Flight to Safe-Haven Assets

An attack on oil tankers in the Middle East triggered a fresh investor flight to safety. As a result, gold has maintained its upward price momentum and negative yields have reappeared for safe-haven bonds.

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The price of gold was stable for the first half of last week following the 4.9% jump from US$1,278/oz to US$1,341/oz between May 30 and June 7. The price spiked again, however, last Thursday, June 13, after an attack on two oil tankers in the Gulf of Oman, and the metal closed the week at US$1,355/oz. Although gold retreated below US$1,334/oz at the start of the new week, the precious metal's three-week upward momentum remains in place.

The price of gold will have benefitted from lower holding costs. Barclays data shows that bonds trading globally with sub-zero yields has soared to almost US$12 trillion. The Financial Times notes that Germany last week sold 10-year Bunds at a record low yield of minus 0.24% on mounting expectations of a monetary stimulus from the European Central Bank. Medium-term debt issued by Switzerland, Holland and Denmark is also trading with yields of less than zero, which reflects the uncertain outlook for the European economy.

Meanwhile, iron ore continues to share the limelight. After price corrections over the two previous weeks, iron ore jumped 11.2% higher last week to close at US$109.4/t in London. The iron-ore analyst at S&P Global Market Intelligence (SPGMI), Maximilian Court, notes that demand is increasing for seaborne cargoes destined for China, and that short-term pricing signals remain positive. He comments that "fundamental scarcity at Chinese ports remains the dominant driver as stocks of both iron ore and finished steel continue their decline".

On other major-metal markets, the price of nickel improved 2.4% last week to close in London at US$11,900/t, but zinc slipped 1.1% to US$2,457/t. There was little week-on-week change for aluminium (closing at US$1,761/t) and copper (US$5,810/t).

On the corporate front, the directors of Acacia Mining have been told by two important shareholders of the Tanzania gold-mining company that they will reject the takeover offer from Barrick Gold unless the terms are improved. Odey Asset Management and Fidelity International are amongst minority shareholders to say the company is undervalued.

Vale SA has announced that it will spend US$1.9 billion to speed up the decommissioning of nine upstream tailings dams in Brazil's Minas Gerais state following the fatal dam burst at its Feijao iron ore mine in January. The company estimated that it will spend over US$150 million this year, US$500 million in 2020, and an annual US$150-200 million in the following years.

SPGMI expects Vale to require at least three years to regain its iron ore production level of last year, and has forecast an output of 320 Mt this year, only 256 Mt in 2020 and 392 Mt in 2021. Even more significantly, ANZ Banking Group said the iron ore supply crisis brought about by the Feijao tailings dam rupture is becoming a "structural shift". ANZ believes that firmer steel margins could keep demand strong not only in iron ore but also in coking coal, despite high prices.

ANZ is also optimistic on copper, which has been hammered amid worsening trade tension, as the bank sees hope in China's fixed asset investment infrastructure. ANZ sees this as likely to grow by over 6% given the country's recent additional stimulus, which targeted infrastructure. While conceding that investors have "turned bearish" on copper, the red metal is still on ANZ's preference list due to its underlying "strong fundamentals".

Market News

The concept of export-led growth is in retreat, and global foreign direct investment has fallen to its lowest level since the financial crisis. A UN report notes that worldwide FDI fell 13% in 2018 (down for the third consecutive year) to US$1.3 trillion, and blamed rising global protectionism, an increase in US profits being repatriated and a 18% drop in investment by Chinese multinationals to US$130 billion.

The Chinese currency has fallen to its lowest level in six months after the central bank hinted that it did not object to a weaker renminbi. The move will heighten US-China tension ahead of the G20 meeting in Osaka, Japan, on June 28-29.

A long-delayed link between the London and Shanghai stock exchanges is being launched today. The scheme will allow global investors to access shares in Chinese companies, and give Chinese investors an opportunity to buy LSE-listed equities. The programme was first announced in 2015, and was due to launch last December but delayed because of uncertainty over Brexit. The Financial Times quotes sources saying the link is largely symbolic at this stage as there are unresolved issues and the trade is limited to depository receipts rather than direct trade in company shares.

India has raised tariffs on US goods in retaliation for Washington's decision to remove 'preferred nation' status on the country's imports. US-India bilateral trade was valued at US$142 billion last year, which represents a seven-fold increase since 2001, but President Trump has criticised New Delhi for its protectionist policies.

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.