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COLUMN-Gold may keep Australia the "lucky country" if commodity exports stumble: Russell

Clyde Russell

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* GRAPHIC: Australian commodity exports by value: https://tmsnrt.rs/2mgaTmE

LAUNCESTON, Australia, Sept 30 (Reuters) - Is Australia the ultimate commodity hedge?

When looking at the country's natural resources the focus tends to be as its status as the world's biggest exporter of iron ore and liquefied natural gas (LNG), and its competition with Indonesia as the top shipper of coal.

But this ignores that Australia is also the world's second-largest gold producer after China, giving its export earnings from resources a hedge should growth commodities start to suffer as a result of a slowing global economy.

In effect, Australia is the also world's largest gold exporter, given China is still a significant net gold importer.

The importance of gold to Australia was underlined in the latest Resources and Energy Quarterly, released on Monday by the Department of Industry, Innovation and Science.

The report forecast earnings from gold exports to rise to A$25 billion ($16.9 billion) in the fiscal year that started on July 1, up 32% from A$19 billion in the year that ended on June 30.

That A$6 billion increase is an exact match to the decrease expected in earnings from exports of thermal coal used in power plants, with the value forecast to drop to A$20 billion in 2019/20 from A$26 billion in 2018/19.

This would make gold Australia's fourth-most valuable commodity export, behind iron ore, LNG and coking coal used in steel-making.

It's also interesting to note the underlying assumptions used by the government forecasters, because they may be on the somewhat cautious side.

The gold price is forecast to average $1,470 an ounce in the 2019/20 fiscal year, which is below the current spot price of $1,496.82 in early Asian trade on Monday.

There is obviously no guarantee that gold will maintain its current price level for the forecast period, but currently most market analysts see the risks being to the upside.

Gold tends to rally in periods of economic uncertainty as investors seek a safer haven than equities or bonds.

Lower interest rates in the United States are also usually supportive for the precious metal.

It's also likely that the current geopolitical uncertainty caused largely by the policies of U.S. President Donald Trump will continue for some time, again supporting gold.

GEOPOLITICS, TRADE

Tensions in the Middle East between the United States and its ally Saudi Arabia on the one hand, and Iran and its proxies on the other, show little sign of easing as yet, which may keep crude oil markets somewhat nervous.

The trade dispute between the United States and China continues to follow its established pattern of escalation, followed by failed negotiations, followed by threats, followed by some hopeful comments before more threats and then once again escalation of tariffs and perhaps now even financial measures.

There is little genuine sign that the two sides are even close to some kind of breakthrough, notwithstanding the near universal hope of business leaders and governments that the situation can be resolved.

For as long as the Trump administration remains a somewhat rogue actor on the world stage, gold is likely to be a beneficiary.

This means the Australian government's forecast for the gold price may be too cautious.

But for every silver lining there is a cloud. If the gold price forecast is too low, it's likely that the forecasts for other commodity exports may be too bullish.

In some ways, gold is the anti-commodity commodity, working as a contrarian indicator to the other natural resources that are more geared toward global economic growth.

The Australian government expects iron ore prices to average $70 a tonne in 2019/20, which seems reasonable given the current price for benchmark 62% ore <MT-IO-QIN62=ARG>, as assessed by commodity price reporting agency Argus, is $91.70 a tonne.

But if the global economic outlook continues to deteriorate, it will take a massive stimulus effort by top importer China to keep iron ore around those levels.

Throw in the likely return of full volumes from Brazil, the world's second-largest exporter, and the risks are that increased supply also pressures iron ore prices.

LNG prices are forecast A$12 a gigajoule, which works out to about $7.62 per million British thermal units (mmBtu), which is higher than the current spot price <LNG-AS> of $5.75.

However, much of Australia's LNG is sold under long-term contracts linked to the price of crude oil, meaning producers receive prices higher than those in the spot market.

Nonetheless, slowing global economic growth and new LNG supply coming on line is also likely to put downward pressure on Australia's second-most valuable commodity export.

Ultimately, Australia can hope to maintain its reputation as the "lucky country" by hoping that the upside in gold is almost enough to offset the possible downside in other commodities. (Editing by Christian Schmollinger)