Ground Breakers: Threat of rate rises continues to hover as gold's magic run stalls

Metals Focus analysts say rising real rates will “undermine” gold in 2023
De Grey sees queue of bankers keen on debt funding at world class Hemi gold development
BHP names 51-year-old Port Hedland man Jody Byrne as victim of Tuesday’s iron ore rail yard fatality

Gold stocks have enjoyed a bullish outlook so far in 2023, with hopes the US Fed will begin to chill out when it comes to the cost of borrowing powering the price up somewhere in the order of US$300/oz over a three-month period.

But a strong US jobs report on Friday and hawkish commentary from Fed guv’nors has begun to put a dent in that optimism.

Most of the big gold names were in the red this morning, including for the first time since it announced a $24.5 billion approach from US gold behemoth Newmont earlier this week, Newcrest Mining (ASX:NCM).

Gold prices stalled overnight, floating around the US$1875/oz level, down on the ~US$1950/oz mark they hit in the wake of a tamer 50bps US rate rise at the start of the month that signalled an easing in the severity of the world’s biggest central bank’s approach to curbing inflation.

“Gold erased earlier gains after Fed officials reaffirmed the view that interest rates will need to keep rising,” ANZ’s Adelaide Timbrell said in a note.

“Fed governor, Chris Waller, said more increases are needed to bring inflation back to its 2% target.”

Analysts at Metals Focus have urged caution on the steam building around gold prices and equities in 2023, despite calls from other quarters of the investment community that it would be one of the best commodity plays this year.

Market and Fedspeak ‘converging’

They say market expectations, which still price in rate cuts in the second half of 2023, albeit cut from 50bps to 25bps, are beginning to converge with the US Fed’s more hawkish outlook.

The FOMC will likely hike rates at a slower pace than in 2022, but sees a peak rate above 5%. Currently rates are in a band between 4.5%-4.75%.

“Going forward, this will remain a key dynamic to watch out for. If US economic data in the coming months rules out an outright recession and suggests only a modest slowdown, the case for holding on to higher interest rates will become stronger and also help rule out rate cuts for the foreseeable future,” Metals Focus analysts say.

“In this context, the Fed’s March meeting will show new projections by Fed members for the first time in 2023.

“In all likelihood, this will point to higher terminal rate and rule out rate cuts in 2023.”

That would be negative for gold, which will lose some of its shine as a store of wealth to interest-generating cash.

“As such, we continue to believe that interest rate cuts are unlikely this year and this, coupled with falling inflation, will lead to rising real rates and in turn undermine gold prices as we move ahead in 2023.”

On the markets

One gold stock in positive territory today was De Grey Mining (ASX:DEG), up 2.12% after announcing it had received non-binding approaches from 14 leading financial institutions for its world class Hemi gold mine in WA’s north.

A pre-feasibility study put a $985 million price tag on the development of the mine, which will be part of the currently 10.6Moz Mallina gold project near Port Hedland.

The hopeful miner says indications from bankers were it could generate up to $800 million in project finance through debt.

“We’ve been heartened by the strong response to our request for traditional project financing proposals for the Mallina Gold Project,” CFO Peter Canterbury said.

“A range of indicative proposals have been received from highly regarded financial institutions which have significant experience in the mining sector. The Company feels confident that it can deliver an attractive funding package for the development of the Project, subject to a Final Investment Decision by the De Grey Board.”

The materials sector fell 0.42% with Fortescue (ASX:FMG) among the top performers despite WA’s WorkSafe revealing yesterday it had been hit with 34 counts of refusing to or failing to provide documents to a WorkSafe inspector within a specific period and without reasonable excuse, in relation to investigations into alleged sexual harassment at its mines.

An FMG spokesperson told the ABC it had complied with its obligations to report cases of sexual harassment in line with legislation.

Coal prices in Europe dropped, with major coal names down between 3-4.5%, including Whitehaven (ASX:WHC), New Hope Corp (ASX:NHC) and Yancoal (ASX:YAL), and lithium sticks also challenged.

“Meanwhile in gas markets, the European March TTF contract fell to a fresh 17-month low while European thermal coal prices dropped to a 1yr low,” Westpac economists said in a note.

“Higher than expected gas in storage, the expected restart of Freeport LNG facility plus forecasts of milder weather from the weekend are all weighing on European thermal energy markets.”

Ground Breakers share prices today:

BHP name employee killed in train incident

BHP (ASX:BHP) has named the railworker whose death on Tuesday night prompted a temporary shutdown of its near 290Mtpa iron ore business in the Pilbara.

“We can confirm that our colleague who died at our Port Hedland rail yard on Tuesday night was 51-year-old Jody Byrne,” BHP WA iron ore asset president Brandon Craig said.

“Jody joined BHP in 2013 and worked in our Queensland coal and WA iron ore teams. He lived in Port Hedland with his wife Maxine. Jody is survived by his wife, three daughters and four grandchildren. Jody was a respected and valued member of our team and the community, and he will be deeply missed.

“Our thoughts and deepest sympathies are with Jody’s family and friends, and we are providing all the support we can to them during this difficult time.

“We are also providing support to members of the rail team who have lost a colleague and friend in such tragic circumstances.”