Investec sees gold as best performing metal in 2016

Article first posted yesterday on sharpspixley.com

In his address to today’s Global Mining Finance Spring Conference in London, Jeremy Wrathall, Investec’s Global Head of Natural Resources, placed Gold at the top of his list as the likely best performer in global metals and minerals for the current year.  But overall he was not too optimistic for the continuation of the recent commodities recovery over the short to medium term.  May to September, he commented, tend to be weak months for commodities and he doesn’t see this year as being any different.

But, many metal commodities have outperformed this year so far with silver and gold top of the list in terms of gains to date.  It has been a commodity rally, Wrathall averred, that came out of the blue.  Almost all the metals and minerals had been drifting in price up until the end of 2015, but right from the start of the 2016 New Year things did begin to pick up – at least for the precious metals.

Wrathall put the principal drivers down to China and weakness in the US dollar.  The former’s fundamentals appear to have improved quite sharply – perhaps even akin to the 2009 recovery there which drove commodity markets to new highs.  This was a total change from 2015 which he commented was a year of maximum commodities pessimism.  However he wasn’t entirely convinced that the Chinese recovery would be sustained through the rest of the year.

So what has changed?  Mining companies across the board have proved remarkably successful in substantially cutting operating, management and capital costs, reducing debt and in taking impairments on projects whose values had been slashed by commodity price weakness due, in many cases, to substantial oversupply brought on by weakness in the manufacturing sector worldwide, and notably in China.  They have been helped in their efforts by the strength of the US dollar against local currencies and lower oil prices.  This is something of a two-edged sword though.  It has helped operations which might otherwise have closed stay open, thus continuing to keep supply surpluses in place.  For example Wrathall showed charts suggesting about 90% of world iron ore and copper production as being viable at current prices despite the big price declines for both metals.  Currency parities and oil prices could also reverse which could put mining operations which had been enjoying corresponding benefits back into difficulties again.

On gold, Wrathall admitted that he’s been trying to work out a rationale for gold price performance for the past 30 years – and failed!  But what he has seen is an increased allocation by fund managers into resource assets – and precious metals have probably been the major beneficiaries here – after they had been ignored through times of rising prices.  Now funds are flowing back, but into what is effectively a small sector in global financial terms, which has led to some well above average price increases as a result.

Wrathall’s most preferred order of positivity on metals and minerals is as follows:  Gold (silver wasn’t mentioned but presumably falls into this category), diamonds, copper, oil and gas, alumina, rhodium, manganese, platinum, zinc, aluminium, lead, nickel, palladium, iron ore, chrome and coal – the worse the prospects the further down the list one goes.  Part of the uncertainty is the possibility that China, which is key to a sustained recovery in the industrials sector, could possibly be exhibiting parallels with Japan of the 1970s, and which has been suffering virtually zero growth most of the time since!  That palladium falls so far down his list will surprise many who feel that fundamentals are very supportive (but again much of this is predicated on substantial growth in the global market for petrol (gasoline)-powered vehicles and China is very much the key market here so any faltering in growth could put a substantial dent in market expectations, while allowing alternative drive units (electrical and fuel cell) to take an ever growing share of this market as technology improves.)

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Best read gold article 10 months old!

The power of the internet:  The best read story on Mineweb.com on Thursday with well over 2,000 page views was one I wrote titled Gold to fall to $1,100 then skyrocket – silver, platinum in behind.  With the gold price having been knocked back to the $1,150s with the potential for moving down further, one might say the article was perhaps timely  – but if one looks at the date of the article it was written on May 26th last year.  I suppose it could be seen perhaps as relevant today as it was nearly 10 months ago – it’s possibly just that the timing was out.  In the article I was reporting on a piece of Elliott Wave analysis which was then suggesting that a gold price fall to around $1,100 would probably take place over the following 3-4 months and that the bullion price would have begun its huge upwards surge by the end of 2014!

However as recently pointed out by GATA’s Chris Powell, perhaps such technical analysis has lost its value and relevance in these days where he sees the market as being manipulated by those who have a vested interest in controlling the prices of precious metals – notably central bankers, governments and their mega bank allies.  The analysts who came up with the research, and its conclusions, might say that any manipulation there may be is only delaying the inevitable, but the big question is how long can this ‘inevitable move’ in the price pattern  be pushed into the future.  By the time we know it may well be too late to take advantage.

But, despite perhaps my best read article of the week on Mineweb being so dated, there have been others which I would commend readers of Lawrieongold to view if they haven’t already.  On Monday Mineweb published Knives are out for gold and silver – again which was looking at how quickly some bank analysts are keen to downgrade their price forecasts at the slightest blip in price.  To be fair any sustained increase in price will also see forecasts raised but it does rather devalue the predictive assessments of these analysts who have to try to ensure they don’t get the call wrong, thereby being reactive to price moves rather than having a genuine long term view.  One may quibble with an analyst like Jeffrey Currie at Goldman Sachs over his $1,050 gold price forecast, but at least he has been consistent in his views and doesn’t change them every time the price deviates upwards or downwards.

On Tuesday I published an article titled All is not well on the metals commodities front  which was looking at the general price malaise afflicting metals commodities virtually across the board and on Wednesday World top 10 gold miners face negative free cash flows which pointed out that in Q4 2014 the world’s biggest gold miners combined had moved from producing free cash flow to negative cash flow.  Thursday saw the publication of a report on a London presentation by Willem Middelkoop: Very positive on gold but silver the big favourite – MiddelkoopWillem runs a Dutch precious metals fund which primarily invests in pre-development gold juniors and is very much in the gold bull camp.

Finally today an article entitled Not another groundhog year for metals – Wrathall set out the Head of Investec’s Global Natural Resources team’s rather gloomy analysis of the mining sector looking ahead.  Indeed the only really positive sector of the industry he could see over the next couple of years was diamonds.  He reckoned that to an extent recovery in most mined commodities sectors was being adversely affected by the strong dollar and low energy prices which have enabled many operations, which might have shut down otherwise to stay open and thus not help alleviate the global oversupply situation which now seems to prevailing.

If you haven’t read these, do follow the links perhaps and do so now.  They do give an insight into current thinking on what is going on throughout the mined commodities sector which has been having a pretty hard time right across the board.