Volatility Continues

Gold declines as real yields less negative and dollar pops

Gold declined -3.8% to US$1,810/oz this week, its largest decline since November 2021, as real yields became slightly less negative as inflation edged down and nominal yields rose on Fed rate hikes, and the US dollar pop'ped.

Metals' prices sliding and TSXV large miners take a hit

Markets continued to be roiled over the past month by the Fed's rate hikes, with most major metals declining, including copper, an abrupt drop in which tends to indicate economic decline, while most of the large TSXV miners have taken a substantial hit.

Gold stocks hammered by combined gold and equity market plunge

The producers took a hit, with the GDX down -4.2% but the juniors especially saw pressure, with the GDXJ plunging -10.5%, and the Canadian juniors nearly all down, on the combined heavy drop in gold and the equity markets.

Volatility Continues

Gold slid -3.8% this week to US$1,810/oz, its worst decline since November 2021 as the Fed starting to come through with rates hikes has offset around a US$100/oz geopolitical premium in the gold price that had arisen since Russia's invasion of Ukraine. We do see some fundamental basis for the drop, first from a continued major spike in the US dollar, but also from a shift to slightly less negative US 10-year real bond yields, to -5.5% in April 2022 (Figure 4). This was caused by a surge in the nominal yield to 2.8% in April 2022 from 2.1% in March 2022 on anticipation of the Fed's 50 bps rate hike which became official on May 4, 2022, while the inflation rate actually eased moderately to 8.2% from 8.6% month on month.

Real yields tend to be a key historical driver of the gold price, as rising real yields make alternatives to gold like bonds relatively more attractive, while falling yields increases the investment attractiveness of yield-less gold. So, while the 10-year bonds still remain an unattractive option in absolute terms, with a -5.5% loss for holding them to maturity as of April 2022, compared to with gold only around a 1.0%- 2.0% storage cost, they have become relatively less unattractive over the past month. The US 10-year yield has also continued to rise in May 2022 to 3.0%, and while we don't have the May 2022 CPI inflation data yet, if it continues to ease somewhat, we could hypothetically see quite a reduction in the negative yield from -6.4% in March 2022 to -5.0% in May 2022. While we don't necessarily expect inflation to continue to ease, and it could just as well shock to the upside again, the market could well be forecasting in such a decline in inflation, which theoretically could justify the move towards bonds and away from gold.

The market could be justified in starting to bake in some easing of CPI inflation, if it is looking forward 12-18 months, especially given the recent decline in metals prices. While such moves are unlikely to immediately bring down inflation in the next few months, the price drops of such key commodities will eventually make their way through supply chains and lead to declines in the prices of end consumer goods. There has been a shock plunge in nearly all the major metals, with tin, which was up as much as 130% from 2021 as of March 2022, now up just 58.4%, and aluminum, which reached a peak up 85%, now up just 37.2% (Figure 5). While the lead price hasn't seen the volatility like these two metals, remaining relatively flat since 2021, it has also eased a bit in recent weeks, now down 0.5%, and iron ore has been experiencing weakness since late 2021 on lower demand from China, and has reversed some of a pickup through 2022 to March, and is down -21.8%.

The nickel price has had a major decline, down from 177% gains set in April 2022 to just 56.7%, on distortions to the market from concerns over supply from Russia, the third largest producer of the metal, followed by the broader decline in the metals markets especially since May 2022 (Figure 6). The copper price, a key indicator for economic growth, has reversed a period of strong gains in March-April 2020, and is now up 25.6% since 2021. This decline in 'Dr. Copper' (so called because of the metal's 'PhD' in economics given that its movement tends to predict directional shifts in the economy) could be indicating that an easing of the economy could be coming. This is especially if it breaks below US$4.0/lb, with the metal trading in a range between this level and US$4.9/lb for over a year, and it had been moving towards the highs of this range through until late April 2022 before the recent decline (Figure 7).

The previous decline in copper had been much more gradual, with a slide taking about four months from US$4.8/lb in May 2021 to $4.0 in August 2021, while the current drop took just a few weeks. If copper keeps falling it could be indicating that the market is starting to price in a recession, meaning that it may have only taken the Fed a single 50 bps rate hike to drive the markets to start factoring in a major economic decline. The zinc price reached its high since 2021 in April 2022 before sliding in the recent metals' downturn and is now up 16.6% since 2021.

