by Aditya Pattanaik | apattanaik@sprottglobal.com
“Hindsight is notably cleverer than foresight” – Chester Nimitz
We may be at an interesting turning point in the business cycle today with historic sovereign debt levels, negative interest rates in many countries, the risk of unfunded pension liabilities, increasingly protectionist economic policies and all-time highs in the general stock market. The economy and markets are operating under rules that are different from those of the past in many ways. There are many differing opinions about what will happen next but when something has not happened in the past, it is impossible to be sure about how it will end up. The charts below should stir up your imagination about where things could go.
Negative Interest Rates
One of the big questions today is about the spread of negative interest rates and whether it will ultimately reach the US. Most of the negative yielding bonds today are in Europe and Japan. Negative rates abroad have strengthened the demand for US dollars and positive yielding US dollar denominated debt. This has had an effect on the foreign currency cost of US exports and their economic competitiveness. How much longer can the Fed maintain rates that are much higher than those in the rest of the world?
The target range for federal funds rate is now at 1.50-1.75% following the third rate cut since July 2019. Most stimulus programs in the past, in response to economic weakness, have entailed rate cuts totaling several percent.
Chart 1: Effective Fed Funds rate over the last 60 years. Recessions indicated by the shaded areas. Source: St. Louis Fed.
The financial system was invented on the assumption of positive interest rates. A rise in negative interest rates would require the system to be rebuilt on a new set of assumptions.
Furthermore, the verdict is still out on whether negative interest rates are the solution or are more a matter of “pushing on a string”, powerless to stimulate flagging economies.
Safe haven assets may become front of mind for investors again.
An Exploration Boom in the Mining sector
The news this past week of Continental Gold in Colombia being acquired by Zijin Mining for 1.4B$ is the latest in the series of the M&A activities that points to the shrinking reserves in the coffers of Senior gold producers. This year has seen the biggest M&A binge since bullion prices peaked a decade ago led by the majors - Newmont & Barrick.
Chart 2: Number of significant Metal discoveries over the last 100 years. Source: Minex Consulting.
The demonstrated need to invest more in commodities exploration and production, coupled with the historically low valuations of commodity-oriented equities relative to conventional equity and debt markets is generating a boom in merger and acquisition activity, which is developing into a promising speculative theme.
Chart 3: Goldman Sachs Commodity Index versus the S&P 500 index. Source: Incrementum.
For the Metals & Mining investor, I think it is important to remember that a renewed interest in safe haven assets as a consequence of a potential Global economic contraction and a marked rise in Metal prices may fuel a renewed wave of Exploration spending - a perfect storm for the Junior Mining sector.
Chart 4: Barron's Gold Mining Index versus S&P 500.
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About the Author
Aditya Pattanaik | apattanaik@sprottglobal.com
Investment Advisor, Sprott Global Resource Investments Ltd.
Aditya graduated with a M.Sc. in Petroleum Geosciences from Royal Holloway, London and worked as an Exploration Geoscientist for Royal Dutch Shell for 12 years. He started his own portfolio in the metals and mining sector in 2016, before transitioning into the role of a professional investment executive at Sprott under Rick Rule’s direct mentorship. Aditya has a passion for Exploration, having spent his professional life exploring for and developing oil and gas resources in Canada, Europe, Asia and the Arctic and closely follows investment opportunities in Exploration and Development stage resource companies.
