September 6th, 2022 | 12:54 CEST
Electricity price brake and "Lehman Moment" - Barrick Gold, MAS Gold, Standard Lithium
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"[...] Internally we expect the resource to significantly grow the deeper we mine. [...]" Dennis Karp, Executive Chairman, Manuka Resources
Complex electricity markets favor risk for "Lehman Moment"
With the help of a kind of "excess profit levy," the German government wants to intervene in the electricity market and reduce galloping prices. In the electricity market, the most expensive energy source needed to meet demand determines the price. Currently, it is gas-fired power plants. As a result, the cost of electricity has also risen significantly recently. However, those who produce electricity from renewable sources, nuclear energy or coal, are making high profits. The state wants to skim off these "excess profits" and use them to finance a kind of basic tariff for electricity customers that covers a basic electricity requirement under favorable conditions, possibly those from before the crisis. Beyond that, it becomes expensive again. But the plan has a catch. On the one hand, it torpedoes the transformation to renewable energy sources, and on the other, it risks increasing the extent of market intervention the more the price of gas rises. On Monday, the gas price rose in the wake of Gazprom's new production freeze.
Many energy suppliers already have their backs to the wall. Not only in Germany, but also in other European countries, such as Sweden, the state has to support companies. If the state now intervenes in pricing on the electricity market and does not consider the supply situation around the various energy sources, further distortions could arise. The danger is all the greater because electricity grids are complex - in Germany, for example, gas-fired power plants in the south have to kick in spontaneously when the wind blows in the north in order to keep the grid voltage constant. The federal government's plans, which are not very concrete so far, are, therefore, like open-heart surgery in which the surgeon has had one too many coffees.
How can investors act around this situation? Utilities, in particular, and industrial companies, could be in for a hot fall and winter. Even an assault on stocks from the financial sector cannot be ruled out. Then, for example, if payment defaults threaten across the board. The heterogeneous situation in many sectors within the EU is doing the rest. In addition to a reduced share quota, investors can rely on classic crisis insurances, such as gold.
From Barrick to MAS Gold - How shares can become risk insurance
The precious yellow metal is trading at a long-term support zone of around USD 1,700. The shares of well-known gold producers, such as Barrick Gold, are also not doing particularly well. As reasoning for the gold slump, the interest rate turnaround is mentioned repeatedly - gold gives, as is well known, no interest. But unlike promissory notes, gold never loses its value. If the stress in the system increases, gold and gold shares could increase again. At the current level, it may be worth adding a position of the precious metal to the portfolio. In the case of shares of gold miners, however, investors should note that the possible profit is capped since companies such as Barrick Gold sell parts of their production in advance at a fixed price.
Smaller gold companies that are not yet in production could be more interesting. Stocks like MAS Gold are currently focused on developing promising precious metal properties and paving the way toward possible production. The market tends to value such companies very capriciously: if sentiment around gold is negative, even resources already proven in the ground are worth little. If the approval for gold increases, the market exaggerates, even pricing in positive events in the future that have not yet happened. For example, stocks comparable to MAS Gold staged a brilliant rally within a few weeks of the pandemic outbreak and multiplied. Since MAS Gold, which pursues several projects in crisis-proof Canada, is trading near multi-year lows, there is a good opportunity to add the crisis insurance to the portfolio at a reasonable price.
Standard Lithium & Co. - The overall market shows no mercy
Suppliers of renewable energies and producers of critical raw materials will likely benefit in the long term from energy price shocks. The shares of these companies have already made substantial gains in recent weeks or have remained stable compared with the market as a whole. One example is Standard Lithium. The Company has two lithium projects in the USA and points to a more efficient extraction process for lithium. What sounds exciting at first is also likely to be in little demand in the market as stocks correct across the board.
Although gold stocks can also suffer losses in times of crisis, the past has shown that a special boom can develop around precious metals, affecting smaller stocks with some delay, but all the more severely later on. Depending on their market view, investors can already put a foot in the door with titles such as MAS Gold or be particularly vigilant - if the gold price and established gold titles such as Barrick Gold react, the starting signal for a rally could quickly follow for smaller values. The CEO of MAS Gold and his team explain in a recent webinar which advantages the Company of mining legend Jim Engdahl can offer.
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