LAWRIE WILLIAMS: Crunch time for gold and minerals - Hegarty
Speaking at PayDirt’s Africa Down Under conference in Perth, EMR Capital’s chairman, Owen Hegarty had some interesting comments on ever-growing resource supply constraints. While he was talking about all metals and minerals the comments could be seen as particularly pertinent for the precious metals as he sees resource production as constrained in the face of strong growth in some of the world’s biggest emerging economies – particularly in Asia.
Hegarty thus comments that China will remain a key driver of global commodity demand but India- the world’s fastest growing economy – and Indonesia’s emergence as Asia’s new rising tiger – would put added pressure on minerals supply. All these nations’ citizens have an inbuilt propensity to buy gold, while silver, as nowadays an important industrial metal as well as finding increasing demand in the jewellery sector as ‘cheap gold’ could perhaps benefit even more.
Hegarty comments that Investment in the minerals sector sector remains at trough levels and that future supply constraints will parallel the more than halving in minerals exploration spend, particularly for the global non-ferrous exploration budget while at the same time the global economy itself remains healthy. He pointed also to genuine fears about impacts on resources commodities of a trade war between majors and the United States – with copper pundits pricing in a greater than 0.5% drag on global growth due to the uncertainty about economic policy within the resources powerhouses.
“By any examination, however, the global economy is expected to double by 2050 and this will be led by the emerging seven top economies – China, India, Brazil, Mexico, Russia, Indonesia, and Turkey,” Hegarty said. The U.S. may only still rank as the world’s third largest economy by 2050 but the seven emerging economies noted above will be those which will be growing fastest. The other slots in the world’s top 15, after the seven mentioned above and the U.S. would likely be Japan, Germany, the UK, France, Saudi Arabia, Nigeria and Egypt.
“You have to look at China – a country rebalancing, reforming and transforming – and that will make it the key driver of minerals commodity demand,” Hegarty said. He cited China’s five year old Belt and Road initiative - designed to improve infrastructure and connectivity between China and the rest of Euro-Asia – as one such factor driving new resources demand centres for construction and technology materials.
“But it is not just China. India will derive 25% of its GDP from manufacturing by 2022 and its Smart Cities Mission has committed US$3 trillion to infrastructure spending to 2035,” Hegarty went on to say. “This alone will create another wave of minerals commodities demand.”
“Yet” he went on to say “capex investment in resources projects slumped to negligible levels last year compared to the highs of 2011 and 2012 with global exploration spend following the same downward trajectory.”
The EMR Chairman – whose entity manages more than US$5 billion across 10 resources investments in seven countries - pointed to copper, gold, potash and coking coal – as commodities on which to focus.
He also notes specifically that there remains strong demand for gold as an alternative currency but insufficient exploration is limiting the production pipeline.
We have commented in the past that ‘peak gold’ where new mined production starts to turn down for the reasons noted by Hegarty above – notably a huge decline in mineral exploration and lack of capital commitment to the big new projects necessary to maintain global output levels – is close, if not here already. This will generate a big supply/demand squeeze in the future - maybe not quite yet but definitely by the turn of the next decade (which is only around 16 months away now) which says volumes for the long term future for gold and other key metals and minerals.
Gold is currently struggling to stay above $1,200 an ounce due, in our opinion, to continuing shenanigans in the paper gold markets, but fundamentals will eventually win out as demand exceeds supply. Buy gold now and save yourselves is the mantra of The Credit Strategist’s Michael Lewitt, one of the smartest economic commentators out there. He’s unlikely to be wrong in the medium to long term.
30 Aug 2018