An increase in the US inflation rate could help lift the gold price, which is good news for Kalgoorlie.

Could it be cocktail hour in Kal?

Thursday, 22 February, 2018 - 09:09

Kalgoorlie has witnessed too many booms and busts for its residents to get easily excited about what’s happening in commodity markets, but that could change if the good news keeps flowing for a cocktail of local metals that includes gold, lithium and the serial disappointment, nickel.

Gold, the reason Kalgoorlie exists, is always tricky to forecast because it is as much a currency as a commodity. However, the unleashing of inflation in the US could trigger a surge in an already strong gold price.

Lithium, the flavour of the month in the mining industry, is rapidly becoming an important export from deposits close to the city thanks to strong demand from Asian battery manufacturers supplying the electric car industry.

Nickel, after a decade of bad news, has been showing signs of a sustainable price recovery as a supply deficit emerges.

Combined, there is so much good news emerging in the mining industry that it’s hard to not see a rub-off in Kalgoorlie’s service sector, and possibly even its depressed property market as investors and workers are lured back to the region.

Gold is likely to be the most reliable of metals thanks to its dual currency-commodity status, particularly as investors seek shelter from what could become an inflationary storm caused by a surge of spending by the US government.

Inflation has effectively been missing from the global economy for the best part of two decades, which means most investors, and certainly the average household, have little idea what it does to prices and asset values.

The most obvious effect is to push prices up. Money issued by governments buys less and becomes less valuable, which means investors turn to assets not controlled by governments, especially gold.

Big-name investment banks such as Citi are dusting off their gold-price forecasts because of the threat inflation may erode asset values, and while Citi’s price tip of $US1,385 an ounce looks modest compared with gold’s recent price of $US1348/oz, it is a sign of changing sentiment towards gold at the highest level of banking.

The outlook for local goldminers is improved by other events in the currency market, such as a decline in the value of the US dollar, which helps lift all commodities traded in that currency.

The combination of gold price and currency lies behind the Australian gold price moving back above $A1,700/oz, a level at which even the most inefficient goldminer can post a profit.

Citi’s view on gold is that it ‘appears cheap’ compared with other asset classes, and is being aided by volatility in stock markets.

“Gold tends to outperform during equity market corrections,” Citi said.

Lithium, the new metal affecting Kalgoorlie’s economy, is a wild card for the city. While it is booming today, there is a wall of supply heading towards the market from producers in South America, Canada and elsewhere in Australia, especially the Pilbara.

If the rush into electric cars continues, aided by government incentives, then lithium deposits close to Kalgoorlie will continue to be developed.

The latest lithium project to move close to production is the Bald Hill mine of Tawana Resources close to Lake Cowan about 90 kilometres south-east of the city. Commissioning of the plant at Bald Hill started last week and first spodumene concentrate should be produced soon.

Nickel, which has been hit by a prolonged period of low prices caused by overproduction in the Philippines and Indonesia, is staging a comeback, with the price rising by more than 50 per cent over the past nine months, from $US4 a pound to around $US6.26/lb.

The latest price is a long way short of the $US9.50/lb of four years ago, and a country mile from the $US22/lb of 2007, but at its latest price (which converts to $A8/lb in Australian dollars) nickel projects that were struggling can breathe a little easier.

Even the mothballed Ravensthorpe nickel mine would be profitable at the latest price, and BHP’s financially stretched Nickel West business has become more attractive to another owner, if one can be found.

The outlook for nickel has started to attract investor attention thanks to comments from investment banks such as Credit Suisse, which said last week that nickel was “finally looking attractive”.

“Since late 2014, the commodity has been ugly,” Credit Suisse said. “It has been a slow path back, but soaring stainless steel demand under synchronised world growth has improved the outlook.”

Everyone involved in mining knows that an upturn in commodity prices can fade as fast as it arrives, but this time it could be different because of fundamental changes in the underlying financial system, where an era of super-low interest rates is giving way to a period of rising rates.

That shift means international investors are rotating their funds out of financially focused products into commodities such as industrial metals, a group that includes copper, nickel and zinc.

If only a fraction of the money currently invested in stock and bond markets around the world is redirected into metals, then prices could continue to rise strongly over the rest of 2018, which has to be good news for WA and its mining capital, Kalgoorlie.

Homebase warning

Interest in Wesfarmers’ ill-fated adventure in the British hardware sector refuses to go away despite apologies from the company’s new chief executive, Rob Scott, for a self-inflicted wound.

The latest comments on the 2016 purchase of the Homebase chain, which has been criticised in several Business News stories, come from the authoritative Financial Times newspaper, which reported that Wesfarmers ignored an early warning about the deal.

According to the FT one of Britain’s top retail experts, Archie Norman, emailed Wesfarmers before the investment was made saying it wasn’t worth the risk.

Mr Norman is no ordinary executive. He is chair of retailer Marks and Spencer and a one-time adviser to Wesfarmers on retailing.

What Mr Norman saw in Homebase was a problem waiting to become a crisis, which is exactly what happened when a team of Australians thought they could change the way the British buy hardware.