China’s authorities sets the mark 0.87% or 594 points lower than last Friday, the biggest daily decline since late June in 2016. Traders are allowed to trade up to 2% either side of the reference point for the day.
The Hong Kong Interbank Offered Rate for offshore yuan, known as the CNH Hibor, plummeted to 14.05% from last Friday’s 61.33%, down 4,728 points.
The People’s Bank of China set the yuan midpoint at 6.9262, a sharp drop for the renminbi compared with Friday’s fixing at 6.8668.
China’s central bank does not allow the currency to move more than 2% from its daily fixing in onshore trade. While policymakers cannot closely control offshore trade of the currency, it usually remains relatively close to its onshore counterpart. Onshore, the dollar was fetching as little as 6.8679 yuan last week, compared with 6.9318 yuan at 9:54 a.m. today.
Investors are still giving platinum the cold shoulder and oil production likely hit its recent high in September. Oil likely hit an output record in September.
Platinum Still Not Trusted
Investors bruised by platinum’s dismal failure to capitalize on a five-month strike in 2014 are not convinced that stocks of the metal have shrunk enough to justify a return to the market, despite positive supply-side news this year.
Uncertainty over how abundant stocks of the metal are is continuing to curb investment interest in the metal, with holdings of platinum-backed exchange-traded funds (ETFs) falling to their lowest since mid-2013 this month.
Oil Likely Hit an Output Record in September
The Organization of the Petroleum Exporting Countries‘ oil output is likely to reach its highest in recent history in September, a Reuters survey found on Friday, as Iraq boosted northern exports and Libya reopened some of its main oil terminals.
This outcome suggests that slow economic growth and low inflation are forcing the central bank to rethink how fast it can move rates higher. But let’s get to the point: how will this decision impact metal prices? The key here is that interest rates impact the value of the U.S. dollar which has a huge impact on metal prices.
Higher rates mean higher borrowing costs, which usually make a currency more attractive to investors seeking higher yields than in other currencies. So, basically, higher rates domestically (or expectations of a rate increase) normally translate into a stronger dollar which leads to lower metal prices. This happened in May, when the U.S. dollar strengthened amid new expectations that the Fed would raise rates in June or July. Consequently, base metals fell.
The Industrial Metals ETF pulls back in May and recovers in June. Source: @StockCharts.com
However, in June, the dollar pulled back, as expectations for rate increases receded. A dismal May employment report, combined with concerns about the June 23 British referendum on whether to leave the European Union, made officials pause while they weighed when to raise rates. Now, although the Fed still sees two rate increases later this year, a greater number of officials see now one increase, rather than two.
The Fed’s Economic Pencil Sketch
These projections aren’t set in stone, but they do indicate how officials’ views are changing.The Fed doesn’t see rates going as high as it thought they would before and, if this trend continues, the dollar could continue to weaken which would support metal prices.
The ongoing slowdown in China’s economy; the so-called Brexit vote set for June 23 and the next European Central Bank meeting in Frankfurt will be factors to watch for clues on whether the Fed will increase rates in the near futures. So far, unless something turns around, we continue to see metal prices supported by a weak dollar.
While London Metal Exchange warehouse queues have all but disappeared, with the exception of Vlissingen in the Netherlands for aluminum and New Orleans for zinc, the even better news is physical delivery premiums have dropped back closer to historically lower levels and more importantly taken on a flat, stable pattern.
As Reuters’ Andy Home points out in a recent article, the reasons for the horrendous spike in physical delivery premiums last year were always contentious and, in reality, multiple in origin but arguably long load-out queues played a part, although we always maintained they were as much symptom as cause of a deeper malaise in the physical aluminum market.
Aluminum Premiums Easing
Still, the return to a steady $170-180 per ton level for the Midwest premium and a stable range of $90-120 per metric ton range for Japanese Port premiums is a welcome relief for consumers after the sky high levels of 2014-15 when Japanese rates hit $425 and the MW premium was well over $500. Read more
As gold continues to flirt with $1,300 an ounce, some major investors are making opposite bets on the investment metal in the SPDR Gold ETF.
Paulson or Soros Will Be Wrong About Gold
Gold bull John Paulson slashed his bets on bullion while billionaire investor George Soros and other big funds returned to the metal for the first time in years, filings showed on Monday, as prices staged their biggest rally in nearly 30 years.
New York-based hedge fund Paulson & Co., one of the world’s most influential gold investors, slashed its investment in SPDR Gold Trust, the world’s biggest gold exchanged-traded fund (ETF), by 17% to 4.8 million shares, Securities and Exchange Commission filings showed on Monday.
China’s Largest Private Steelmaker: We Need Even More Gov’t Support
Jiangsu Shagang, the listed unit of China’s biggest privately-owned steel producer, said on Monday the Chinese government should provide steelmakers with even more support in their efforts to export products and shift capacity overseas. China’s massive steel sector has come under growing international scrutiny, with foreign steelmakers accusing the country’s firms of flooding the global market with cheap, subsidized steel and driving them out of business.
Encouraged by a sharp fall in the dollar and a doveish stance by the Federal Reserve, the metal climbed 1% to $1,262.77 an ounce as the dollar fell over 2% against the yen after the Bank of Japan decided not to further ease monetary policy.
Source: Financial Times
Gold had continued a long decline last year from it’s peak in Q3, 2011, but along with all other metals it has rallied some 19% so far this year as investors have plowed back into gold-backed exchange traded funds, encouraged by a relaxation in the Fed’s stance on interest rates and, from that, the prospects for inflation in the medium term. Read more
But, is this price rally just another dead cat bounce or the start of new bull market? and, what factors do we need to watch for more clues?
