Weekly review: China buys more gold as central banks continue lowering rates

China gold central banks lower rates oil stocks review ASX trade
WEEKLY MARKET REPORT

A dip earlier in the week was offset by hints of an interim trade deal between the United States and China, which saw the ASX 200 close out strong to finish up 0.39% at 6,669.2 points.

The delayed imposition of tariffs is only temporary however, with the two nations set to meet at the table early in October in an attempt to iron out ongoing trade issues.

With the US Treasury Department announcing this week that the budget deficit passed the US$1 trillion mark, the highest in seven years, Trump’s tone on China may change, especially depending on the Federal Reserve’s decision next week on interest rates.

A rate cut from the US Federal Reserve is expected, however strong retail numbers released today for the month of August, driven surprisingly by new car sales, could see the central bank once again deny the President’s request for rate cuts.

ECB lowers rates deeper into negative territory

Mario Draghi, the head of the European Central Bank (ECB) didn’t need arm twisting however, as interest rates were lowered this week to -0.5%.

Not only did the ECB lower rates by 0.1%, it also launched the latest round of quantitative easing to the tune of 20 billion euros (A$32 billion) each month, with no end date in sight.

“You remember me saying that all instruments were on the table, ready to be used. Well, today we did it,” Mr Draghi said.

This comes at a time when the powerhouse economy of Europe, Germany, teeters on recession.

Similar scenes in Asia where despite the yuan moving lower, China’s exports again declined last month as the world’s 2nd largest economy continues its downtrend.

The now undeniable global economic slowdown could lead to negative interest rates becoming the new norm around the world.

Economists from the National Australia Bank (ASX: NAB) even forecasting the Reserve Bank to drop the cash rate to 0.25% by mid-2020 unless the government delivers a meaningful fiscal stimulus.

China buys more gold, Citi sees US$2,000/oz

China added 15.91 tons of gold to its reserves in July and August, making the total increase a whopping 100 tons since December 2018.

Both the Chinese and Russian central banks have been acquiring the precious metal in recent times, something western banks seem to have not given any thought to mimic.

Which is surprising considering Citigroup stated this week that it sees gold headed for new record highs of US$2,000 per ounce “within the next year or two”.

Commodity researchers at the bank claim a perfect storm of low interest rates around the world, mounting recession risks, trade wars and demand for the precious metals to be the driving factors.

However Citi also noted was that in the near-term the price of the metal could face headwinds. With rate cuts from the Federal Reserve, a US-China trade truce and a pick up in global manufacturing data potential factors.

Oil slides as Australia hits production record

Oil prices slid this week as the United Stated considered easing sanctions on Iran, which could see global crude supplies increase.

In the broader oil market, the US has at times this year surpassed Saudi Arabia and Russia to become the world’s top oil exporter, even if for brief moments.

Part of Saudi Arabia’s pull back was due to the fact the kingdom cut production in a bid to boost prices, as higher oil prices mean more money for the kingdom’s coffers.

Aramco, the Saudi state-run oil company, is seeking to list 5% of its shares in 2020-2021 in what some analysts say could see the company valued at US$2 trillion. Resulting in an IPO raise of US$100 billion.

The Saudi’s will do whatever is necessary to try cash in on the listing and raise oil prices, which could include manufacturing political tensions with neighbouring countries such as Iran.

Meanwhile Russian oil production has been hampered by the country’s most important export pipeline into Europe becoming contaminated with corrosive chemicals.

Back at home, Australian petroleum production hit a record high passing the billion-barrel milestone in the 2019 financial year, rising 16% year-on-year. LNG output in is also set to rise significantly in Q3 of this year.

Small cap stock action

Despite the larger indices posting gains this week the Small Ords index ended 0.41% in the negative on 2,875 points.

ASX 200 XJO September 2019 small ords chart
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

Winchester Energy (ASX: WEL)

In a busy week, the onshore oil producer recovered “significant oil” from its Lightning prospect in Texas after fracking two sand intervals.

Having begun drilling work on its new well in the Permian Basin in July, Winchester Energy has consistently reported good oil and gas shows, culminating in this week’s recovery.

Technical data confirmed 25ft of calculated net pay in the upper and 20ft in the lower Cisco sands – an area Winchester began testing only last month but one that is already returning a combined swabbing rate of about 80 barrels of oil per day.

Red Sky Energy (ASX: ROG) & Santos (ASX: STO)

Red Sky Energy and industry giant Santos will collaborate as part of a joint operating agreement to explore South Australia’s onshore Cooper Basin and develop the Innamincka Dome oil and gas project.

The prime purpose of the deal is to accelerate the development of Red Sky’s Yarrow gas field acreage and the previously shut-in Flax oilfield, first acquired in May. The field has a contingent resource of 20 billion cubic feet of natural gas while Flax weighs in with 9.9 million barrels of oil and 24 billion cubic feet of natural gas, not to mention in-place infrastructure and six production wells.

