ENTHUSIASM for precious metals had evaporated in recent weeks, leaving mining shares in good buying territory, said analysts.
“Investor sentiment towards South African mining equities has deteriorated materially in recent months as commodity enthusiasm faded, geopolitical risk premiums normalised and concerns around Chinese demand resurfaced,” said UBS in a recent report.
This was specific to gold and platinum group metals, with speculative investment that drove prices last year having largely exited the market. The debasement trade had disappeared for gold amid higher yields and a stronger dollar, but fundamental drivers such as central bank purchases of gold were in place.
“While a period of consolidation would not surprise us, we continue to expect these structural drivers to support gold prices over time,” the bank said. “In this environment, we believe operational quality, capital allocation and valuation support will remain important differentiators across the gold sector.”
The World Gold Council said today physically backed gold ETFs declined $8.9bn in June, with North America leading the exodus. In the month, global gold ETFs’ total assets under management fell 13% to $526bn, it said. Holdings were reduced by 74 tonnes to 4,047t.
The geopolitical background to gold trade is hard to read given that the US has both abandoned the memorandum of understanding with Iran, hitting Iranian targets again, while also sabre-rattling in Europe as Nato members meet.
“The metal has faced continued pressure throughout the US-Iran war and recovered somewhat in the wake of the tentative MoU,” said SP Angel, a UK broker. “This now appears to have broken down. An extended period of conflict lifts inflation expectations driven by higher energy costs, weighing on gold,” it said.
PGMs
“We remain buyers of PGMs. The market is seeing too many ghosts and has become too bearish, in our view,” said Arnold van Graan, an analyst for Nedbank Securities. “Demand has softened, yes, but it hasn’t broken, while supply remains as tight and unresponsive as ever,” he said, adding that any “bad news” about the sector was “in the price”.
The basket price for platinum, palladium and rhodium is 39% weaker than in January, when prices peaked. Platinum ETF holdings are also lower, down 574,000 ounces from their peak earlier this year, while Nymex (where futures and options are traded) holdings of the metal are 288,000 oz lower.
“While we’re cautious near term, we think this is a healthy reset for the [PGM] sector,” said analysts at RMB Morgan Stanley. “Even with steady ICE [internal combustion engine] demand erosion, we have Pt [platinum] and Rh [rhodium] in deficit for much of the rest of the decade. The sell-off in the equities significantly improves risk-reward, making valuations much easier to justify today than three months ago,” they said, describing the correction as a “pothole, not the end of the road”.
