The backdrop for miners is ready to brighten in the second half of this year. They just need a resolution of the trade war between the U.S. and China to light a fire under their stocks.
Metal prices and mining equities have been at the mercy of trade headlines all year, and business fundamentals have a taken a back seat. To be sure, easier central bank policies around the world have helped some metals, especially gold and silver. But a resolution of the trade tension between U.S. and China -- or at least some steps to bring down the temperature -- could prove the ultimate catalyst for the metals and mining complex.
In fact, the discrepancy in performance between gold and base metal prices has widened heading into the second half of this year. Gold had a blockbuster start to the summer owing to expectations of a U.S. Federal Reserve rate cut, while base metals investors stayed cautious due to the potential impact of disputes on the commercial demand for metals. That’s led some industry analysts to ratchet up their preference for gold in the second half and into 2020 while remaining cautious on the base metals outlook.
The supply and demand outlook for base metals is relatively tight, which means a healthy market for miners, according to a report from RBC’s Mining & Materials Equity Team. The outlook for gold in the near-term has improved due to expectations for lower rates, but there’s also risk to precious metals if geopolitical tensions in the Persian Gulf subside, the team said.
BMO analysts led by Colin Hamilton agreed with that view. Precious metals prices have been quickly helped by rate cut expectations, but investors “still face a world where the industrial economy remains nervous about the impact of trade friction,” they said.
RBC’s team has become “more constructive” on gold prices heading into the second half of 2019 and for 2020. The team also thinks base metals can go higher in the second half of 2019, since most of the macroeconomic concerns have been reflected in prices. But the recent rally in iron ore seems to be unsustainable and could turn back in the third quarter, RBC said.
BMO also prefers precious metals, believing that the sentiment for gold has shifted to a new, higher range. The bank has a stable outlook for base metals but thinks any outperformance in the sector may have to wait until trade tension lifts. But in the copper market, BMO says the recent sell-off in copper prices is unjustified and expects higher prices into the year-end, with or without a trade accord.
Easier trade rhetoric could translate into some downside for gold and silver, and a big rally in base metals. A continuation of the status quo might translate into further declines for base metal miners or, at best, leave the sector waiting for the next shoe to drop.
What Bloomberg Intelligence says
Gold-price appreciation is likely to be the dominant and most concerning 2H theme for the metals, especially if the peak-dollar theme that’s gaining credibility with a dovish Federal Reserve provides the final rally pillar. Gold has worthy catalysts for price gains after five years of caged trading. It stands to be the primary beneficiary, absent a definitive U.S.-China trade accord that reverses accelerating global declines in sovereign-debt yields, rate-cut expectations and increasing stock-market volatility.
Industrial metals will benefit if the greenback declines, which places the broad sector on stable 2H footings. The Bloomberg All Metals Total Return Index is poised to reverse a prolonged period of underperformance vs U.S. equities, as we see it.-- Mike McGlone, commodity strategist-- Click here to read the research