‘Guy on Rocks’ is a Stockhead series looking at important developments in the resources market each week. Former geologist and experienced stockbroker Guy Le Page, director and CEO of Perth-based financial services provider RM Corporate Finance, shares his high-conviction views on the market and his “stocks to watch” .
Market Rumors: Rising Bond Yields Put Pressure on Gold
Apologies for the delay in this week’s column, however, extreme volatility resulted in some outdated comments as I reached the end of my cigarette as the VIX index rose from 12.8 to 19.8 in the last three weeks. The VIX now stands at somewhat elevated levels of 18.48. So the solution last week was to keep doing what I do best and that is lighting another cigarette and looking out the window while chaos reigned.
All eyes were on the bond market last week, with US Treasuries rising and base and precious metals remaining under pressure. Gold (Figure 1) had a rough week with a drop of $16 and closed at $1,831 an ounce after a late rally on Friday when 10-year US Treasuries (Figure 2) rose to 4.83%, more than 30 basis points in the past week, marking a 16 year high before retreating to 4.79% on Friday. Silver closed the week at US$21.5/ounce, down 2.8%.
Other pressure metals that sold off last week included palladium, which fell 7.13% to close at $1,135 an ounce. Palladium has declined more than $1,000 per ounce over the past 12 months (Figure 3), representing a 4.5-year low. Platinum also fell 3.1% last week and closed at $877 an ounce.
It appears the market is now pricing in inflation to be higher for longer as risk-off sentiment continues. US PMI numbers were below 50 (bearish) with a late rebound in the DOW on Friday to 33,407 (up 0.87%) in response to a stronger than expected US jobs report which saw 335,000 jobs added. Mercenary geologist Mickey Fulp, however, notes that 50% of this number were part-time jobs and the rest were mostly government positions that were already filled.
On the domestic front, last week’s August CPI rose from 4.9% to 5.2%, suggesting inflation is very much alive and well. Inflation in the United States last week was 3.9%, down from August’s revised 4.3% rise, roughly in line with market expectations.
Unfortunately, gold is likely to remain under pressure in the near term as the Federal Reserve is likely to maintain its aggressive monetary policy for longer than expected, which will undoubtedly lead to a rise in bond yields and a dollar. Strongest American. Capital Economics’ Andrew Hunter, however, believes core PCE inflation will fall below the Fed’s 3.7% projection by the end of this year, which should prompt the Fed to cut rates early. of the next year.
Lithium has also not been spared from falling prices in response to the prospects for Chinese demand, a key ingredient in electric vehicle batteries. Lithium carbonate prices in China fell to 166,500 yuan (US$22,814) a tonne last Wednesday, representing a loss of almost half compared to record highs of 598,000 yuan in the middle of last year.
Copper rose 2 cents and was trading at US$3.73/lb early last week, with some positive signals emerging from China. Morgan Stanley (September 2023) reported that Chinese imports of copper and copper products (refined + alloys) rose to 473 billion in August, the highest levels since December last year and a 5% month-on-month increase.
Import arbitrage between the London Metal Exchange and the Shanghai Futures Exchange has also widened and the Yangshan copper premium has reached just under US$60/tonne, the highest since December.
Rising bond yields mid-week helped copper fall to $3.51/lb, approaching the 12-month lows of $3.40/lb we saw at the end of fiscal 2022. After After a volatile week, copper closed at $3.56/lb with three-month futures remaining in a 3-cent contango.
As I mentioned last week, LME reserves have risen sharply in recent months due to tepid Chinese demand (chart 4). Bloomberg is now calling for copper to hit $3 per pound, even though BloombergNEF projects a 50% increase in copper demand over the period 2022 to 2040.
Nickel also remained under pressure last week and surpluses are projected for the next two years.
While all eyes are currently on the growing bond market, Robert Minter, director of ETF Investment Strategy at abrdn, noted in a recent interview on Kitco News that investors continue to underestimate the growing supply imbalance, which affects to the global economy and keeps inflation persistently high. .
The recovery of the weakened housing market in China has continued to weigh heavily on the price of copper over the past year (chart 6). However, the 17% increase in industrial profits reported in August may be a sign that fiscal stimulus is having a positive effect on the Chinese economy.
The market seems to be pricing in a 22% chance of a further rate cut on November 23, so I anticipate that anti-inflationary monetary policies and the strength of the dollar will contribute to the downward pressure on both base metals and pressure which, in the case of copper, is around long-term incentive prices of US$3.59/lb (Morgan Stanley Research, September 2023).
After topping $93 per barrel late last month, crude oil retreated to $82.97 per barrel, down 8.5% on the week in response to the collapse of the US bond market. Rigs in the US are down 160 years to date and oil production has remained stable at 12.9 million barrels per day. Inventories were down to 2.2 million BOPD last week and refineries were down 200,000 BOPD. Not surprisingly, gasoline demand fell in the United States last week.
The bright spot on the horizon, of course, remains uranium, which traded above $73 a pound (a post-Fukushima high) before settling at $69.75 a pound late last week. The uranium price is approaching the incentive prices of US$80/lb that Deep Yellow CEO John Borshoff noted at last week’s Morgans Uranium Conference is needed to ignite much of the uranium currently underground.
As the haze of smoke cleared at Cigar Social this week, I thought I’d take a step back and let the dust settle before extending another chestnut for the Stockhead Faithful to consume. With the collapse of the bond market and the flight from risk assets, it seems that no company has been saved.
A couple of stocks I’ve mentioned in recent months are back in buy territory if you want to take a medium-term view. Included in this list would be one of the REE sector’s brightest lights, namely Malawian rare earths developer Lindian Resources (ASX: LIN), down 5c per share to 20c since my mention in mid September and American West (ASX: AW1) down 5c per share to 20c since my mention in mid-September. Up a whopping 16 cents per share to 13 cents since early August despite a series of promising copper intersections and a confirmed Elvis sighting.
Despite the volatility, the 12-month outlook for these companies looks extremely positive.
At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives, from mergers and acquisitions, initial public offerings to 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. Before entering the stockbroking industry, he spent 10 years as an exploration and mining geologist in Australia, Canada and USA. State. The views, information or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or taken responsibility for any financial product advice contained in this article.