Editorial: Sharp commodity price rally surprises markets

Even if it’s only temporary, it always improves the mood of delegates when metal prices rally right before and during a mining convention. And that was certainly the case at the Prospectors & Developers Association of Canada convention in Toronto this week, most notably with gold and iron ore prices. (The uncharacteristically balmy 10ºC weather added more than a few winter-weary smiles to faces, too.)

More than for any other metal, the junior mining market depends on a healthy gold price, and so the PDAC crowd was particularly enthusiastic about spot gold’s intraday surge on March 4 to US$1,279.60 per oz., before easing to US$1,264 per oz. at press time. Traders cited mixed jobs data out of the U.S. on March 4, which pressured the U.S. dollar and bolstered speculation that the U.S. Federal Reserve would be slow to raise interest rates this year.

Spot gold prices at the moment are up US$90 per oz., or 7.6% in the past 30 days, and US$96 per oz., or 8.3% in the past year. They are nearing a 13-month high and are on track to record the first quarterly gain since 2014. Gold chartists like what they see, too, and have an eye out for gold prices taking out the Comex future top of US$1,308 per oz. attained on Jan. 21, 2015.

Strong gold sales by exchange-traded funds (ETFs) hammered gold prices in 2013, but now we’re enjoying a bit of the opposite, with the term “shopping spree” regularly being used to describe current ETF action in the marketplace.

At press time Bloomberg calculated that ETF gold holdings had risen for the 18th straight trading day — the most since May 2010 — up 1.3 tonnes to 1,725.1 tonnes, or the highest level in 18 months. It found gold prices have correlated of late with the buying and selling of gold by ETFs, “moving in the same direction in all but two months in the past year.” Bloomberg further reported that ETF gold holdings are up 18% in 2016 alone — the fastest growth since April 2009 — after sinking 44% from 2013 to 2015, as gold prices declined.

And if all that wasn’t enough to warm a miner’s heart, the iron ore market — where the real money is made in mining — is showing even more upward volatility, with iron ore prices shooting up an astonishing 19% on March 6 to trade at press time at US$63.63 per tonne for 62% fines.

The Australian Broadcasting Corp. quoted one Morgan Stanley analyst as saying the March 6 surge of more than US$10 per tonne was “a bit surreal, even for the most bullish” in the market, and that the one-day rise was a record in percentage terms, and even equalled the largest rise in dollar terms achieved when iron ore traded above US$130 per tonne in 2011.

It’s only been a day since the 19% shocker, and analysts, still grappling for an explanation, point to several factors in China: seasonal restocking; improved margins at Chinese steel mills; an 8% cut in domestic iron ore production year-over-year; and improved credit and political encouragement for large domestic infrastructure projects, as a form of economic stimulus for the slowing Chinese economy.

The iron ore price is now well above most banks’ 2016–18 iron ore price forecasts, which tend to be in the mid US$40- to low US$50-per-tonne range, leading to renewed words of caution by most of the big banks that the current surge cannot be sustained. Most prominent of the bearish bunch has been Goldman Sachs, which argued only one trading day before the 19% surge that iron ore prices would average just US$38 a tonne in 2016, down from US$43 in the first quarter.

In the meantime, iron ore miners can hope the big banks continue to make the wrong call in the near term, as iron ore prices surprise on the upside.