Gold and other metals expected to soar as world roils from disease, social discontent

Protests in Amsterdam

GOLD is a disaster metal. In other words, its price improves when notions of the good life are threatened. This seems a time-honoured fact of gold’s reputation as “a store of wealth” – a well-known characteristic behind the logic for owning Krugerrands, for instance.

Consequently, the metal has had a pretty good pandemic. The gold price eased through $2,000 per ounce in August, and is forecast to do the same again this year, possibly assisted by a US $1.9 trillion stimulus package provided President Joe Biden’s party can force it through in the next few weeks.

Less publicly known, however, is how Covid-19 is helping the gold price in a more direct, industrial way. According to legendary gold bull, Sprott Asset Management, a Canadian company, precious metals in medical instruments, which comprises between 3% to 5% of overall precious metal demand, is also playing its part.

Gold, as well as silver and platinum used in a host of medical devices, including Covid-19 preventative face masks, will benefit from a rise in health spending. Pathogens travel less easily on silver (as well as copper) which is interesting to know considering national health spending in the US is expected to rise to 19.4% of GDP by 2027, about $6 trillion a year which Sprott says represents “a generational shift”.

If extracting benefits for gold from the daily (but necessary) chore of putting on a face mask smacks of the over-zealous, it’s worth remarking that some of the gold price hysteria is just part of the enormous enthusiasm that is being extended to nearly all other metals and minerals, excluding the old world energy products, such as coal.

Surprisingly robust China GDP growth, and supply concerns, has led to a hike in the spot price of iron ore, the mineral that goes into making steel.

Assuming the current spot price for iron ore of $167.50 per ton (73% higher year-on-year), a combination of dividend increases and share buy-backs could hand investors a yield of between 15% and 30%, according to a recent RBC Capital Markets report.

Kumba Iron Ore, a company controlled by Anglo American, would be an immediate beneficiary. But Anglo American is also expected to benefit from its exposure to so-called ‘transition metals’ which includes copper and cobalt, platinum group metals, and nickel.

As widely reported, this is the investment boon expected to flow as the world’s leading economies seek to meet Paris Agreement targets on decarbonisation. “We have written extensively on the potential increase for copper in renewable energy and electric vehicles, but we also note that nickel, cobalt, aluminium, and zinc are increasingly important as well,” said Jefferies, a US bank, in a recent report.

“Our view is that the miners of these transition metals are positioned to be structural winners as the world goes green,” it said, identifying the Johannesburg-listed South32, Anglo American, and Glencore as the seventh, eighth and ninth-highest ranking diversified mining companies in terms of their production of transition metals.

Goldman Sachs said that post-Covid-19, a new era had been ushered in for minerals and metals, after a decade of relative underperformance. “What we think is key, however, is that this recovery in commodity prices will actually be the beginning of a much longer structural bull market for commodities,” it said in a November report.

Underinvestment in mining would apply upward price pressure on metals in a vaccine-driven economic recovery, the bank said. It also thought that a new era of government policies worldwide aimed at social need instead of financial stability would “… likely create cyclically stronger, more commodity-intensive economic growth”.

A preference for commodities over dollar investment will be another factor. The dollar was already under pressure before Covid-19; it’s now thought revaluation of the dollar and subsequent reflation will assist the commodity complex.

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