Gold prices continue to increase on back of weak dollar and geopolitical threats

26 June 2018 4 min. read
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Gold prices increased 2% while nickel prices increased 4%, according to the Q1 2018 edition of EY’s Canadian Mining Eye index. Meanwhile, copper and zinc prices decreased by 7% and 2% respectively.

Canada is one of the leading mining countries in the world, with mineral production worth $40.8 billion in 2016. The country is the number one global producer of potash, and a top 5 producer of cobalt, diamonds, gold, nickel, platinum, and uranium. Gold, copper, potash, iron, and coal are the top 5 mineral products by value, accounting for $24 billion (or 60%) of Canada’s mineral production.

The Canadian minerals industry accounts for about 596,000 jobs, and adds $87 billion in GDP (3% of Canada’s GDP). Minerals exports were valued at $89 billion in 2016, accounting for about 19% of Canada’s total domestic exports. The country is also the world’s most attractive region for mining investment, according to a survey of mining executives conducted by the Fraser Institute.

The mining sector has, however, seen turbulent times in the past number of years. Commodity prices – including metals – took a dive during the Financial Crisis, rebounded, and then fell again in the mid-2010s. Prices have rebounded somewhat, stabilizing at a lower mark than their pre-crisis peak. The World Bank projects commodity prices – including agricultural, energy, and metals products – to stabilize throughout the next decade after the previous ‘boom-bust’ cycle. Agriculture and metals prices are expected to weaken slightly in real terms to 2030, while energy prices could increase slightly.Composite index performance since 2008Accounting and consulting firm EY’s most recent Canadian Mining Eye index report for Q1 2018 showed a decline of 8% points from Q4 2017. Meanwhile, the S&P/TSX Composite Metals and Mining Index, as well as the Mining Majors index, declined 6% from Q4 2017.

Gold prices, however, were up 2% in Q1 2018, driven by geopolitical risks and dollar weakness. “We’re bullish on gold and believe the demand for gold as a safe haven will increase,” remarked Stephen Letwin, President and CEO of IAMGOLD. “An extremely volatile market, reflecting global trade wars, unpredictable policy changes in the US and elevated geopolitical risks, drives demand for gold as a hedge.”

EY’s report cautions that Canadian gold production of is expected to be flat to slightly lower due to reducing grade, mine closures, and suspensions. According to Barrick Gold and Newmont Mining, gold production is expected to trend lower in the near to medium term. In response senior gold companies will be looking to invest in more junior companies to replenish their reserves.

Looking to the future, rate hikes from the Federal Reserve will challenge the over US$1,300 price of gold by strengthening the US dollar. However, continued strong demand from China and India, as well as ongoing geopolitical risks, will help support gold prices in the future.Canadian Mining Eye index, LMEX index, gold, and copper over Q1 2018In the category of base metals, nickel prices increased 4%, compared to a staggering 22% gain in Q4 2017. In the long-term, nickel prices are expect to do well, supported by demand for electric vehicle (EV) batteries.  However, EY expects some pressure on prices in 2018 due to nickel surpluses, with higher supply from Indonesia (which is projected to produce a quarter of the world’s nickel), while demand from China slows.

Copper prices decreased by 7% in Q1 2018 after gaining 12% last quarter because of concern over labour disruption. Although EV battery demand is also expected to drive up copper prices, near-to-medium copper prices are projected to be soft, depending on the scale of supply disruptions.

“The long-term outlook for copper and nickel remains positive, with prices slated to benefit from the growing adoption of electric vehicles and battery technology,” commented Jay Patel, EY Canada Mining & Metals Transactions Leader. “But it is likely that significant price increases won’t come into play in the immediate future, as both markets currently face surplus conditions. In the meantime, companies should be actively reviewing their portfolios – keeping a keen eye on minerals and new technologies fit for future growth.”

Meanwhile, zinc prices declined by 2% in Q1 2018 on the EY Canadian Mining Eye index. The report expects zinc prices to trend higher in 2018 because of a considerable supply deficit. However, global supply is expected to increase in 2019 with the opening of large zinc mines in Australia (Lady Loretta, Dugald River) and South America (Gamsberg).