Sharp Rallies Are Usual in Bear Markets
The Industrial Metals ETF – Price rallies during bear market (2011- today). Source: @StockCharts.com.
Since the commodity bear market started in the spring of 2011, we’ve had several price rallies in industrial metals (see the graph above), that made some people think that a new bull market was underway. It wasn’t. Sharp price rallies are not unusual in bear markets and, although base metals are showing strength, we need more evidence before confirming that this won’t be another bounce followed by further declines like we’ve seen before.
Crude Oil and Base Metals Move Simultaneously
The main driver causing metal prices to rally this quarter is the oil price recovery that’s been happening since February. Lower fuel prices have compounded the longest commodity slump in a generation as oil is also key input in the cost of producing industrial commodities. Read more
World central banks are under pressure to provide monetary stimulus and to keep interest rates low in response to volatile financial markets, low oil prices and a slowdown in China and emerging markets.
Japan’s central bank surprised markets in January when it lowered interest rates into negative territory for the first time in its history, as the country tries to fight deflation. Meanwhile, markets expect the Federal Reserve to leave short-term interests rates flat at their next meeting on March 15-16.
On Thursday, in a new conference, the European Central Bank said it would provide more stimulus measures including additional bond purchases and extremely cheap loans for banks. However, the bank also pointed out that it probably won’t lower interest rates more.
Stocks Down, Euro Up
How did the market react?
The Euro Index rises after the ECB conference. Source: MetalMiner analysis of @StockCharts.com data.
First, European stocks ended the day sharply lower signaling that investors were not impressed with the larger-than-expected stimulus measures. Second, the euro strengthened as the central bank said its emphasis would shift away from interest rates and toward other policy measures. Read more
The World Platinum Investment Council Ltd. (WPIC), an authority on the physical platinum investment market based in London, has brought out its sixth quarterly report appropriately entitled Platinum Quarterly Q4, 2015.
We don’t mind saying it’s a must for anyone remotely connected with or interested in the platinum market. Packed within the 22 pages of the report — produced for the WPIC by independent research house SFA (Oxford) — is an analysis of supply, demand and market trends that, with this sixth edition, builds up an unparalleled level of granular detail on market trends for this most interesting of metals.
What Drives Platinum Demand?
Speaking with MetalMiner, WPIC Director of Research Trevor Raymond threw additional light on the dynamics driving supply and demand for platinum as it reacts to its multiple roles as an industrial, jewelry, investment and green pollution-reducing product.
Just about every authority would agree the platinum market has been in deficit for a number of years, for any other metal this alone would have been enough to support prices, but platinum’s role as an investment product has ironically contributed to it’s price weakness since 2011.
Many had expected the miners’ strike in South Africa to constrain supply so that prices would rise, but a combination of significant producer inventory and a cooling appetite, generally, for precious metals as an investment product led to a net outflow of metal from what Trevor Raymond refers to as liquid-vaulted holdings.
Although ownership of such inventory is understandably opaque, the WPIC probably produces the best estimates of inventory, suggesting above-ground stocks have fallen dramatically in recent years, partiallly fueled by a misplaced investor perception that platinum prices should move in tandem with the wider precious metal market. Also, partially, by the perception that demand is heavily linked to growth in China. Neither of assumption is wholly correct.
Quarterly Platinum Market Report: Existing Supply
By the report’s estimation, inventory has fallen from 4.14 million ounces just a few years ago to 2.315 million ounces today. With the prospect this year of further labor unrest in South Africa over wage negotiations, and the closure of a mine shaft due to fire supply, is expected to reduce output by some 225,000 ounces with only producer stocks able to make up the shortfall, such inventory is likely to dwindle further.
To understand just how crucial South Africa is to the platinum supply market, this graph from SFA (Oxford) illustrates what a crucial role this increasingly unstable source plays, in spite of recently rising supply from Zimbabwe and relatively stable by-product supply from Russia that is linked more to Norilsk Nickel‘s production than sole platinum demand. The world remains heavily reliant on South African supply and, as a result, it is expected to fall in 2016.
Source: SFA (Oxford)
Supply, though, has recovered well since the 2014 strikes, rising 8% overall last year to 7.825 million ounces, mainly on the back of recovering supply from South Africa. But while primary supply increased last year, secondary supply fell as declining metal prices reduced recycling of both jewelry and auto-catalysts. Read more
The dynamic behind the rise in prices has been a heightened risk aversion and panic over… well, just about everything really. Without fear to drive demand, gold suffers from the cost disadvantage of storage and finance costs but without the corresponding income stream of dividends.
Fear Can Be a Great Gold Price Driver
With Japan becoming the latest country to offer negative interest rates, investors sitting on cash are figuring out the sums on gold carry costs. Adrian Ash, head of research at BullionVault, is quoted as saying: “Negative deposit rates in the Eurozone and Japan are now approaching commercial storage charges on physical bullion, while Swiss Libor and the Swedish Riksbank’s deposit rate already exceed even the higher fees of gold-backed exchange traded funds (ETFs).”
Are gold prices really going to keep rising? Source: Adobe Stock/Nikonomad.
The cheapest major ETF is the iShares Gold Trust, says Ash, which charges 0.25% per year, while the biggest gold ETF is the iShares SPDR, which costs 0.40%. “Commercial storage rates for large-bar gold are nearer 0.10%,” says Ash. Read more