DECEMBER 2017 Gold, Mines & Natural resources Towards a rally after the Fed's decision? - Arnaud du Plessis - CPR AM Arnaud du Plessis - Senior Portfolio Manager, Global Thematic Equities, Natural Resources / Gold & Precious Metals In brief Gold prices stayed within the relatively narrow range in which they have been shifting since early October ($1260/$1306/oz). They remain just above their 200-day average. Still under influences that are contradictory, yet inverted since the previous month, the yellow metal is struggling to find a clear trend. On the one hand, the dollar s recovery has lost momentum. The green back has even undergone a somewhat downward trend. On the other hand, US real 10-year rates are up to around 50 bps, following a slowdown over these past few weeks. Regarding inflation, there is still no strong sign of recovery, despite a trend taking shape, leaving central banks somewhat abashed. While awaiting the Fed s mid-december decision, the market might stay clouded with uncertainty. Nevertheless, the rate hikes that the Fed announced in December 2015 and 2016 consistently marked a low-point in the gold market. Yet these lows were followed by a nice upswing at the start of the next year. Price of gold ($/oz) vs. Dollar Index & Dollar/Yen 1Yr Price of gold ($/oz) vs. US Real Interest Rates 10Yr & US Break-even 10Y 1Yr Source Bloomberg
Regarding physical gold, the market has been relatively calm yet has performed strongly: outstandings invested in gold-backed ETFs are at their highest point of the year (~2235 tonnes), up 241 tonnes since the start of the year, and have exceeded their high-point of 2016 (2234 tonnes) while reaching the level attained in May 2013. Changes in gold ETPs outstanding (tonnes) and gold prices since January 2013 Other precious metals Silver prices have been weak in relation to gold over the past few weeks, with a mint ratio (gold/silver ratio) rising to 77x. This is still well above the averages observed over 10 years, 20 years and 30 years, which stand at 63.4x, 61.4x and 66.5x respectively. Gold and silver prices Gold/Silver Ratio (Mint Ratio) 10Yr ource: Bloomberg S A strong trend remains in palladium: prices are staying at around $1000/oz. In contrast, the trend in platinum is more downbeat. Yet the World Platinum Investment Council (WPIC) has stressed that the platinum market could undergo a deficit in 2018. This would be caused by both a ~2% drop in production in South Africa and a level of demand set to rise after falling by almost 6% in 2017. Still, a true recovery is far from certain.
Platinum and palladium prices Platinum/Gold Ratio & Palladium/Platinum Ratio since 2001 What about other commodities? The main metals (copper, aluminium and zinc) have strengthened, maintaining commendable levels of performance since the start of the year (+19%/24%). Yet the effects of China s cuts in aluminium production as winter approaches remain to be seen. There was a marked fall in nickel, prices of which had been buoyed by speculation regarding electric vehicles. Nickel used for making batteries represents only 2%/3% of worldwide consumption, far behind stainless steel production, which represents more than two thirds of openings and whose market, especially in China, is showing some signs of weakness. Uranium was highly volatile. There was an initial upswing relating to cuts in production announced by Cameco. Then, Kazakhstan s decision to further reduce its production by 20% rekindled this trend. As a result, uranium could finish the year as the leading performer! Materials relating to the steel industry (iron ore, furnace coal) also rallied, up 20%/21% in one month, with China s industrialists in steel ramping up their production prior to the winter cuts. Performance ($) of the main commodities - YTD (base 100: 30/12/2016)
Overall, materials relating to the rise of electric vehicles were the stars of 2017, especially graphite, lithium and cobalt. Although demand will grow strongly over the next few years, these materials are not rare commodities and many new projects are underway to respond to this development. Following the speculative phase observed this year, from which all players benefited, 2018 will be doubtless more adverse. OPEC and Russia have both confirmed they will continue cutting production until the end of 2018. Still, they are due to take stock of the situation in the middle of the year. Their decision is of course eagerly awaited by the markets. The opposite would have been taken badly. After an initial reaction that was rather moderate, the market has taken off again, with Brent Crude prices brushing their high-point reached on 7 November. OPEC has clearly become