The precious metals have been weak in comparison to the base metals, looking at their performance since 2021, although gold has held up the best, gaining -6.8%, and has outperformed the rest of the precious metals in the May 2022 downturn (Figure 8). While both platinum and palladium had seen a spike in March 2022 on Russia's invasion, as the country is a major producer for both metals, it is a much more important global source of palladium, which surged to a gain of 24.1% in March 2022.

However, this jump in palladium has been completely reversed since, with palladium down -19.2% for the year, and platinum down -13.1%. Silver has been the worst performer of the four metals since 2021, down -23.3%, as it tends to be driven more by industrial factors than gold, which is driven more by monetary factors. Combining silver's slide with that of copper's, the market seems to be pricing in a decline in the pace of economic growth from the current level. The pressure on gold may have been less because of the only moderate easing in negative real yields.

TSXV large junior miners take substantial hit on gold and equity market declines

The combined declines in metals prices and the equity markets have been hard on the leading TSXV junior miners, with our main theme for this year, 'A Time for Caution', (outlined in our product The TSXV Top 50 Metals Miners), appearing to be playing out. The juniors have had it particularly rough in a market where the majority of stocks, even some of the most stable, large cap companies, are seeing significant declines, given the substantial risk-off sentiment, which has hit smaller, riskier companies the hardest overall. The juniors are especially exposed to a sell down given that most have no revenue and are in need of constant capital to keep exploring, many with cash to fund expenditure of a year or less.

The largest TSXV gold stocks have seen double digit declines over the past month, and apart from relative newcomer Arizona Metals, have seen double digit declines over the past year. Osisko Development stands out for a -50% decline over the past twelve months, although its decline over the past month was actually the least severe of the group (Figure 9). New Found Gold and Rupert Resources, both explorers with some of the most impressive and consistent high gold grades of the TSXV over the past three years, were near flat for the year before the market plunge of the past few weeks, while developer Artemis, which has secured financing for Blackwater, one of the largest projects of the TSXV gold juniors, saw a very rough month, down -25%.

The base metals and silver stocks also had a difficult month, but most have twelvemonth gains because of strength in the price of the metals they target. Alphamin held up the best, down just -13% for the month but up 37% for the year, given the high grade of its tin mine, and the fact that tin prices are still well up for the year (Figure 10). Jervois, developing cobalt and nickel operations, is down -23% over the past month, but up 62% for the year as cobalt and nickel prices are still relatively high even after the recent pullback. Copper developers Foran and NGex are down by -23% and -33% over the past month, respectively, on the drop in the copper price, although both are still up over twelve months, while Discovery Silver is down -35% for the month and -40% for the year on the persistent weakness in silver.

The lithium companies have performed the best overall as the strong long-term story for battery demand from electric vehicles has apparently offset the short to medium term cyclical pressure seen in the other metals. The sector has also seen significant acquisition activity over the past year, and expectations of further M&A could be supporting prices. Sigma is down just -6% and Frontier just -1% over the past month and are still up 228% and 285% over the past year, Standard and American have declined over -20% since mid-April 2022, but are up substantially yoy, and Rock Tech is down -13% over the past month, but up 16% for the year (Figure 11).

With the Fed coming through with its first 50 bps rate hike even though the stock market had already clearly been seeing signs of weakness, it suggests that they are serious about tackling inflation and one or two more aggressive hikes could follow. Even if inflation remains at its current high levels, but does not increase, with yields rising, this could lessen the degree of negative real rates, putting some pressure on gold. Meanwhile, the equity markets are likely to decline further on such rates hikes, dragging down especially riskier small cap stocks like the juniors. This could mean that for the next few months, we could see continued pressure on gold and junior gold mining stocks, and we continue to view the current period as time for high caution, where it seems quite risky to invest in small cap stocks in general.

Producers and Canadian juniors nearly all down

The producing gold miners were all down except for Iamgold on the drop in gold and equity markets, although there was no news flow from any of the group as they just finished their reporting season (Figure 12) and the Canadian juniors were also nearly all down (Figure 13). For the Canadian juniors operating mainly domestically, Tudor gold started Phase I of its 2022 exploration program at Treaty Creek, Probe Metals reported drill results from the Monique zones at Val-D'or East and Amex reported drill results from the Denise and Eastern Gold Zones at the Perron project (Figure 14). For the Canadian juniors operating mainly internationally, Rupert reported drill results from Ikkari and Heina South, Prime Mining reported its Q1/22 results, Lumina released drill results from Cangrejos and Gran Bestia and Novo Resources reported drill results from a new zone at its 50%-owned Malmsbury project JV (Figure 15).