Kitco Copper demand....News Bites Fed has 'punished' the gold sector and Musk is 'wrong' on copper - Kai Hoffmann Ernest Hoffman Ernest Hoffman Wednesday March 22, 2023 12:01 Kitco NewsShare this article: Editor note Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here! (Kitco News) - The Federal Reserves rate hikes have squeezed the gold sector and the pain is likely to last for some time, according to Kai Hoffmann, founder of Soar Financial and CEO of Oreninc. What's the famous saying, Don't fight the Fed? We tried to fight the Fed, we tried to be smarter than the market, and we're being punished for it right now, Hoffmann said. It hasn't been positive overall. Hoffmann spoke with Kitco News journalist Ernest Hoffman at the recent PDAC 2023 mining convention in Toronto, where he said that the Feds aggressive rate hikes have taken an outsized toll on the mining sector and have also impacted investor interest in gold. I didn't expect it to be as important, the Feds rate hike cycle, to the juniors as it has become, he said, adding that the environment became very challenging immediately after the Feds first rate hike in March of 2022 and the wallets had been shut. Hoffmann said that inflation is still high, and appears sticky. I don't see it going away, and I don't see it going back to 2% anytime soon unless something drastic happens, and that's not on the horizon. So weve got to fight that negative sentiment for a while now. Hoffmann said the interest rate environment is also impacting the biggest gold producers, and is tamping down investment in the precious metal itself. It's tough because it'll drive the cost base up, and if gold doesn't move higher, the margins are shrinking, making gold investments just not lucrative, he said. Gold doesn't pay a dividend, the physical metal. The miners do, but if their margins are shrinking, they're cutting dividends, we've seen that already, and that's not positive. Why would you invest if your dividends are being cut, or you don't get any yield at all? He said that the potential Newmont-Newcrest merger is also weighing heavily on the sector, but if it goes through, it has the potential to change the fortunes of the juniors. As a junior mining investor, I still hope that the mega-merger between Newmont and Newcrest goes through, maybe at a higher valuation, he said. It means that more money might come back into the market. Let's assume it's a $20 billion takeover, that's money that could get reinvested into the sector, that's very positive. Try to allocate $20 billion in the mining space. That's a big chunk of change that needs to find a new home, and it won't just go to the majors. Some of it might trickle down all the way to the juniors and that has me positive. Hoffmann believes that egos and lower valuations are keeping mining executives and their boards from pushing ahead with beneficial mergers. If you were trading at a dollar last year you wouldn't accept a merger at 30 cents right now, he said. A lot of companies are sitting on that valuation gap right now, and boards are not approving terms. It just doesn't make any sense, and nobody wants to look like a loser. Hoffmann said that in the current environment, its not surprising to see interest move from precious metals into the base and battery metals. It's definitely trending towards the base metals right now, he said. Gold-copper projects are being loved by the market, it's just that optionality with copper as well. There will be a supply-demand gap at some point, with electrification and the goal of reaching carbon net-zero, you need copper. Lithium is the flavor of the month, that's where some of the money is going, that's what the numbers tell us. Fun fact, five out of the top 10 companies are lithium companies in terms of market cap right now on the TSX Venture. He also said the numbers are telling him Elon Musks confidence in the copper supply may be misplaced, which makes him very bullish on copper prices. I'm looking at the whole infrastructure, not just the batteries that you need copper for, but the whole infrastructure, he said. If you want to build superchargers around the globe, they need copper wiring to be added to the grid. Home storage is a big factor as well. And he talks about trucks and electrifying shipping fleets, and they need storage capacity, and copper is a big part of that equation. There's a lot of guesswork involved, and my guess is that he's wrong actually on it. I'd love to see the math behind it. Im happy to believe him if there's a case for it. To hear more of Hoffmanns predictions for mining and metals in 2023, watch the video above. By Ernest Hoffman For Kitco News Follow @KitcoNewsNOW Contact ehoffman@kitco.com www.kitco.com