Articles in Category: Investing Hedging

The U.S. dollar index, which tracks the buck against a basket of international currencies, hit a 15-month low this week.

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The fact that traders are not supporting the dollar above these levels is quite bearish for the currency.

Dollar Index Hits 15-month low

The U.S. dollar index hits a 15-month low. Source: MetalMiner analysis of @StockCharts.com data.

.There are three major factors that explain the weakness in the dollar:

  • Japan was expected to implement a fresh round of stimulus to weaken the yen to combat low inflation. However The Bank of Japan kept interest rates unchanged last Thursday.
  • Federal Reserve officials left interest rates unchanged at their meeting last week and remained ambiguous about raising rates in June. The Fed showed intentions at the end of last year to raise rates four times in 2016, that changed early this year and the prediction is now just two rate hikes. Recent weak U.S. growth data isn’t encouraging at all for the prospect of increased interest rates.
  • The rebound in commodity prices hurts the dollar, too. As commodity prices rise, the currencies of commodity exporting countries appreciate against the US dollar.

Gold Surges on Dollar Weakness

Gold prices (in yellow) rise as dollar index (in green) falls

Gold prices (in yellow) rise as dollar index (in green) falls. Source: @StockCharts.com.

The dollar weakens on higher commodity prices and commodity prices rise on a weaker dollar, the effect is reciprocal. One asset that is really enjoying the dollar’s weakness is gold. The yellow metal hit a new 15-month high this week as the dollar index hit a 15-month low. The correlation, gold-to-dollar, is way more reliable that any physical demand indicator of gold.

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Not only gold but all precious metals are rising as the dollar weakness. Silver also hit a 15-month high this week, while platinum and palladium rose to their highest levels in 10 and six months, respectively.

Industrial Metals Gain Traction

Industrial metal ETF rises on weaker dollar and Chinese stimulus

Industrial metal ETF rises on weaker dollar and Chinese stimulus. Source: @StockCharts.com.

Now, with a falling dollar and the demand side of the equation looking brighter thanks to China’s stimulus measures (at least until their effect lasts), industrial metals are enjoying a tailwind. It’s a great time for metal buyers to minimize their price risk exposure.

Markets are unpredictable. Picking a bottom is a difficult task as things can change quickly. However, for the first time since 2011, we are seeing enough positive signals to believe industrial metals might have bottomed out.

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A broad recovery might be underway and metal buyers should have a plan. “Commodity price risk” might become a highly popular Google search again.

Why is the picture turning bullish? First of all, the two main drivers of metal prices are finally giving some bullish signals for the overall metal complex.

CRB commodity index hits 5-month high

CRB commodity index hits 5-month high. Source: MetalMiner analysis of @StockCharts.com data.

The dollar has weakened since January, and it’s certainly showing no signs of strength. Second, and perhaps more importantly, the sugar rush of China’s not-so-mini fiscal stimulus, initiated late last year, has really picked up momentum in the first quarter. Read more

In the first two months of 2016, gold was the market’s MVP but, as we noticed in March, the silver price has started to play catch up.

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The gray metal recently hit a 10-month high after closing above $16 per ounce, while gold has traded flat over the past two months.

Silver hits 10-month high

Silver hits a 10-month high. Source @StockCharts.com.

Silver keeps outshining gold thanks to the same factor we pointed out in March: Oil prices making a comeback have boosted demand for silver’s industrial uses. Gold is not used nearly as much in cars, solar panels and gadgets as silver is.

Oil Holds Near $40 a Barrel

Oil manages to hold above $40-barrel

Oil is managing to hold above $40 a barrel. Source: @StockCharts.com.

Oil prices have, so far, successfully fought off bears when they were attacked earlier this month. Oil has a huge role in the world’s economy. Higher oil prices are giving relief to market participants who were worried by its continuous fall. That helped metal prices rise in Q1. Silver’s price strength is clearly coming from its economically-sensitive role as an industrial metal.

Stock Market Rally Remains Intact

S&P 500 rising non-stop. Will it overcome last year's levels?

The S&P 500 rising non-stop. Will it overcome last year’s levels? Source: @StockCharts.com.

