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Growth and inflation trades add shine to miners

Investors are signalling a stronger US economy and the risk of rising inflation under the Trump administration, as robust price gains for precious and industrial metals have this month spurred a rise in miners’ shares.

MSCI’s ACWI Metals & Mining index, a broad barometer that tracks companies around the world, has rallied nearly 15 per cent in 2017, the strongest year-to-date showing in more than a decade, Bloomberg data show. Miners such as Antofagasta, Fresnillo, Anglo American and Glencore listed on London’s FTSE 100 have registered gains in the region of 20 per cent this month.

The Trump administration’s proposed policies of greater infrastructure spending, paring of regulations and a defensive trade posture have lifted expectations for both inflation and economic growth, boosting prices for precious and industrial metals.

Market-based measures of US inflation expectations have also climbed sharply in recent months.

“The reflationary trade of last year and earlier this month has now moved to more of a legitimate inflationary trade, and that is why you have seen a bid for gold and other things that are inflation protection-type investments,” said Michael Underhill, a portfolio manager at RidgeWorth Investments.

Vinay Pande, head of short-term investment opportunities at UBS Wealth Management, said investors were not properly positioned for stronger growth and higher inflation. “We are now seeing a rebalance of inflation expectations.’’

As the S&P 500 closed in record territory on Tuesday, the benchmark’s rise of 1.8 per cent this year has been eclipsed by a gain of nearly 6 per cent for the materials sector, with sentiment buoyed by Mr Trump’s infrastructure and protectionist policies.

“We will build our own pipes, like we used to in the old days,” the president said on Tuesday as he signed executive orders advancing construction of the Keystone XL and Dakota Access oil pipelines, two lightening rods for environmentalists.

Market-based expectations of US inflation are at levels last seen in the summer of 2014 and have risen sharply in recent months as bond yields have climbed.

Reflecting concerns over rising inflation in 2017, open interest in New York gold futures has grown 16 per cent so far this year, supported by increasing bullish bets from money managers.

Gold has gained more than 5 per cent since the beginning of January. Silver and copper prices have risen 7.5 per cent and 4.7 per cent, respectively, this year.

That has triggered a strong performance from gold and silver miners, with Freeport-McMoRan and Barrick Gold up 28 per cent and 15 per cent respectively year to date, while the Philadelphia Stock Exchange Gold and Silver Index has rallied 18 per cent.

“The gold miners have had a really good year,” said JJ Kinahan, chief market strategist at TD Ameritrade. “Part of that was also going into the inauguration — we started to see those pop as people were using gold as their hedge for a down move in the market, or volatility.”

He said the plans by the Trump administration to lighten regulation generally could lead to bets by some market participants that new areas for miners might open up.

Additional reporting by Gregory Meyer in New York

Via FT