Precious Metals versus Base Metals – The Prizefight of 2017
In a year in which we lost Mohammed Ali (aka Cassius Clay) we can’t help but be drawn to the likeness of the gold price to an aged prize fighter that decides to refill the coffers via a career-reviving bout in Las Vegas with punters paying big bucks in the hope of seeing that old spark of genius.
Gold strode back into the ring in 2016 full of brash confidence, and ended the year carried off on a stretcher having barely lasted two rounds and being KO’ed by reality. Like an old slugger, gold needs to find some new tricks because the old ones are well-known and tired and can be pre-empted.
Political or event risk… doesn’t work anymore… monetary base degradation.. yawn.
Precious metals bears see the gold space’s self-appointed loons coming with their $2,000, $4,000 or even $10,000 per ounce scenarios and know that they can knock these arguments over with a feather.
When 2016 began the gold price was $1,080 and we ventured a twelve month target price of $1,180 for which we had scorn heaped upon us by the gold fanatics. As it has turned out our estimate overshot for the year end number, and the gold enthusiasts have gone away to lick their wounds and await another opportunity to tout their wares.
The two stimuli for gold during the year were the Brexit vote in July which inexplicably fired gold up by over one hundred dollars per ounce in a matter of weeks and then the Trump victory, which contrary to expectations, pulled the rug from under a gold price that was already on the slide from its post-Brexit highs. Both moves were made upon false premises so is it no wonder that gold has “gone the wrong way” in both cases? Brexit was not the end of the world and ironically it was gold bugs listening to “elite” opinion on a Doomsday scenario that led to gold being pushed up ahead of the economic slump, which failed to materialize. Then in the case of Trump, we had a surprise result, but that result was supposed to signal instability and a rise in risk (which may yet happen) but instead gold went down because of an interpretation (rightly) that interest rates would rise because of loose fiscal policy. In that they were not wrong but they failed to carry through the scenario to its inflationary end.
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A Trump administration promises the greatest chance of an inflationary breakout since the early 1980s (and with it an interest rate upcycle) and while a jump in interest rates will crimp those gold bulls who buy on borrowed money (we can’t imagine who they are) the prospect of inflation and a rebalancing of asset distribution away for the multi-decade “no-brainer” of property towards savings in either fixed income or ingot form should be welcomed by gold bulls. Inexplicably though they are dumbstruck by the new scenario and unappreciative of the potential of inflation to be a real motor for the gold price. Our estimate for the yellow metal is for it to end 2017 around $1,270.
Now for the Real Story
Base metals came roaring back to life in 2016 and the outlook for 2017 looks as promising if not even more so. For us the most pleasant surprise was our favorite, Zinc, actually managing to outperform our target of $1.05 per lb for the year end. Hidden by the actual result ($1.15) was the fact that the metal had even reached a price of over $1.30 per lb if only fleetingly. Most of our other estimates were out slightly, to the upside or downside, by less than 10%. Our notable “fails” were Uranium which plunged and spent most of the year wallowing in abject misery until a last gasp recovery on a Trump tweet in December and Tungsten which managed to climb above $200 per MTU and then slipped back. We perceive the hidden hand of Chinese manipulation as being involved in this malaise.
Notably Platinum and Palladium also undershot our expectations. Three metals we did not make estimates for, Manganese, Chromite and Vanadium, proved to be stellar risers in the latter part of 2016. With good reason we would expect them to do well again in 2017 as it seems it shall be what we term the Year of the Infrastructure Metal as Trump promises to out-FDR on building programs. Easier said than done but we shall see.
Other base metals will also be invited to this party with us holding high expectations for Zinc and Copper as well (but not Lead). Specialty metals should also be counted amongst the winners. Some of these metals however have made their move and should see little in the way of gains like they may have just enjoyed.
The surge in gold in the middle of 2016, made financial markets back into a happy hunting ground for gold juniors that were staring at enfeebled bank accounts after the long drought from 2011. Investors were prepared to throw ever larger amounts at the financings on the back of the thesis that gold had definitively turned up. All that cash is sitting in companies’ bank accounts now and execs are on record as saying that it was “for exploration and general administrative purposes” however with gold looking so flaccid and even bulls unable to enunciate a story that might fire up the price, the very strong temptation will be for execs at gold juniors to “fake” some low level exploration in early 2017 and basically keep their cashpiles virgo intacta so that they don’t face the danger of running out of cash and crimping their own lifestyles. A lack of work eventually produces a lack of results and thus announcements…. and accordingly no progress towards production or expanded resources. Investors should maybe brace themselves for a frustrating period where juniors sit on the cash they have gathered in 2016 and don’t spend it (at least not on exploration work).
The contrast will be poignant with the base and specialty metals sectors. One should note how investors throw credulity to the four winds when gold moves. The slightest gain is the start of a “major uptrend” and yet base metals spent 2016 consistently rising and still they are always suspected of being a flash in the pan. Zinc more than doubled and yet it was only near the end of the year that financings started to take place and talk of RTOing assets into shells began to surface. Copper’s move happened even later. Nickel also started to get a tailwind. The problem there is that projects in recent decades have tended towards the gargantuan so investors have stopped believing in the more bite-sized plays. One should not discount though that the base metals movers in 2017 will be those with miniaturized projects, rather than those thinking (or talking) big.
All that being said, we are tempted to go prophetic and utter the words “the last shall be first and the first shall be last” and predict that Uranium (and Tungsten) will be two of the largest movers (upwards) in 2017.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>