more credible, appearing genuinely determined to take global stocks to their five-year average with great discipline. In such conditions, the market s forecast of an average Brent Crude price of $56 ¼/b in 2018 might seem restrained. In any case, it would not be enough to support the expected Saudi Aramco IPO. Change in US oil stocks 2017 versus 2016, 2012-2016 & average 5 year / global stocks since 2014 Source: DOE Stock market overview With the exception of energy stocks, changes in natural resources have stayed close to an equilibrium since the end of October, lagging behind global equities by only 2%. Since the start of the year and after a strong upturn observed in 2016, natural resources have not generally managed to capitalise on their achievements this year. Only materials have done noticeably well, particularly the forestry and chemical sectors, up 28%/32% ($). Industrial mining firms, which are always volatile, have
managed to display a performance level in line with global equities. Construction materials, on the other hand, have struggled to find a clear trend. 1yr Performance ($) of the main global resources indices (base 100: 10/11/2016) Until mid-august, the oil sector was bottom of the class among natural resources. Since then, it has bounced back remarkably, reflecting changes in oil prices. The sector s level of performance nevertheless lags considerably behind that of others. While Brent Crude prices have risen by almost 15% ($) since the start of the year, the energy sector (MSCI World Energy) is only just balanced. The consensus remains highly cautious and clearly does not expect prices to stay in this range. Yet past correlations between varying performance levels in the energy sector (vs global equities: MSCI World) and changes in Brent Crude prices give reason to expect this gap (~15%) will close. Relative performance: MSCI World Energy vs MSCI World ($) & Brent 5Yr Changes in the gold-mining sector have displayed no clear trend since the end of October, staying more or less balanced. Since the start of the year, its movement has been characterised by large zig-zags as the US dollar fluctuates and as investors level of risk-aversion varies. Still closely correlated to changes in physical gold, mines have not managed to perform above average this year, penalised by a number of specific situations.
Performance ($) of gold, gold mines and global equities YTD base 100: 30 December 2016 So long as gold prices do not distinctly go beyond the 1350/1375 mark, there is little reason to believe that mining companies will catch up. If they did, the appreciation potential would be huge. Relative Performance (vs Gold) of gold mines (NYSE Arca Gold Miner - GDM) & Change in gold prices Valuation of Natural Resources The positive forecasts remain robust, led by an energy sector that has grown by more than 6% since the end of October and is outperforming gold mines (+4%) and materials (+3%), as well as global equities (+1.3%). Having been the subject of downward adjustments in July and August, the energy sector has found analysts favour again. Since the start of the year, materials have been performing above average, with 12-month profits revised upwards by almost 25%, far more than for global equities (+14%). As regards gold mines, expected 12-month profits have been revised downwards by ~7.5% since the start of the year, which is nonetheless an improvement since mid-september (by when they had been revised downwards by -15% since the start of the year). For the past three years, since the decline from September 2014 to March 2016, the energy sector has been lagging behind other sectors. Today, this is still the case. Gold mines, on the other hand, remain in the lead, but only thanks to a basis that is weak (expected 12-month profits are still down by more than 75% compared to their level five years ago!). At the same time, materials have virtually caught up with global equities. Based on results expected for the next twelve months, the energy sector s valuation should improve further, despite being already high. There has been no noteworthy shift in materials, which are still around their historical average.
Gold mines MSCI World Energy & Materials: EPS Momentum (3Yr) P/E & EV/EBITDA vs MSCI World (10Yr) Following the net-asset approach (P/NAV), there is no real change in the gold-mining sector. With a valuation multiple below 1x, the market is giving the gold-mining sector no credit regarding its capacity to boost its mining assets valuation. Gold mines Change in P/NAV (5%) since 1985 Source: Scotia bank GBM estimates - Company reports Written on 5 December 2017
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