Australia's Rocky Economy Rescued By Another Gold Rush
Australia has not escaped the threat of increased tariffs on its exports to the U.S., but it does have one world-class industry which is reveling in commodity market confusion, gold.
Rising production coupled with a rising price has reinvigorated Australian gold which has reclaimed its position as the country's fourth most valuable commodity export displacing thermal coal to sit behind iron ore, liquefied natural gas (LNG) and steel-making coal.
The upward move by gold could continue if two new investment bank research reports are correct, potentially lifting gold to third spot on the list of Australian commodity exports reviving memories of past gold booms which offset the effects of a wider economic downturn.
Both Citi and RBC Capital Markets see the gold price continuing to rise while the Resources Department of the Australian Government is forecasting an increase in national output from 286 tons this year to 309 tons next year, cementing Australia's position as the world's third biggest gold producer after Russia and China.
The return of gold is a bonus for the Australian Government which has called an election for May 3 with sluggish economic growth a key issue being offset by rising gold income to compensate for falling iron ore, coal and LNG prices.
Over the past 12-months as the gold price has risen by 36% to $3089 an ounce, the iron ore price has fallen by 28% to $102 a ton.
Gold's rise in U.S. dollars is magnified in Australia by the currency effect with an exchange current rate of US63 cents delivering an Australian gold price of A$4903/oz, a record which easily eclipses all earlier gold booms.
The share prices of leading Australian gold producers have risen with the gold price. Northern Star, the biggest producer, is up 25%. Evolution, the number two producer, has done better with a rise of 87%.
But it's further down the pecking order where more impressive capital gains are being recorded by stocks such as Catalyst Metals, up 660% and Spartan Resources, up 187% thanks to a takeover bid from rival Ramelius Resources which has risen by a more modest 33%.
Citi described the current market for gold as 'a one in 40-year gift for gold producers'. RBC said a high level of economic uncertainty could see gold rise to $3496 an ounce later this year, up $407/oz or 13% on the latest gold price of $3089/oz.
RBC said in a noted headed 'Uncertainty is the Midas touch' that it was clear that economic sentiment has deteriorated, and gold's appeal is more durable in this environment, meaning elevated prices should hold.
Citi said three anomalies were resulting in gold producer profit margins being at a 40-year high. The anomalies are the spot gold price at an all-time high, U.S. interest rates being very high, and the U.S. dollar being relatively strong.
'This gift for miners is not only based on multiple anomalies, it is unique to gold,' Citi said, adding that high-cost gold miner margins are at their highest level since the 1980s,
Citi said that using five-year forward prices of $3650/oz a massive $1700/oz gap existed between the forward price and the 90th percentile of the all-in mining cost curve.
The anomalies identified by Citi are said by the bank to be a gift for goldminers.
'The disconnect between long-dated gold prices and marginal cost happens in gold because there isn't enough producer hedging relative to consumer borrowing of above ground stocks,' Citi said.
"The demand from consumers to borrow stock, largely from central banks, means that the long-dated gold curve is also relatively liquid compared to other commodities.
'This presents a relative gift for gold producers, should they choose to accept it, since in other commodities such as oil and copper five-year forward prices are anchored to their marginal cost.'
RBC said gold continued to be priced on the basis of uncertainty, and in particular tariff uncertainty.
'While economic concerns are rising, vibes and sentiment are deteriorating and recession probabilities are rising,' RBC said.
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