A curious economic inversion appeared on traders’ screens in the first week of 2019 and set a decidedly uncertain tone.
The contrast was startling: very weak PMI numbers from the world’s fastest growing major economy, China, and very strong numbers from the world’s most sluggish major economy, the UK.
The UK numbers can be explained away pretty straightforwardly – purchasing managers are stocking up ahead of a potential “hard” Brexit, a one-time anomaly that renders the usual purpose of the index, to measure economic activity, temporarily obsolete.
In the Chinese case though, the implications are more profound. It was no coincidence that in the same weak as the Chinese PMI dipped below 50, one of the world’s richest companies, Apple, warned on revenues for the first time in over ten years. The reason for the warning from Apple? – weakness in the Chinese markets.
Hardly surprising then that with the world’s biggest company warning on poor economic data from the world’s fastest growing major economy markets were skittish.
The miners in particular were hard hit, since the major producers have for years been reliant on an ongoing narrative of Chinese growth to fuel their own growth aspirations.
If Chinese growth slows – and the official figures suggest the rate will now slip below 6.5% - then Chinese demand for commodities will also slow. Bad news for miners, given that all the major western markets are fully mature.
But depending on where you are and what positions you hold, there are some silver linings.
The Chinese data sent the Australian dollar plummeting by as much as 5% at one point on Wednesday, a fall that was exacerbated by a lack of liquidity as market participants were thin on the ground as the holiday season draws to a close. Automated trading therefore made much of the running until humans stepped back in later in the day.
So, fine if you were short the Aussie dollar. But more significantly, fine too if you’re actually mining in Australia. Any weakening of the Australian dollar serves the miners there very well indeed, since costs are incurred in the local currency but sales are almost always denominated in US dollars.
That built-in dynamic allows for increased margins at times of currency weakness, and accordingly the gold price, as denominated in Aussie dollars, is now hitting all-time highs.
On the whole then, in spite of the wider structural worries, it’s not such a bad time to be a miner in Australia. And this is borne out by the amount of activity that’s occurring on the ground at all levels.
Earlier in the week, UK-listed ECR Minerals (LON:ECR) announced the acquisition of a sizeable swathe of new ground in the Yilgarn region of Australia. It’s just the latest in a long line of companies to peg ground in Australia as the gold boom continues, and it’s not just small companies looking to make it big either.
Newmont has just pegged ground next to ECR’s other holdings in Victoria, while all sorts of companies are swarming around Greatland Gold’s (LON:GGP) ground in the Paterson region of Western Australia.
How long this momentum can be maintained is an open question but, in the case of Australia at least, there are clearly several factors at play.
The weak currency is being complemented by global economic uncertainty as President Trump steps up his tariffs policy. Gold in US dollar terms is stronger too, though not quite at record levels like in Australia.
And gold itself is unlikely to be affected in the medium to long-term by any reduction in Chinese growth. No wonder investors are piling in; gold is once again proving its worth as the ultimate hedge.