April marked a bottom in business sentiment around the world. The rebound first began in China, followed by the Eurozone and then in global composite surveys. Also, some leading economic indicators around the world are no longer falling, the dilemma for investors going forward is whether this rebound in “soft” economic data will be validated by “hard data” this summer. The risk is that the world economy needs more reflation to avoid a slump, neutrality may not be sufficient.
Commodity markets are still facing a number of conflicting factors including potential US-China trade escalation, and the prices were at pressure for another month in 2019. The precious metals overall volumes running well below ADV, the recent selloff in the gold price to $1270 level has given back earlier gains of this year, also the divergence among the gold equities and gold price has been shrunk.
At present, the Central Banks are the largest positive influence on gold, last year saw 651t of net additions on the World Gold Council data, the strongest since 1971, there is expectation that the higher rate of purchases will be maintained, led by China and Russia. But the Asian retail buying remains slightly down on expectations. Long term, we continue to believe that global production has peaked, and current prices are insufficient to sustain production and replace reserves. We believe gold prices of >$1350/oz are required to incentivize large greenfield gold projects.
The M&A theme may drift into the medium-sized producers after the large one completed, which can be from asset divestitures through the recent round of large producer M&A, and the aggressive sentiment with strong balance sheet in the mining sector might go ahead in 2019 especially for the Australian miners that trade at premiums to other North American medium-sized producers.