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Putting cash into gold mining offers the best prospects
February 12, 2019
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LAUNCESTON: If the adage “follow the money” is to be applied to commodities, then currently the place looking most attractive to investors is gold mining.

The common theme at two mining investment conferences held last week in Cape Town was that putting cash into gold mining companies offers the best prospects in the commodity space.

At the 121 Mining Investment event about half of the more than 100 mining companies attending were either pure gold plays, or were targeting the precious metal in their portfolios.

The conference aims to put together mainly junior miners with investors seeking growth opportunities, and it was clear that gold companies were the flavour of the month.

A panel made of up investors from across the spectrum, ranging from major banks to smaller specialised funds, was unanimous in their support of gold. “For us, gold is the only place to be this year,” said one of the fund managers, who can’t be identified as the event was held under Chatham House rules.

Another investor who, in addition to placing funds in junior miners, offers expertise and industry contacts by sitting on the board of directors, said the hype surrounding lithium, cobalt and other battery metals has largely subsided, and been replaced with gold.

At the Investing in African Mining Indaba, also held in Cape Town last week, gold companies featured heavily on the agenda, with almost an entire day of the three-day programme for junior miners devoted to the yellow metal, substantially more time than for the battery metals, copper, uranium or other minerals.

The reason for the surge in interest in gold mining was two-fold; firstly a positive outlook for gold prices and secondly, the relative advantages of exploring for, and developing a gold project over other types of mines.

REWARDS, RISKS

The likelihood that the US Federal Reserve will hold off increasing interest rates, and the clouds gathering over the world economy, have boosted gold’s prospects for 2019, with some of the conference participants even being bold enough to call the start of a sustained bull run.

While it’s generally good advice to treat gold bulls with caution because of their permanent “buy” recommendation, it’s possible to make an argument that the sluggish market for the precious metal of the past few years may be over.

Spot gold has been trending higher since a closing low of $1,173 an ounce on Aug.16 last year, ending at $1,314 on Feb. 8, an increase of 12 per cent.

Gold has a fairly strong inverse correlation to US 10-year Treasury notes, tending to rally as the yield drops.

The 10-year yield has been falling in recent weeks as the market responds to the cooler economic outlook, the lower risk of Fed rate hikes and ongoing uncertainty over the trade dispute between the administration of US President Donald Trump and China.

On the mining front, exploring for gold and establishing a new mine compares favourably from a capital cost perspective against similar efforts for copper, cobalt and other minerals.

While Africa as a whole suffers from a poor image among investors, the countries that are on the more attractive end of the scale also tend to be where gold can be discovered and developed.

These include nations such as Ghana, Mali and even the former global gold powerhouse South Africa.

However, the two events in Cape Town also highlighted the challenges of undertaking projects in Africa, with numerous complaints about the continent’s governments changing the rules too often, and generally seeking to extract a greater share of the mineral wealth, perhaps to the point where mines become unviable.

The kidnapping and killing of Canadian geologist Kirk Woodman in the West African country of Burkina Faso last month, while working for gold explorer Progress Minerals, also highlights the dangers of working in certain countries.

Nonetheless, the happiest miners in Cape Town were the ones with gold mines either in production, or near production, as it was their conference booths that investors were beating a path toward.

Meanwhile the three legs that supported gold’s extended rally from just after the 2008 global recession until the all-time peak in 2011 may be making something of a comeback this year.

This is sparking hopes that the precious metal may finally break out of a fairly narrow five-year range, although it’s still far from certain that the dynamics for a sustained rally are entrenched.

The 2008-11 rally that saw spot gold almost triple in value to reach a record of $1,920.30 an ounce was built on three pillars, namely strong physical demand from top buyers China and India, robust central bank purchases, and appetite for a safe haven investment amid the fallout from the global recession.

With all three of these factors working in concert, gold posted solid gains before likely entering a bubble market, with hot money chasing a trend that was fuelled by the usual outlandish forecasts of a never-ending spectacular rally.

However, while central bank buying remained solid, the two other legs of gold’s rally, namely the largely Western-driven investment buying and Indian and Chinese buying moderated after the September 2011 record.

recovery

The recovery in the global economy limited the fear-appeal of gold, while the high prices stymied physical demand in India and China.

This has meant that gold has effectively meandered in a rough range between $1,050 and $1,380 since the start of 2014.

Notwithstanding the recent 11 per cent rally from a low of $1,159.96 an ounce on Aug. 16 to the close of $1,287.50 on Jan. 11, gold remains within that range.

But there are some signs that gold may make an effort to challenge the upper reaches of its range in coming months.

A weaker US dollar is generally a boost to gold, especially if the reason for the lower greenback is the winding back of expectations for more interest rate increases and the ramping up of concerns about an economic slowdown.

This is currently the case, with the US Federal Reserve signalling it could be more patient with its monetary tightening.

Concern over the global economy is also increasing amid signs of softer growth in China amid the ongoing trade dispute with the administration of US President Donald Trump, and weaker manufacturing numbers in Europe and the United States. If these concerns persist, or amplify, then Western buying of gold as a hedge may increase.

Certainly there is evidence this is already occurring, with holdings in the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, reaching a six-month high last week.

Short-term drivers such as the US government shutdown and volatile equity markets are dove-tailing with the longer-term themes of slower world growth and mounting geopolitical tensions on the back of the Trump administration’s upending of long-standing US foreign policies.

There are also signs that physical demand in China, the world’s biggest buyer, is picking up, with net imports via the main conduit of Hong Kong rising 28 per cent in November from the prior month to the highest since July.

Reuters

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