Santos is on course to earn an 80% interest in Yarrow and Flax, by funding the development of appraisal wells and the completion of 3D seismic surveys to the value of $9 million.

Meteoric Resources (ASX: MEI)

Meteoric Resources announced that it had secured the services of Brazil’s largest drilling company Geosol as it gears up for a maiden drilling campaign at its Novo Astro gold project in central Brazil.

Novo Astro will undergo a 21-hole drilling program for 2,500m designed to test targets where gold has been previously extracted by artisanal miners. The junior explorer emphasised that despite the area being actively mined, the project has never been drilled at the depths Meteoric plans to explore.

In parallel to Novo Astro, Meteoric is also conducting a similar drilling program at its other prospect Juruena – a site where two Geosol rigs are currently drilling 26 holes for a total 4,700m and have intersected visible gold. Initial assay samples are currently undergoing analysis with results expected within the next two weeks.

DroneShield (ASX: DRO)

Anti-drone technology provider DroneShield announced its “watershed moment” in the form of a partnership with UK’s largest telecoms company, BT Group.

The partnership is likely to see DroneShield’s technology and anti-drone services being deployed to protect BT’s customers in the UK and globally, including airports and other civil infrastructure.

The deal could potentially serve as a significant commercial boost, as well as, promoting DroneShield’s proprietary technology that offers the public and private sectors alike with a fighting chance of securing sensitive airspace around their operations.

Envirosuite (ASX: EVS)

Envirosuite make an assertive step into China’s environmental protection industry following an agreement with Mr Zhigang Zhang, one of the country’s most prominent leaders with respect to environmental protection.

The country is currently facing a public outcry domestically and vocal condemnation internationally, for its sloppy attitude to environmental issues such as toxic air pollution, soil erosion and water quality.

Envirosuite was identified as a company that has a part to play in China’s broad clean-up policy, specifically in focus areas of waste and wastewater, mining and “smart cities”.

Having agreed on terms, the next steps are for Envirosuite and Mr Zhang to establish a series of subsidiaries in the coming weeks.

The ASX-listed company will pay for the deal via 50 million shares and 25 million unlisted options, although in return, stands to obtain an accelerated entry toward the achievement of “critical mass” in the Chinese market, thereby laying the foundations to sustained growth in the years to come.

BMG Resources (ASX: BMG)

The battery minerals explorer commenced its long-awaited drilling program at its Salar West lithium brine project in Chile.

The initial program announced this week is expected to take three to four weeks to complete with three key objectives having been set.

These include the testing of under-drilled shallow portions of prospective ground, testing new predictive structural models within the project and to better understand results obtained from previous TEM surveys.

BMG has opted for sonic drilling as opposed to diamond drilling – a move that allows the explorer to avoid fluid lubrication that diamond drilling typically does, which in turn, eliminates the risk of sample contamination.

Paradigm Biopharmaceuticals (ASX: PAR)

Paradigm will make its move into the US market with its leading drug pentosan polysulfate sodium (PPS) for treating knee osteoarthritis, after an investigational new drug application was granted by the US FDA.

In the US, there are currently around 33 million people diagnosed with osteoarthritis, a figure that is growing but which could be mitigated with appropriate treatment.

Paradigm is hopeful it can make commercial inroads into this growing market with an injectable form of PPS, otherwise known as Zilosul, which has been shown to reduce pain, improve joint function and slow the progression of osteoarthritis.

Having already been tested in Australia on AFL players, Paradigm now has the ability to deploy PPS on a compassionate use basis across the US.

The FDA clearance could also mean that the medical company could also apply PPS in the treatment of rare disease mucopolysaccharidosis.

The week ahead

Minutes from the latest Reserve Bank meeting are out on Tuesday, words will be read cryptically to see if there are signs of another rate cut this year or if the current 1% cash rate will hold.

However employment numbers out on Thursday will offer an unfiltered view of the real health of the economy. The Australian unemployment rate having been stuck at 5.2% for the past 4 months, is forecast to come in at 5.3% for August.

With household income levels falling by more than 1% over the past year it will be no surprise to soon see the flow on effects in the labour force.

The big needle mover to keep an eye on next week is over in the US with the Fed set to make a decision on rates next Thursday (US time), a rate cut is expected that will see a  drop from the current 2.25% to 2%.

The Fed having previously raised rates nine times since the Trump presidency began.

In a recent tweet, Trump called on the “boneheads” at the Federal Reserve to lower “interest rates down to zero, or less”.

Over 30 central banks have lowered rates around the world this year, leading some experts to believe that we are sleep walking into the next financial crisis.

This week’s top stocks

Filip is the founder of Small Caps and provides analysis on the global economy, geopolitical matters, commodities and equities. He also has many years experience as a professional share market investor and trader.