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Gold down, dollar up, pound swinging wildly

Gold and US dollars
FTSE stalwarts are yo-yoing around as if they were junior miners

It became apparent this week that the skill of hanging on by the seat of your pants is just as necessary in an up-cycle as in a down.

It was week in which gold plunged, sterling plunged and the dollar soared.

It was a week of strong manufacturing data across Europe and good non-farm numbers in the US.

It was a week in which the market raised its expectations of a December rate rise from the Fed to 64% according to Bank of America Merrill Lynch.

And it was a week which concluded on Friday with miners among the best performers in London.

Here, the weakness of sterling is magnifying the effects of a resurgent commodities market to the point that even with gold on the slide, Randgold (LON:RRS) was one of the top five FTSE100 risers, and two of the ten biggest risers across the whole FTSE were also gold companies – Acacia (LON:ACA) and Petropavlovsk (LON:POG).

Randgold was joined in the top five FTSE 100 risers by even bigger mining fish – Anglo American (LON:AAL) and BHP Billiton (LON:BLT).

In the case of the gold companies, Friday’s strength came after weakness earlier in the week, when gold dropped precipitously through the US$1,300 mark on very heavy contract volume, and went down to as low as US$1,254 before recovering slightly.

Gold equities have followed gold down from its highs of earlier in the summer, but the although the correction has marked, not been overly heavy. Acacia hit highs of just under 600p in late August, and is now trading at around 480p. But that still compares very well to the 212p with which the company opened its 2016 account.

Similarly, Randgold has come off from its 9,715p high, but the current 7,190p is still around 40% above where the shares were in January. Indeed, this year’s August peak aside, Randgold’s shares are still trading at higher levels than they’ve been at for four years.

So all is not lost, in spite of the new found downward momentum.

Meanwhile, across the wider mining sector the performance has been even more positive. BHP Billiton’s Friday rise was not part of a bounce off earlier weakness, but part of a sustained upward run built on the back of rising commodities prices and falling sterling.

Indeed BHP Billiton hit a new 12 month high on Friday, and although it’s still got a lot of ground to cover if it’s to get back to its pre-crash levels, it’s nevertheless worth noting that the shares have now doubled in value since January.

And it’s a similar story with Anglo American, which is also at a 12 month high after having more than quadrupled in value since January.

Think about that – these are FTSE stalwarts yo-yoing around as if they were junior miners off on tear on some new discovery.

Taking sterling out of the picture makes for more sober reading, but even abroad the performances of the diversifieds has been strong this year. Canadian stalwart Teck Resources (NYSE:TCK) has risen more than sixfold on the New York Exchange, while even troubled Freeport McMoRan (NYSE:FCX) has more than doubled.

It all makes Lundin Mining’s (TSE:LUN) mere 40% gain seem pedestrian.

This is all good news for mining investors, although sterling’s volatility adds concern for UK-based investors and the Fed’s December plans may soften the impact of the upswing significantly.

Indeed, some analysts are now calling for the Fed to completely revamp its communications strategy and to come clean that quantitative easing hasn’t really worked.

According to Mickey Levy, a senior economist at the German bank Berenberg, the Fed should now “emphasise the proper role of monetary policy in achieving its longer-run objectives.”

Whether anyone in the market can now remember from their textbook-reading days what the proper role of monetary policy actually is though, is another matter.

Markets are now expecting a rate rise, and that in turn will dampen sentiment towards gold companies. But probably not by as much as traditional economists would expect. And it’s this belief, at least for now, which accounts for bouncing gold companies in a falling gold market.


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