Trump’s Mining Revival Faces Critical Minerals Oversupply – Ecclestone

Key Concepts

• Gold Price Correction: Significant drop in gold prices, exceeding $400 USD per ounce.
• Precious Metals Market: The market for gold, silver, and other precious metals.
• International Insecurity: Geopolitical events and conflicts that can influence gold prices.
• Trump Factor: The potential impact of Donald Trump's presidency and policies on the US economy and global markets.
• US Dollar Dominance: The role of the US dollar as the global reserve currency and potential threats to its primacy.
• Venezuela Conflict: Potential US intervention in Venezuela and its implications for oil and gold prices.
• Market Corrections: Natural downturns in asset prices that are part of a broader upward trend.
• Gold-Silver Ratio: The ratio of the price of gold to the price of silver, historically around 15:1.
• Crypto and Gold: The relationship between cryptocurrencies, particularly stablecoins like Tether, and gold as an asset.
• US Federal Reserve: The central bank of the United States and its monetary policy decisions.
• Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
• Interest Rates: The cost of borrowing money or the return on savings.
• Argentina Economic Reforms: The economic policies implemented by Argentine President Javier Milei.
• Dollarization: The adoption of the US dollar as the official currency of a country.
• Critical Minerals: Minerals deemed essential for economic and national security, such as lithium and rare earths.
• ESG (Environmental, Social, and Governance): A framework for evaluating a company's sustainability and ethical impact.
• Lithium Market: The market for lithium, a key component in electric vehicle batteries.
• Rare Earth Elements (REEs): A group of 17 elements with unique properties crucial for modern technology.
• Copper Market: The market for copper, a vital industrial metal.
• US Mining Policy: The US government's approach to supporting and developing domestic mining operations.
• Spodumene Concentrate: A mineral concentrate that is a primary source of lithium.
• Lithium Carbonate Equivalent (LCE): A standard unit for measuring lithium content.
• Electric Vehicle (EV) Market: The market for electric vehicles and their associated infrastructure.

Gold Price Pullback and its Causes

The recent significant fall in the gold price, exceeding $400 USD per ounce, was a development that Christopher Eckleston, principal and mining strategist at Hallgarten & Company, had forecast. He noted that precious metals markets were looking "very toppy" and a pullback of $1,000 per ounce in gold and $10-$12 per ounce in silver was becoming more likely.

Key Points:

• Cyclical Nature of Markets: Eckleston emphasizes the fundamental principle that "what goes up must come down," and that markets eventually correct. He observes that veteran investors, despite witnessing multiple bull and retreat cycles in precious metals, often remain overly optimistic, influenced by "self-deception and self-delusion."
• Geopolitical Factors: Eckleston speculates that a primary driver for the pullback could be an "outbreak of peace." He perceives a strong link between gold and silver prices and international insecurity.
  • Resolution of Conflicts: The potential resolution or significant fatigue in major military events, such as the Ukraine war, reduces the demand for gold as a safe-haven asset. While acknowledging that wars can be prolonged, he suggests that "fatigue" and "equivocation about who's supporting who" in the Ukraine conflict indicate a likely resolution in the foreseeable future.
• The "Trump Factor": Eckleston identifies Donald Trump as a significant, albeit unconventional, mover of precious metal prices. He suggests that uncertainty surrounding Trump's actions and their potential impact on the US economy is a contributing factor.
  • Doubts about US Economic Fundamentals: There are growing concerns about the long-term health of the US economy, with questions arising about a potential "sunset moment" similar to what the British economy experienced post-World War II.
  • Threats to Dollar Dominance: While not predicting an immediate replacement of the dollar by the yuan, Eckleston foresees an erosion of the dollar's primacy, leading to a more multilateral currency scheme. Since gold is denominated in dollars, any perceived weakness in the dollar necessitates a compensatory rise in gold prices, but this dynamic is contingent on continued "distress for the market."

Potential for Further Correction and the Gold-Silver Ratio

Eckleston reiterates his earlier forecast of a potential $1,000 USD per ounce correction in gold, which would represent a 20-25% decline from its highs. He views such corrections as a healthy part of a long-term upward market trend, akin to "pricking the bubble" of unrealistic expectations.

