Gold prices have fallen since the height of the coronavirus pandemic, but with recent data suggesting the precious metal has hit a ‘double bottom’ markets are poised for a possible breakout.

Gold prices have tracked relatively sideways over the past week, following the release of better-than-expected US Producer Price Index (PPI) numbers – which measures changes in the prices domestic goods producers receive for their output over time.

The PPI is considered an indicator for inflation (including the US Consumer Price Index) and – given gold is considered an inflation hedge – long-term data shows the price of gold moves in the opposite direction to PPI.

The dip in gold prices however appears to have formed a ‘double bottom’, which typically occurs at the end of a downward trend in prices and signals a reversal could be about to take place.

And in the longer term, Barclay Pearce head of trading Trent Primmer believes gold is typically a safe bet.

“You should always have some gold exposure in your portfolio, irrespective of short-term fluctuations,” he told StockHead in March.

Mr Primmer said the spot price could even push back above USD 2,000 per ounce from its current level.

Gold forecast keeps its sheen

Gold prices set new highs in 2020, with the yellow metal delivering its best annual performance in more than a decade – with bullion trading at an average price of US$1769.59 per ounce for the year.

Although the commodity has cooled off since hitting its US $2,000 per ounce and over peaks, market consensus still expects the gold prices will hover around US$1,851 per ounce in 2021 and dip slightly to US$1,794 per ounce in 2022.

Meanwhile Goldman Sachs is forecasting the price will rally to US $2,300 per ounce in 2021 as investors look to hedge against inflation.

Nusantara Resources continues exploration work

Australian-listed gold explorer Nusantara Resources (ASX: NUS) is poised to capitalise on these trends with work at its Indonesia-based Awak Mas project continuing to advance through 2021.

Recent close-spaced diamond drilling work within the 14,390 hectare Awak Mas site delivered the company its maiden measured resource – 2.2 million tonnes at a grade of 1.6 grams per tonne.

The site also holds a further indicated resource of 36.5 million tonnes (at 1.4 grams per tonne), and an additional inferred resource of 5.9 million tonnes (at 1.1 grams per tonne).

To stay updated with the latest company news and announcements, register your details on Nusantara’s investor centre.

Indonesian explorers offer value

Indonesia is considered a low-risk jurisdiction based on its low 3.9 score in the Marsh Country Economic Risk Ratings, which is scored out of 10 (higher rating meaning higher risk).

Despite this, ASX investors appear to materially discount mining operations in the country based on the price to net asset value (P/NAV) metrics, where Nusantara falls well behind the 0.7x average for its peer group with a ratio of only 0.1x – more competitive than its higher-priced competitors.

 A similar story plays out in the Enterprise Value to Resource (EV/Resources) ratio, too.

This metric divides the value of the business by the total volume of the resources it holds in the ground, and is commonly used by investors to value mining projects.

Nusantara has an EV/R ratios of $27 per ounce of gold, respectively.

This falls well short of the $70 per ounce EV/R of the Geopacific project in Papua New Guinea (Marsh rating 5.3).

By contrast, Australia holds a similar Marsh rating, 3.1, to Indonesia (3.9) but local gold miner Capricorn Metals holds an EV/R ratio of $257 per ounce.

Source: PFC Capital

With local partner and major shareholder Indika poised to tip a further US $25 million into the project, FEED and process plant expandability studies being finalised, and a further 60% of the 144km2 Contract of Work area yet to be thoroughly explored, the business expects these metrics to change.

Indonesia ramps up mining efforts

In the past year, Indonesia has implemented a raft of policy changes designed to support its domestic mining industry, most notably through the passing of its omnibus bill.

This bill is designed to cut red tape and streamline the mine licensing process to encourage investment into the sector and create jobs for the local economy.

The bill will also provide incentives to miners for investing into downstream value-adding processes as the country looks to squeeze more money out of its mineral resources.

The Indonesian government is also backing the construction of a new smelting facility on the island of Halmahera, which it hopes to develop and integrated smelting hub in the region.

The smelting facility is being developed by PT Halmahera Persada Lygend – a joint venture created by local company Harita Group, and Chinese mining outfit Ningbo Lygend.

The JV company is receiving US $625 million from DBS and BNP Paribas to finance the project.

To stay updated with the latest company news and announcements, register your details on Nusantara’s investor centre.  

Reach Markets have been engaged by NUS to assist with private investor management.

Sources:

• Dailyfx: Gold Prices Fall as Strong PPI Readings Boost Yields, USD Rises
• Dailyfx: Gold Weekly Forecast: Gold Prices Preparing for a Break Out?
• FXEmpire: Gold Price Prediction – Prices Rise Slightly but Continue to Consolidate
• bls.gov: Producer Price Indexes
• Sunshine Profits: PPI (PRODUCER PRICE INDEX)
• Stockhead: Gold Digger: You should ALWAYS have gold exposure in your portfolio, expert says
• Mining.com: Gold price rally of 2020 crushes analyst forecasts
• Markets Insider: Gold will soar 22% next year as investors protect against rising inflation, Goldman Sachs says
• ASX: NUS announcement 29 January 2021
• ASX: NUS announcement 16 March 2021
• PCFCapital: Stimulus and Vaccines Drive Commodity Growth
• Mondaq: Indonesia Omnibus Bill – Changes To The Mining Law
• The Jakarta Post: Omnibus bill to centralize permit processing, offer incentives for miners
• Asia Times: China solves Freeport’s $3 billion problem in Indonesia
• The Asset: Indonesian nickel smelter secures US$625 million financing