Commodity Bright Spots

GAVIN WENDT: Whilst the media is almost exclusively full of doom-and-gloom stories as far as commodities are currently concerned, the reality is somewhat different.

For example, the recent pullback in the price of silver to four-and-a half-year lows has led to a surge in investor interest, with the United States Mint this week running out of American Eagle silver coins due to ‘tremendous’ demand.

We’re yet to see the same level of bargain buying interest in gold, but it won’t be far off.

At the same time, gold’s supply side is set to take a big hit if gold prices remain around current levels, with most of the world’s gold producers using gold price assumptions of $1,300 in their reserves calculations.

Sustained price weakness will therefore lead to a major rebalance in the gold industry’s fundamentals.

Irrespective, the US dollar will likely peak during 2015 and gold will recover as economic growth outside of the US also recovers.

With respect to other metals, zinc and nickel remain the best bets.

Silver Scramble

The recent weakness in silver prices to four-and-a-half-year lows has triggered a global scramble by consumers to purchase silver coins and bars, with the metal reaching its cheapest level versus gold in more than five years.

In fact the US Mint has temporarily sold out of its American Eagle silver bullion coins after recent ‘tremendous’ demand.

 

Silver demand has been robust over the past few months, but retailers say buying interest has soared over recent weeks as the price weakened and bargain hunters stepped into the market.

Silver has fallen to lows of around $15 per ounce, which represents a 21 per cent yearly decline.

An ounce of gold is now approximately equal in price to 74 ounces of silver, the biggest spread between the metals since early 2009.

Due to its greater affordability, silver sales tend to outstrip gold in volume terms and attract a lot more retail buyers, a situation that’s likely to continue for the foreseeable future.

Looming Gold Reserve Write-Downs

One of the interesting bits of data that I’ve recently come across that supports my belief in a near-term floor for gold prices, relates to the assumed gold prices on which most major gold companies throughout the world have based their reserve cut-offs.

If gold stays where it is (below US$1,200 per ounce) then gold companies won’t just be facing a likely profit hit – they’ll also be taking a massive hit on their gold reserves positions, which in turn will lead to substantial balance sheet write-downs.

TD Securities has provided a research note examining the various gold price assumptions of some of the major North and South American producers.

 

The table demonstrates the likelihood of significant reserve write-downs amongst major producers like Goldcorp, Newmont and New Gold (all with $1,300 price assumptions), B2Gold with one of the highest price assumptions at $1,350, along with Eldorado with pricing between $1,000 to $1,250 and lamgold with pricing between $1,100 and $1,400.

Companies where write-downs are likely to be minimal include Yamana (with price assumptions between $900 and $950).

Miners typically recalculate reserves at year’s end, so be prepared for substantial write-downs during the course of early 2015 if prices stay where they are.

Mixed Signals for 2015 Global Growth

There was a very interesting presentation given by CIBC Senior Economist World Markets, Peter Buchanan, at the recent MineLatinAmerica symposium in Toronto.

He believes the US recovery will continue to advance, supporting the uptake and price of various commodities into 2015.

Interestingly, even gold could expect a brighter outlook next year.

The general belief is that the market jitters of mid-October have faded somewhat, as evidence of the US’s recovery continued to build.

GDP growth rates were positive during the third quarter, with an advanced estimate of 3.5 per cent announced by the US Department of Commerce, which followed the second quarter’s robust 4.6 per cent growth rate.

In the future, the US could expect a rate of just below 3 per cent for 2015 and 2.5 per cent for 2016.

An important facet of the recovery had apparently been the increase in motor vehicle sales, spurred by drivers replacing their older vehicles.

This purchasing is forecast to continue, which would in turn help buoy the consumption of several metals.

Meanwhile, pent-up demand for housing would help boost property purchases, in turn providing additional support for industrial metals.

The Eurozone’s growth levels were likely to be below 2 per cent in both 2015 and 2016, with figures for Eastern Europe decelerating, weighed on by Russia’s economic performance following the imposition of sanctions.

With respect to South America, the growth performance was mixed.

CIBC noted 2 per cent growth continent-wide, with Chile and Peru the strongest performers, whilst Brazil, Argentina and Venezuela would continue to face difficulties.

On an encouraging note however, China’s GDP growth rate remained strong, despite dipping to 7.3 per cent for the third quarter, down slightly from the government’s objective of 7.5 per cent.

Stimulus measures were likely however to boost China’s fourth-quarter growth figure up to the 7.5 per cent target.

CIBC then expects growth to slow to 7 per cent in 2015 and to 6.8 per cent in 2016.

The forecast decline however obscures the incremental increase in China’s increased consumption of commodities, which even at the lower growth levels, still represents twice the level of demand ten years ago.

Commodity Outlook

Of all the commodities, zinc’s fortunes look most positive, with London Metals Exchange inventories declining once again.

Further support was likely from mine closures next year and an increase in uptake for galvanizing purposes.

Almost half of zinc demand relates to galvanizing and there is likely to be strong support coming from the US construction and automotive sectors, with average prices of $110 per pound in 2015 and $125 per pound during 2016.

With respect to nickel, the Indonesian ban on nickel ore exports is expected to be felt into 2015, with $8 per pound during 2015 and even stronger in 2016.

Copper meanwhile has advanced back to $3 per pound, whilst inventories appeared to have bottomed out.

Upside for the red metal is likely to come from growing US housing starts, along with greater electronics and auto sales; however, price pressure will come in the form of higher production.

 

With respect to gold it’s important to remember that the decline in price is inversely related to the current strength in the US dollar, and that the price remains strong in terms of most other currencies, which have also weakened against the dollar.

Inevitably, the dollar will overshoot and then be sold off.

The exact timing is of course impossible to predict, but potentially during H2 2015 as growth starts to accelerate outside of the US.

I believe that gold will re-establish its support base around $1,300 per ounce during 2015.

Gavin Wendt is the founder of MineLife, publisher of the MineLife Weekly Resource Report

This article first appeared in The Digger