Key Points:

• Comparison to Lithium: The dramatic fall in lithium prices (75% from highs) serves as an example of how market exuberance can lead to sharp corrections when demand falters.
• Silver's Appeal and the Gold-Silver Ratio:
  • Indian Market: Eckleston notes the surprising attraction of silver in India, suggesting it's being used for speculation, unlike gold, which is held as a long-term asset. Profits from silver speculation could be reinvested, putting downward pressure on prices.
  • Historical Ratio: He highlights the historical gold-silver ratio, which has averaged around 15:1 over centuries, compared to recent levels exceeding 60:1 and even 100:1. This suggests significant room for silver to appreciate or gold to depreciate to rebalance the ratio.
  • Industrial Driver for Silver: Unlike gold, silver possesses an industrial driver, which Eckleston believes will contribute to its long-term performance.
• Crypto and Gold: Eckleston expresses skepticism about the notion that gold prices are underpinned by cryptocurrencies. He points out the irony of crypto structures, like Tether, investing in gold stocks and US Treasuries to back their currencies, especially when investors are moving into crypto precisely to avoid US Treasuries. This suggests a lack of understanding of the underlying assets by some crypto investors.

US Federal Reserve and Monetary Policy

The upcoming US Federal Reserve meeting is a key event to watch, with potential pressure from Donald Trump to adopt a more growth-oriented stance, which he equates with low interest rates.

Key Points:

• Low Interest Rates and Inflation: Eckleston argues that low interest rates have contributed to current economic problems, including persistent inflation that emerged during the pandemic and has not been fully contained despite higher rates.
• Inadequate Interest Rates: He considers current interest rates of 4-5% to be not "high" by historical standards (e.g., the 1980s with 15% rates). Savers are receiving minimal returns, with much of the benefit accruing to bank margins.
• Critique of Trump's Economic Approach: Eckleston dismisses the idea of changing the Fed's guard to "loose money people" as a "fallacy," suggesting Trump lacks a strong economic understanding. He criticizes the appointment of "buy-side people" to the Trump cabinet, who may prioritize market booms over long-term stability, potentially leading to crashes like those in 1987 and 2008.
• Desperation for Growth: Trump's perceived desperation for economic growth to offset the damage from tariffs and policy uncertainty might lead to policies that are not sustainable.

Argentina's Economic Challenges and Javier Milei

The political and economic situation in Argentina, particularly concerning President Javier Milei's reforms, is a significant point of discussion.

Key Points:

• Budgetary Control: Milei has achieved success in bringing Argentina's budget under control, a feat not seen for decades. This involved significant government employee reductions and the scrapping of infrastructure projects.
• Low Inflation (Relative): Inflation has decreased compared to previous levels, with some prices even becoming cheaper than in London.
• Consumer Strike: Despite these improvements, the high cost of living has led to a "consumer strike," with empty restaurants and shopping malls.
• Weakness of the Dollar in Argentina: The Argentine peso's weakness against the dollar is primarily driven by speculation from the upper 5% of the population who have converted their pesos to dollars and moved them offshore.
• Dollarization as a Solution: Eckleston believes that dollarization, a key tenet of Milei's platform, needs to be revisited. He argues it would curb speculation, stabilize the economy, and ensure that dollar earnings benefit the broader population, not just the elite.
• Political Challenges: Milei faces strong headwinds in upcoming midterm elections, with opposition parties focused solely on his removal. His grouping is expected to secure a significantly lower percentage of the vote than he achieved in the presidential runoff.
• Mistaken Dialogue on Congressional Majority: Eckleston criticizes Milei's mistaken belief that he needed a majority in Congress for success, a goal that was never realistic given the political landscape. He highlights Milei's poor negotiation skills in Congress, advocating for a more "carrot"-based approach rather than solely relying on "stick" tactics.

Critical Minerals Funding and Market Dynamics

The investment landscape for critical minerals is evolving, with new funds and government initiatives emerging.

