Gold Digger: Early 2022 gold rally could turn sour mid-year

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It’s been fairly choppy for precious metals this year, with economic recovery, rising nominal yields and the potential for rate hikes dampening investors’ appetite for gold.

But on the flip side, new virus variants, fears of stagflation and negative real rates have all supported holding precious metals.

In 2022, Metals Focus forecasts that gold will rise by 1% to an average of $US1,820 from its current trading price of $US1,777 an ounce.

Inflation impacts investor sentiment

As a safehaven, gold loves economic, social and political volatility and it often performs well in an inflationary environment.

Metals Focus director of gold and silver Neil Meader said rising inflation – and how long it lasts for – will be the key factor affecting investor sentiment towards gold.

“Inflation feeds into gold mainly through real rates and yields, with which it has a far stronger and more consistent link,” he said.

“This is why the recent rise in inflation has not translated into stronger investor inflows into gold.”

In the near term the new Omicron strain poses risks to the global economy, which should make for a supportive environment for gold over the next few months – particularly when combined with exceptionally high equity valuations.

But Metals Focus cautions that this price recovery will be difficult to sustain beyond the early part of next year as a new interest rate hiking cycle approached.

“The investment case for gold will turn bearish from mid-2022 onwards when a US policy rate high looks increasingly likely,” Meader said.

“With nominal and real yields firmer, holding zero-yielding assets such as gold will become increasingly unappealing to investors.”

Silver could outperform gold

Silver is projected to mirror gold, up by 2% to an average of $25.75, before softening in H2.

“Silver’s innate high volatility means that it may well outperform gold early next year, ” Meader said.

“After that, however, prices may weaken, when there will be clearer guidance from the Fed on the timing of the first post-COVID rate hike.“

Among the four precious metals, silver is the only one likely to achieve a persistent deficit over 2021-22 – partly due to strong industrial fabrication.

“On top of a bounce back from COVID damage, there are structural forces at work, including vehicle electrification, the proliferation of 5G technologies and governments’ commitment to green infrastructure investment,” Meader said.

PGEs also a 2022 winner, autocatalyst demand increasing

Palladium is forecast to drop 10%, with sluggish vehicle production due to the persistent chip shortage and easing constraints at mine operations creating more headwinds for investor sentiment.

But Meader said that once there are clear signs that the chip shortage has eased, re-stocking by the supply chain could lead to a tighter palladium market in the latter part of 2022, providing a fresh boost to prices.

Then there’s platinum, which is expected to rise 1% off the back of investor interest in the substitution of palladium with platinum in autocatalysts and its use in the hydrogen economy.

Especially in China where quasi-speculative purchases have prompted record platinum bullion imports so far in 2021.

“Given positive sentiment towards platinum’s future use and stock replenishment by the supply chain, the surplus should be comfortably absorbed by investors,” Meader says.

“This explains why we expect platinum prices to post a gradual recovery over the course of 2022, in the process outperforming gold.”

Winners & Losers

Here’s how ASX-listed gold & silver stocks are performing:

Scroll or swipe to reveal table. Click headings to sort. Best viewed on a laptop

Weekly stock focus

Manhattan Corp (ASX:MHC)

The company has reported solid hits like 8m at 40.5 g/t gold from about 70m, including 3m at 105.34 g/t at Main Zone in its Tibooburra project in NSW.

It wasn’t the only hit either, and drilling only covered a small, 650m chunk of a much larger 5km long gold-in-soil anomaly.

Future drilling will focus on testing the size of Main Zone which the company reckons has the potential to be a significant shallow, high-grade gold resource.

A planned 5,000m drilling program will now be significantly increased and extended to include diamond drilling at depth (>100m). Drilling is scheduled to kick off after the Christmas Break.

“These are the best gold drill intersections reported from the Koonenberry Region to date,” exec director Kell Nielsen says.

“We are extremely pleased with their significance and feel that they prove the potential of the Tibooburra Project to host multi-million-ounce gold discoveries.”

The $21m market cap stock is up 18% over the past month, and down 52% year-to-date.

Red 5 (ASX:RED) 

The gold player is racing to get its King of the Hills mine back up and running by the middle of next year.

A major exploration push and $224 million rebuild will revitalise the ageing mine, turning it from a small-scale underground producer into a 2.4Moz open pit with 16 years of life at almost 200,000ozpa.

“The site continues to be a hive of activity as we power on towards our goal of achieving first gold production in the June Quarter 2022. The countdown to production is well and truly on!” Red 5 MD Mark Williams said.

Newcrest Mining (ASX:NCM)

Newcrest wants to be the lowest cost gold miner by 2030 and says its development projects could slash group AISC by more than 50% by FY30, to levels well below today’s lowest cost gold major producers.

Right now the company is focused on drilling at its Red Chris and Havieron assets.

“At Havieron, our exploration is now totally focused on growth which has continued to demonstrate potential for resource additions outside of the existing Inferred Mineral Resource limits,” Newcrest boss Sandeep Biswas says.

“We have eight operating rigs exploring the high-grade targets in and around the main Havieron deposit including the high-grade depth extents of the South East Crescent.”

The gold miner expects to produce 1.8-2Moz of gold and 125-130,000t of copper this financial year, having delivered 2,093,322oz of gold and 125-130,000t of copper in FY21.

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