Articles in Category: Exchange Traded Funds

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This afternoon in metals news, London copper reached its highest price since late 2014, exchange-traded funds tracking palladium are losing cash and one analyst looks at how high zinc can go.

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LME Copper Keeps Rising

LME copper hit a three-year high Tuesday, lifted by strong Chinese steel prices and positive news from the mining sector, Reuters reported.

LME copper soared to $6,642.50 per ton, its highest since November 2014.

What’s the Deal with Palladium ETFs?

According to a Bloomberg report, investors have made quite a bit of money on palladium this year, yet ETFs that track the metal are losing cash, fast.

Why?

“The explanation for the outflows lies in part in the scarcity of physical palladium and a robust borrowing market that has developed among users and speculators,” the Bloomberg report states.

According to data compiled by Bloomberg, more than $49 million has flowed out of the two main palladium ETFs in the U.S. and Europe (the ETFS Physical Palladium Shares and the ZKB Palladium fund) through Aug. 21 of this year.

The Zinc Ceiling

Like copper, zinc has also had a record-setting time, recently hitting a high not seen in a decade ($3,180.50).

On Monday, Reuters’ Andy Home wrote about just how high zinc can be expected to go.

“But right now the LME zinc market is bubbling away with stocks falling and spreads tightening,” Home writes. “Volatility seems assured but can zinc return to the heady days of late 2006/early 2007, when the price peaked out at $4,580?

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The Chinese yuan weakened on Monday afternoon after its midpoint was set at its lowest level in half a year.

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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.

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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.

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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.

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The increase comes despite lower output in top exporter Saudi Arabia and this week’s OPEC agreement in Algeria to limit supply to support prices.

At Wednesday’s meeting, the Federal Reserve left interest rates unchanged and officials lowered the outlook for rate increases in the coming years.

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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.

Industrial Metals ETF pulls back in May and recovers in June

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.

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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.

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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.

Free Download: The June 2016 MMI Report

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.

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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.

Gold prices jumped this week, extending their best start to a year in more than 30 years, the Financial Times reports.

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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

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

After a disastrous year in 2015, industrial metals started off on the right foot in 2016. Indeed, every single base metal is up in price on the year-to-date.

Free Download: The March 2016 MMI Report

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

Industrial Metals ETF - Price rallies during bear market

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.

Oil prices rally since February

Oil prices rally since February. Source: @StockCharts.com.

Moreover, oil is an asset closely followed by commodity investors. Falling oil prices make investors move away from commodities and, of course, industrial metals. Finally, the latest recovery in oil prices has caused oil-exporting countries such as Russia and Canada to strengthen their currencies against the US dollar. Therefore, higher oil prices contributed to a weaker dollar these past few weeks as we’ll explain soon.

As we just reported in our latest MMI, Saudi Arabia and other powerful OPEC members are reportedly discussing how to boost oil prices to $50 per barrel. Despite reports of a Russia and Saudi Arabia-approved production freeze, however, other non-OPEC nations such as Iraq still have not committed to cutting their own oil production. New production from Iran has entered the market at a much lower pace than most expected, but there is also good reason to believe Iran will ramp up production gradually as it deals with the nuances of re-entering global oil trading.

Similarly to what we see in base metals, it’s not possible to know if this oil price rally is sustainable or not. What is true is that we’ve seen oil prices bouncing in previous years, only to then see them slump so we need more evidence to believe oil prices will continue to rise. What oil prices do from now will have a huge impacts on metal prices.

Did the US Dollar Bull Market Just End?

US dollar index moving sideways for over a year

The US dollar index moving sideways for over a year, Source: @StockCharts.com.

Base metals as commodities move in opposite directions to the dollar. In Q4 of 2015, a rising US dollar contributed to the slump in base metals. However, some factors have made the dollar weaken this quarter, helping push metal prices up.

As explained above, a recovery in oil prices contributed to a weaker dollar this quarter. Also, the Euro is gaining against the dollar after the European Central Bank recently announced that it probably won’t lower interest rates more.

The dollar index (shows the performance of the dollar against a basket of currencies) has traded within main support and resistance levels (red lines in chart above) for over a year. The dollar might be topping, but it’s to early to say that. We would to see if the index breaks below support levels to call for the end of the dollar’s bull market. If that happened, we would be more inclined to call a sustainable rebound in metal prices.

China: No Signs of Rebound

Shanghai stock market composite index

Shanghai stock market composite index. Source: @StockCharts.com.

Another big factor that affects the price performance of industrial metals is China. For a sustainable rally in industrial metals we’d like to see a recovery in China, but we haven’t seen that yet. That could change but, so far, it makes the rally in base metal prices a bit suspicious. Investors’ sentiment on China hasn’t become bullish yet, at least we see that reflected in the performance of China’s stock market, which is hovering near the lows recorded in January.

Chinese February imports hit a new 6 year low

Chinese February imports hit a new 6 year low in February. Source: TradingEconomics.com.

Fundamentally we don’t see signs of a turnaround, either. Indeed, if anything fundamentals are signaling more choppiness ahead. Recently, China reported a large drop in exports since the beginning of the financial crisis, with February exports down 25% year over year, confirming weak global demand which will likely be a drag on China’s economic growth in 2016. Even more worrisome for commodities might be the slump in imports. China’s imports in February fell to the lowest levels in six years, confirming weak demand in China.

Is it Now a Good Time to Buy Forward?

Well, that depends on what type of buyer you are. If you are a bottom picker then you are probably tempted to buy large quantities at these low prices. However, picking bottoms is easier said than done and it’s hardly ever a good strategy.

At MetalMiner, we always say the right moment to start buying up/hedging is at those points where there is a high probability of a price increase, and that is when the market gives real clues that the prior downtrend is over and a new uptrend is forming. Although there are glimmers of optimism in the latest metal price trends, there is still a great deal of confusion about whether the drivers of recent price increases can continue to push them higher. We’d like to see a breakdown in the US dollar, further strength in oil prices and signs of a turnaround in China to call this rally in metal prices a bull market.

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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.

Free Download: The March 2016 MMI Report

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?

Euro Index rose after ECB conference

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.

US Dollar Keeps Weakening

US Dollar Index fell after ECB conference

The US Dollar Index fell after the ECB conference. Source: MetalMiner analysis of @StockCharts.com data.

Meanwhile, the dollar index fell sharply as the euro rose. A weaker dollar is bullish for base metal prices. In February we already saw strength in the base metal complex thanks to a falling dollar.

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The interest rate policies that world banks take over the next few months will have tremendous repercussions on currency markets. This is important for metal buyers because industrial metal prices could catch a tailwind from a falling dollar. It’s still too early to call for a bear market in the US dollar but after its bull run in 2014, it has traded flat for almost a year now.

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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.

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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)

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