Guy on Rocks: 35 reasons to listen to Guy Le Page

“Guy on Rocks” is a Stockhead series that takes a weekly look at important resource market events. Former geologist and experienced stockbroker Guy Le Page, director and chief executive of Perth-based financial services provider RM Corporate Finance, shares his high-conviction views on the market and his ‘hot stocks to watch’.

Market Ructions: Run for the hills…

Well, shoot me down with a feather! Apparently interest rate hikes are right around the corner and the world is going downhill!

Music to the ears of doomsday preppers out there, but I know the Stockhead the faithful are 100% relaxed as they would have been alerted to the genie of inflation and the impending apocalypse (otherwise known as recession) last year in this column.

A Balvenie whiskey (17 double wood) and a Late Hour Placencia cigar are recommended to calm nerves in a bear market.

The FOMC meeting ended with new information regarding its balance sheet reduction plan which immediately sent gold down $24, with the February contract trading around US$1,830 after hitting an intraday low. of US$1,814.10 a few days ago.

Interestingly, Bloomberg reported last week that the world’s largest ETF saw its holdings of SPDR Gold shares surge to the highest dollar inflow last week, surpassing $1.63 billion since its listing in 2004.

I think support for gold in this market should come from a weakening US dollar in conjunction with growing demand for gold ETFs combined with demand for hedging.

Bitcoin for those less afraid of risk can also benefit. Interestingly, Chinese consumption of gold (jewellery, coins and bullion) increased by 36% last year to reach 1,120.90 tonnes in 2021 according to the China Gold Association.

Figure 1: 30-day gold price chart (Source: www.kitco.com).

On the positive side, palladium gained $34.60, a net gain of 6.15% and is currently pegged at $2,323.

Platinum has gained 0.6% from April and is currently trading around $1,031.

The majority of palladium as well as a large percentage of platinum is mined in Russia (figure 2) and South Africa (together around 93% of world production) so the current political instability is likely to see PGMs increase, in especially with all the pop guns lined up at the Ukrainian border.

Figure 2: Russia’s global market share by product (Source: www.kitco.com).

Commodities have more or less followed (figure 3) the inflation caused by, according to Macquarie (Macquarie Strategy, January 2022), mainly an increase in aggregate demand.

Figure 3: Commodity indices vs inflation (Source: PBOC, Bloomberg in Macquarie Strategy, January 2022).

Danielle DiMartino Booth, CEO of Quill Intelligence, believes that the change in fiscal and monetary policy could lead to three rate hikes in quick succession which could in turn lead to an inverted yield curve (difference between the yield on Treasury bonds long term and short term). yield to maturity) with an inverted or flat yield curve historically followed by a recession within 12 months.

Figure 4: Monthly bond issuance in China (Source: PBOC, Bloomberg in Macquarie Strategy, January 2022).

With base metal inventories at critical levels, China appears to be heading for a different fiscal and monetary policy (Figures 4, 5) as the PBoC heads into a 10bp cut with stimulus measures. easing for the remainder of fiscal year 2022 (Figure 5).

Figure 5: Interest rates in China (Source: PBOC, Bloomberg in Macquarie Strategy, January 2022).

SHFE futures for nickel, aluminum and zinc also rose over the past week, with nickel inventories in particular falling to critical levels (Figure 6).

Figure 6: Levels of LME nickel warehouses over 1 year (Source: www.kitcometals.com).

SHFE nickel inventories fell to very low levels of 3.9 kt (vs. 300,000 tonnes of open interest), causing the nickel market to stall. Further Chinese easing could put additional upward pressure on the price of nickel.

Discussions of hyper-inflation and currency debauchery are also commonplace, with Bitcoin bull Max Keiser, host of The Keizer Report, telling Michelle Makori, editor-in-chief of Kitco News:

“I think over the next 10 years, as you see these big economies like the United States and China, which are carrying debt at 300% of GDP, and they’re just going to print their way out of that, we’re talking about a fiat currency apocalypse.

Interestingly, El Salvador made headlines for becoming the first country in the world to make Bitcoin legal tender.

All of this volatility is likely to have immediate effects on the precious metals and base metals markets as well as Bitcoin.

Finally, lithium prices have entered low earth orbit with spodumene concentrate sales recently recorded above US$3,100/tonne.

Prices have quintupled in the past year. Only 18 months ago I was calculating numbers on a AVZ Minerals (ASX:AVZ) fetch $750 considering how solid the Manono project is despite the logistical challenges.

Chinese lithium carbonate prices (Figure 7) also hit a new high earlier in the week on the back of a 35% month-on-month jump in Chinese electric vehicle registrations in December, according to China Automotive.

Figure 7: Lithium carbonate price (Source: Bloomberg, Asian Metal Inc., China Automotive Information Net).

With supply-side pressures, some brave analysts are predicting growing deficits in the lithium market this year.

And as I’ve said many times before, sovereign risk is the elephant in the room. Rio Tinto (ASX:RIO) know this all too well, as Serbia revoked the Jadar mine license in response to local opposition.

The CY 2021 annualized investment return of the “Guy on Rocks” recommendations was 35% compared to the total return of the S&P/ASX 200 Resources Index of 9.3% over the same period.

The maximum possible return if you sold at the top was 64%.

The absolute return based on a simple average was 6% if you sat there like a giddy mule all year and took a long-only approach.

Of course, most of Stockhead luminaries reportedly took a few shekels off the table as the market heated up last year – there was ample evidence of an overheated market during CY 2021.

Fortunately, some of the top performers such as gold developers Predictive Discovery (ASX:PDI), Tietto Minerals (ASX:TIE) and Rumble Resources (ASX:RTR) still have plenty of growth in them and the recent downsell presented some interesting opportunities. possibilities of reintegration.

The same goes for some of the laggards such as Auroch Minerals (ASX:AOU) and Amani Gold (ASX:AMI).

New ideas

Figure 8: “Cave Canem” mosaic, House of the tragic poet in Pompeii, around the 1st century AD (Source: GT Le Page, personal collection, 2016).

While the overpriced (and some reasonably priced) juniors get banged up, I’m keeping my powder dry on my next recommendation.

Obviously, I don’t want to mess with my spotless record with my better-served time puffing at Cigar Social until the smoke haze parted and I could see the light.

As with any boom, there are sectors that stick out, and that was certainly the case with many of the junior explorers listed on the ASX last year. Canem Cellar or “beware of the dog”.

Obviously someone in Pompeii 2,000 years ago had also been the victim of a toppy market, as the visitor at the front door recalled. ….

At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives ranging from mergers and acquisitions, IPOs to valuations, consulting and corporate advisory roles.

He was Head of Research at Morgan Stockbroking Limited (Perth) before joining Tolhurst Noall as a corporate adviser in July 1998. Prior to entering the brokerage industry he spent 10 years as a survey geologist exploration and mining in Australia, Canada and the United States. States. Any views, information or opinions expressed in the interview for this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed, or otherwise taken responsibility for the financial product advice contained in this article.

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