Gold just got better

The yellow metal has reclaimed the title as Australia’s mining leader after a string of deals and optimistic forecasts.

Summary: Gold has reclaimed the title as Australia’s mining leader. A recent string of deals between gold companies is set to continue. The local gold price is close to a three year high due to a falling Australian dollar. And unlikely sources such as the conservative ANZ Bank are tipping a rise in the US dollar gold price.

Key take-out: The prospect of further falls in the local dollar and growing demand for gold makes the commodity one of the more interesting asset classes for the years ahead.

Key beneficiaries: General investors. Category: Gold.

Despite some recent relief in the price of iron ore most small and high cost producers remain trapped in a death spiral, which is not the case with another commodity that has reclaimed the title as Australia’s mining leader: gold.

The difference between iron ore and gold can be measured in several ways, but three of the best are deal flow, the effect of currency moves, and a remarkable run of optimistic forecasts from unexpected sources.

First, let’s look at some deals, which involve the injection of fresh funds into gold assets, and are perhaps the best measure of the Australian gold revival which has been gathering pace over the past two years, in direct contrast to the retreat from iron ore.

One company, Northern Star, has led the way with a blizzard of acquisitions that has seen it transformed from penny-dreadful status to a business valued at $1.3 billion which gives it a ranking just outside the ASX’s top 150 stocks by capitalisation.

Other companies are angling to replicate what Northern Star has achieved with their starting point being the same sort of deals, and that essentially involves buying back the farm (or mine, in this case) from international owners.

Northern Star has been able to buy high-quality operating gold mines in Australia from US and Canadian companies, including the Jundee mine from Newmont Mining and the Plutonic, Kundana and Kanowna Belle mines from Barrick Gold.

More international divestments of Australian gold mines are expected, especially by North American companies, because they conduct all of their business in US dollars and are keen to cut debt levels ahead of a rise in US interest rates.

For Australian domiciled companies operating in an Australian dollar environment (and with interest rates more likely to fall than rise) there is a different outlook best demonstrated by the fact that the local gold price is close to a three year high thanks to the fall in the value of the Australian dollar.

While it’s tricky calling a top or bottom to any commodity it is interesting to compare the plunging price of iron ore (in US or Australian dollars) with the gold price which is down in US dollars but marching steadily higher in Australian dollars since late last year thanks to the currency effect on gold, a commodity which doubles as a currency.

The Australian low point in the cycle for gold appears to have been $A1339 an ounce in early November last year with the current price of around $A1568/oz, representing a 17 per cent rise in five months which is almost entirely a function of currency change.

A similar currency effect can be seen in Europe where the gold price in euros is approaching a two-year high of €1132/oz compared with €873/oz at the start of last year.

More mine sales by international owners will spark fresh interest in the local gold sector with the investment bank, Goldman Sachs, recently publishing a list of big internationally-owned mines likely to be offloaded, including Barrick’s Lake Cowal mine in NSW and the Kalgoorlie Superpit in WA owned jointly by Barrick and Newmont.

Interest in those mines, plus others named by Goldman Sachs such as Newmont’s Boddington mine in WA, will be strong from locals as well as from investors with a big appetite for gold, and that essentially means China and India.

One international player to hold his hand up last week as a potential investor in Australian gold was Indian jewellery billionaire, Rajesh Mehta, who breezed into Melbourne saying he was keen to buy Australian gold assets as well as open jewellery shops.

Mehta said he wanted to spend up to $US700 million expanding in Australia with gold mines his priority because: “We have been importing gold from Australia on and off in the past, but now we want to have a formal presence … so we can ensure a reliable and permanent gold supply-line.”

What the Indian jewellery merchant demonstrated was precisely what ANZ Bank predicted three weeks earlier: the rise of Asia as the world’s gold leader with sufficient buying power to drive the gold price substantially higher.

In a remarkable piece of research from a conservative Australian bank, ANZ went as far as to tip a future gold price, or at least assign a range of probabilities in a 10-page report headed “East to El Dorado: Asia and the future of gold”.

Authored by the bank’s seasoned chief economist, Warren Hogan, and commodity strategist, Victor Thianpiriya, the report was based on a view Asia will represent more than 50 per cent of the global economy by 2050 and while China and India are already the world’s largest gold consumers individual incomes in those countries have a long way to rise to reach developed world levels.

Asian central banks are also expected to be significant buyers of gold as they move closer to developed world central-bank holdings.

For those reasons, plus the defensive nature of gold as an investment, ANZ reckons the price will rise above $US2000/oz by 2025 with a 45 per cent probability that by 2030 the price will be between $US2160/oz and $US2640/oz.

Notable because of its surprising source, ANZ is not alone in seeing the headwinds which have pushed the US dollar gold-price backwards in recent years start to moderate or for the price in currencies other than the US dollar continue to rise.

Our own Adam Carr picked up the lessening headwinds theme in his March 25 report (Better days for gold ahead) which was based on a view that the US dollar “may have run out of puff”. If that’s correct, he wrote, “a key factor weighing on gold ... will have been removed”.

Analysts at HSBC Bank certainly subscribe to the US dollar peaking view, telling clients in mid-March that: “The US dollar rally is nearing its end”.

“The US dollar has already rallied more than is typical historically,” HSBC said.

The bank reinforced that point last week when it compared the strong US dollar with “classic asset-price bubbles”, adding that all bubbles have similar life cycles which end with a sharp fall.

If HSBC is correct then the US dollar gold price could mimic what’s happening in several other currencies.

Thomson Reuters GFMS, a gold research agency which once traded as Gold Fields Mineral Services, reported last week that while the US dollar gold price was expected to slip further this year gold could have already bottomed in other currencies.

Over the course of 2015 GFMS said it expected the US dollar gold price to slip to around $US1100/oz with an annual average of $US1170/oz, before rising to $US1250/oz in 2016 as “buying picks up in Asian markets”.

Tipping the future price of anything is difficult with gold perhaps more difficult than other commodities.

But, for Australian investors the prospect of further falls in the local dollar, coupled with growing Asian demand for gold and the prospect of increased deal flow makes gold, and high-class gold equities, one of the more interesting asset classes for the years ahead.