Key Points:

• Aion Capital Advisory Fund: Aion Capital Advisory has launched a $1 billion USD critical minerals fund in partnership with the International Finance Corporation (IFC) of the World Bank Group. The fund aims to combine Aion's expertise with the IFC's ESG rigor.
• Critique of Fund Size and Project Scope: Eckleston questions the necessity of $500 million investment ranges for many critical mineral projects, arguing that it can lead to oversupply.
• Oversupply in Lithium and Rare Earths: He points to a significant oversupply of lithium and rare earth projects, indicating that the market has not learned from past booms. He notes that many companies are now claiming to be in production, but the demand does not justify this level of output.
• Government Subsidies and Unworthy Projects: Eckleston criticizes government subsidies for projects like MP Materials and Arafura, deeming them "unworthy" and suggesting that resources should be directed towards more promising ventures.
• Copper Project in Arizona: The pre-feasibility study for Arizona Sonoran Copper's Cactus project in Arizona is presented as an attractive opportunity. The project is projected to produce 99,000 tons per year of copper cathode for 22 years at a competitive cost.
• US Mining Revival: Eckleston believes that under Trump, mining in the continental US has been brought back from the cold. He argues that a US mining industry is essential for self-reliance and industrial strength, as older mines like Bingham Canyon will not last forever.
• "Scattergun Approach" to Funding: Eckleston criticizes the Trump administration's "scattergun approach" to funding critical minerals projects, arguing that funds are being spread too broadly across projects at various stages of development. He suggests that the administration lacks expertise in identifying promising mining ventures.
• MP Materials and Rare Earths: The example of Molly Corp (predecessor to MP Materials) is cited as a cautionary tale of a company that failed in the public markets. Eckleston questions the understanding of rare earths within the Trump White House and criticizes the focus on light rare earths by MP Materials, neglecting the importance of heavy rare earths.
• Government Equity Stakes: The US government's practice of taking equity stakes in projects it funds, such as MP Materials and Lithium Americas, is viewed with concern. Eckleston argues that governments are likely to lose money due to excessively high guaranteed prices and the creation of an uneven playing field for other rare earth companies. He draws a parallel to countries like Mali and Tanzania demanding project participation, but notes that the US is not legislating mandatory stakes.

Lithium Market Outlook

The lithium market is facing significant challenges, with oversupply and weakening demand.

Key Points:

• Lithium Price Collapse: The lithium price has fallen by approximately 75% from its highs, now around $10,000 per ton of Lithium Carbonate Equivalent (LCE).
• Pausing EV Infrastructure: Many planned EV and lithium-ion battery infrastructure projects in North America are being put on hold or scaled back due to slowing EV sales and reduced government subsidies.
• PMT Resources' Spodumene Project: Eckleston dismisses PMT Resources' spodumene feasibility study in Quebec as "totally excess to requirements," given the existing oversupply and the potential for cheaper salar lithium projects to emerge. He also notes that the proposed 5.5% spodumene concentrate is below the industry average of 6%.
• Salar Lithium Dominance: Salar lithium projects are significantly cheaper to produce than hard rock lithium (spodumene), making them more competitive and potentially rendering underground spodumene producers obsolete.
• Weak EV Demand: Demand for EVs is described as "sloppy," particularly in the global south, where governments are not providing subsidies and there is little interest in EVs.
• Affordability of EVs: Eckleston argues that EVs remain unaffordable for the working class and lower-income groups, even with potential trickle-down effects from the secondhand market. The short lifespan of EV batteries (around eight years) makes secondhand EVs less attractive compared to internal combustion engine vehicles that can last much longer.
• Protectionism in the EU: Politicians in the EU are resisting the influx of cheap EVs from China and India, preferring to promote domestically produced (e.g., German-made) EVs, which are likely to remain unaffordable for many.

Conclusion

The discussion highlights a complex and dynamic global economic and mining landscape. The gold price correction is attributed to a confluence of factors, including the cyclical nature of markets, potential geopolitical de-escalation, and concerns about the US economy. The Argentine economy faces significant challenges despite President Milei's efforts at fiscal discipline, with consumer spending severely impacted by high living costs. In the critical minerals sector, there are concerns about oversupply, particularly in lithium and rare earths, driven by a combination of market exuberance and government funding initiatives that may not be strategically sound. The US is attempting to revitalize its domestic mining industry, but questions remain about the effectiveness and focus of its funding strategies. The lithium market is particularly precarious, with a projected oversupply and weakening EV demand posing significant risks to new projects.