventions in the metals markets have had a limited impact on prices in the medium to long term, so if the Chinese government comes to the end of these reserves, there is no stop in metal prices at My opinion.
In any case, well done to them for trying!
The recent negative sentiment towards metals is also attributable to weakening indicators of construction activity in China (Figure 1) and the high likelihood of a Chinese credit crunch in this weakness.
There also appears to be a disconnect between metal prices, the Chinese PMI (new orders minus inventories – Figure 2) and global PMIs (weighted and amplitude-adjusted copper demand country by country) over the years. last three months.
On the other hand, domestic prices of Chinese lithium carbonate have increased recently (Figure 3) with battery grade lithium carbonate from S&P Global Platts to a record 170,000 yuan / t ($ 26,372.94 / t) compared to its previous record of 160,000 yuan / t.
Everyone is talking about iron ore and its apocalyptic setback caused by the slowdown in China and declining steel production.
With the Dalian futures contracts delivered in October around 625 yuan or US $ 96.6 / tonne (Figure 4), I would have thought that people concerned about inflation and input prices would be relieved to see this turn around. unwind.
In the short term, I think we will see a rebound in iron ore with a recovery in steel consumption after a very sharp drop in recent months (Figure 5).
With iron ore (CFR China, 62% fines) fetching less than $ 93 (Figure 4), it seems GWR Group (ASX:GWR), which is currently on a commercial shutdown, is set to hoist the white flag over its C4 iron ore deposit near Wiluna, with freight charges on the 711 km journey to Geraldton port being a bridge too distant.
The project was operated by private developer Pilbara Resource Group. There is no doubt that if market conditions improve, the project can be put back online.
Fenix Resources (ASX:FEX), with C2 costs of around A $ 100 / mt, still looks profitable with margins in the range of A $ 40-50 / tonne after being ex-dividend (5 cents) on 9/21/2021.
Other iron ore juniors like Strike Resources (ASX:SRK) have also seen significant declines, dropping from 30 cents in mid-July to around 11.5 cents at the time of writing.
i feel for Company minerals (ASX:VMS) whose life as an iron ore producer lasted only one month before the suspension of operations (VMS, ASX announcement 9/17/2021).
Either way, not the end of the world for VMS, who are carrying out a drilling program at Mount Lindsay targeting skarn mineralization that could represent an extension of the Renison mine sequence (former high-grade tin producer).
Recent drilling intersected potentially magnetite-rich skarns containing tin (Figure 6).
Rio tinto (ASX:RIO) ($ 133 to $ 93), BHP Group (ASX: BHP) ($ 53 to $ 37) and FMG (ASX: FMG) ($ 26 to $ 14) led the decline.
In the case of GMF, margins remain strong at CFR 62% Fe (equivalent) costs of around $ 58 / tonne, so there could be a business opportunity here as always on any rebound (and short cover) in the price of iron ore (Figure 7).
This could well happen when Chinese steel mills get back on track, which should not be too far away with margins well and truly restored to sustainable levels.
The short-term elephant, however, could be the outlook for Chinese real estate developer Evergrande whose debt has swelled to $ 300 billion and remains under significant pressure.
It will be interesting to see if government support is forthcoming …
The Evergrande crisis comes as the US Federal Reserve holds its two-day monetary policy meeting starting Tuesday morning and ending Wednesday afternoon with a statement and press conference from Fed Chairman Jerome Powell.
The market is wondering if a massive sell-off in global equity and financial markets at the start of the week would impact the Fed’s discussion of when to scale back its bond buying program.
Mergers and acquisitions are in full swing and recent volatility could present some interesting opportunities.
Metalicity Limited (ASX: MCT) is attempting to consolidate its position for its Kookynie and Yundamindra (WA) gold projects with a 4.81-to-1 paper bid for joint venture partner Nex Metals (ASX: NEX).
If successful, NEX (Figure 8) would end up with around 38% of the merged group. A few more games to come but I think this deal makes sense and will eventually cross the line.
With the gold index down almost 40% from its July 2020 highs, I think it’s time to re-enter mid-to-large cap gold stocks and I think Evolution mining (ASX:EVN) is probably a good option.
While FY21 gold production of 681,000 ounces was below fiscal 2020 levels of 747,000 ounces, underlying net income was still $ 354 million for fiscal 2021.
The earnings outlook is a bit flat, but there is reasonable growth for Red Lake (Canada) and Cowal over the next 4-5 years as they hit full production.
All-inclusive sustaining costs are less than A $ 1,300 / ounce with CitiResearch projecting gold production to increase to over 940,000 ounces by 2024.
EVN are a bit more conservative in their growth strategy, sticking to first world jurisdictions and somewhat cautious about stretching their balance sheets, however the company provides good leverage to any rebound in gold.
At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives ranging from mergers and acquisitions, IPOs and valuations, consulting and corporate advisory roles.
He was head of research at Morgan Stockbroking Limited (Perth) before joining Tolhurst Noall as a corporate advisor in July 1998. Prior to entering the stock exchange industry he spent 10 years as a geologist exploration and mining operations in Australia, Canada and the United States. States. The views, information or opinions expressed in the interview for this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for the advice on financial products contained in this article.