Monday, July 3, 2023
Mark Reichman, Senior Research Analyst, Natural Resources, Noble Capital Markets, Inc.
Refer to the bottom of the report for important disclosures
Mining companies trail the broader market. During the second quarter, mining companies (as measured by the XME) declined 4.4% compared to a gain of 8.3% for the S&P 500 index. The VanEck Vectors Gold Miners (GDX) and Junior Gold Miners (GDXJ) ETFs were down 6.9% and 9.7%, respectively. Gold, silver, copper, and zinc futures prices fell 2.0%, 5.6%, 8.2%, and 15.6%, respectively, while lead increased 1.2%. Year-to-date through June 30, gold futures prices were up 5.7%, while silver was down 5.1%. Copper, lead, and zinc prices declined 1.40%, 3.1%, and 19.9%, respectively.
Precious metals headwinds. While gold prices crossed $2,000 an ounce during the second quarter on the back of turmoil in the banking sector, concerns moderated, and the resiliency of the U.S. economy seemed to favor risk-on assets. Additionally, rising short-term interest rates have provided investors with an alternative haven for their funds. During the January, March, and May Federal Open Market Committee (FOMC) meetings, the Federal Reserve served up three 25 basis point rate increases and paused in June keeping the target federal funds rate in the range of 5.00% to 5.25%. Expectations are for additional increases in 2023. Precious metals may be challenged as real yields rise, along with the potential for a stronger U.S. dollar. While we expect precious metals prices to remain at levels that are economic for producers, we expect some weakness in pricing during the second half of 2023.
Outlook for industrial metals. While the long-term investment case for owning industrial metals mining companies remains favorable, it is still too early to offer a bullish call due to near-term concerns about economic growth in the U.S. and abroad. Longer-term secular trends, including electrification, remain supportive of supply and demand fundamentals for copper.
Putting it all together. While well-diversified portfolios should have exposure to precious metals, mining equities may offer a stronger current alternative to bullion. In our opinion, junior companies remain attractive based on valuation, and we expect industry consolidation to increase as senior producers seek to replenish reserves and resources. Longer-term, global central banks could increase gold reserves as they seek to move away from their reliance on the U.S. dollar as a reserve currency which could be supportive of gold prices. While the near-term outlook for industrial metals could be negatively impacted by near-term macroeconomic factors, an eventual return to economic growth could result in strong prices due to potential supply and demand imbalances.
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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
FINRA licenses 7, 24, 63, 87
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