Thanks, in part, to healthier oil prices global markets have been gaining since mid-February and while this rally lasts, money keeps rotating out of safe-haven assets such as gold and bonds. Silver is less impacted than gold in this way, and that also helps silver outperform it.

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Stock markets in the U.S. are acting particularly strong and, so far, they have avoided any price pullback. We will keep a close eye on stock markets and see if they can continue to go up from here as sellers could come into the market soon as prices approach last year’s levels.

Is Silver Set to Continue Gaining Against Gold?

The gold-to-silver ratio falling since March amid global stock market and industrial metals recovery

The gold-to-silver ratio has been falling since March amid a global stock market and industrial metals recovery.  Source: @StockCharts.com.

Not necessarily. But while the factors explained above keep moving in a positive direction, silver will continue to benefit. We’ll see if the rally in the base metals complex and the accompanying one in stock markets extends into Q2.

This week saw metal prices, particularly hot-rolled coil and cold-rolled coil steel, rally even as major steelmaker Tata Steel announced it was abandoning the U.K. market because of regulations and low prices.

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Markets can sometimes appear paradoxical that way. Steel-Insight’s James May elaborated that it’s actually curtailed supply that has helped prices increase here in the U.S. Bye, bye, oversupply!

Steel Prices Rally, Speculators Arrive

Another factor, at least for steel ingredient iron ore, was more trading activity in China as investors are looking for short-term returns rather than investing in iron ore long-term there.

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can't find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2

This steel plant at Port Talbot in South Wales, U.K., could close if Tata Steel can’t find a buyer. Even as steel prices increased last week. Source: Adobe Stock/Petert2.

Back here in the U.S., steelmakers are cautiously increasing prices of rebar and other products as the construction season begins in earnest in the East and Midwest, testing the waters of recent commodity price increases.

So, speculative buying, price increases despite demand levels that are still relatively flat and more supply shutdowns are all happening. Is it any wonder that Barclays is warning investors that commodities, overall, could experience a “rush for the exits?”

They’re not the only ones saying Q2 could be bad, either. Our own Raul de Frutos wrote that markets could change direction, big-time, in the next quarter.

Anti-Dumping 2: Electric Boogaloo

It also wouldn’t be a day ending on y, these days, either without mentioning dumping, dumpling. Was that too friendly? Sorry.

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My colleague, Raul, explained the effects anti-dumping duties have had on hot-rolled coil, cold-rolled coil and hot-dipped galvanized steel prices here in the U.S. Another investigation into phosphorous copper from South Korea was opened this week, too.

If you wanted an eventful week in steel, you got it.

Thanks to the momentary recovery in global markets, lead prices started on the right foot in March.

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However, prices lost steam recently as they neared resistance levels. Lead is finishing the month 2% down.

Lead struggles near $1900

Lead prices struggle to move above resistance levels. Source: MetalMiner analysis of FastMarkets.com data.

The latest figures showed that growth is cooling down in China’s vehicle market, raising a caution flag. China sold about 1.38 million cars in February, down 1.5% from a year earlier, capping off a two-month sales period that is traditionally affected by the Lunar New Year.

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February represented the first decline in six months. Last month we pointed out that the 7.7% growth in January could shrink in the following months as China’s weak economic situation could hurt consumer confidence. Also, the growth seen in previous months came thanks to a 50% tax cut for small cars, serving as a stimulus measure rather than a sustainable, long-term demand increase.

What This Means For Metal Buyers

Lead prices are lacking upside momentum despite the momentary recovery in commodity markets. Lead prices are holding well, but for them to make a significant upside move we would probably need to see further strength in commodity and Chinese markets. A possible pullback in these markets could bring lead prices down in Q2.

A note issued by Barclays recently told customers that, although investors have been attracted to commodities as one of the best performing assets so far in 2016, returns are unlikely to be sustained in the second quarter of the year.

Free Download: The March 2016 MMI Report

“This could make commodities vulnerable to a wave of investor liquidation that we estimate could, in a worst case scenario, knock as much as 20-25% from current price levels,” the note to investors said.

Copper and Oil Under Pressure

This would take the price of oil back to the low $30s per barrel and copper to the low $4,000s per metric ton, the analysts said. Channeling its inner bear, Barclays said that the recent price appreciation does not seem to be founded in improving fundamentals, and that the key markets already face overhangs of excess production capacity and inventories.

Net flows of investment into commodities totaled more than $20 billion in January and February, the strongest start to a year since 2011.

“The kind of commodity investment that is taking place currently is not the long-term buy-and-hold strategy for portfolio diversification and inflation protection that underpinned the huge inflows of the previous decade,” the Barclays note said. “It is much more short term and opportunistic, as is clear from the relatively short holding period for (exchange traded product) buyers in oil. Many have been liquidating on the recent move up in prices, having held their positions for only 5-6 weeks.”

The UK investment bank goes further to say both copper and Brent crude could fall by as much as a quarter of their current positions if a mass selloff occurs. The following chart illustrates the precarious position that both commodities find themselves due to recent speculation.

FT_Commodities_scorecard_First_quarter-bar_chart_550_032816

UBS Warns of Volatility

This could easily be dismissed as a the overly cautious forecast of a single investment bank, but it’s not just Barclays. UBS is also warning its investors about short-term swings and, in some ways, is going beyond the Barclay brothers’ analysis in telling them that commodities may be more susceptible to chaotic swings than ever before. Read more

Chinese mutual funds are turning to metals and other commodities to create wealth for investors and Brazil is the latest producer-nation to cut back steel production.

Free Download: The March 2016 MMI Report

Chinese Mutual Funds Bet on Commodities

China’s mutual fund industry is pushing to develop investment products linked to local commodity futures, betting that plans to fight chronic oversupply in the country’s mammoth resource sector will drive up prices for raw materials.

Brazil Will Cut Steel Production

Brazil will produce 32.9 million metric tons of raw steel in 2016, 1% less than last year, as the sector wrestles with a slump in demand amid the worst recession in a generation, the Brazil Steel Institute said on Monday.

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Steel sales for the year are expected to fall 4.1%, to 17.4 mmt BSI President Marco Polo de Mello Lopes told reporters at the industry association’s headquarters in Rio de Janeiro.

With the stock market in a funk and property prices rising fast in China, some Chinese investors are turning to iron ore futures trading to make a fast profit.

Free Download: The March 2016 MMI Report

The chart below, from Westpac, shows the daily traded volume of Chinese iron ore futures on the Dalian Commodities Exchange back to when the market first came into existence in late 2013.

Westpac_Dalian_iron_ore_futures-550_032816

Day traders have reached a new speculative higher on Dalian iron ore. Source: Westpac.

It’s not the first time the Chinese market was swayed more by sentiment than reality.

What’s Really Going On?

Monitoring daily price movements in the domestic Chinese market (sign up for membership in our IndX if you would like to receive daily prices) gives MetalMiner the opportunity to keep a finger on the pulse of the country’s metals market, so when our editor, Jeff Yoders, remarked on the fluctuating daily prices for iron ore and coal on the Dalian exchange last week, we thought some of our readers may likewise by intrigued to know what is going on. Read more

Major U.S. airlines have abandoned hedging their fuel costs and home sales unexpectedly fell in February.

Airlines Drop Hedging Fuel Costs After Losing Big

More airlines, including some of the world’s largest, are backing off spending billions of dollars to hedge against rising fuel costs after getting burned by low oil prices, the Wall Street Journal’s Susan Carey reported.

Free Download: The March 2016 MMI Report

The speed of the 58% plunge in oil prices since mid-2014 has caught the airline industry by surprise and turned its hedging measures into big money losers.

Delta Air Lines Inc., the U.S.’s No. 2 airline by traffic, racked up hedging losses of $2.3 billion last year, and United Continental Holdings Inc., the No. 3 carrier, lost $960 million. Top-ranked American Airlines Group Inc. abandoned hedging in 2014 and enjoyed cheaper fuel costs than many of its rivals. Delta and United said they have no hedges in place for next year.

Existing Home Sales Fall Sharply

U.S. home resales fell sharply in February in a potentially troubling sign for America’s economy which has otherwise looked resilient to the global economic slowdown.

Free Sample Report: Our March Metal Buying Outlook

The National Association of Realtors said today existing home sales dropped 7.1% to an annual rate of 5.08 million units, the lowest level since November.

Sales have been volatile and prone to big swings up and down in recent months following the introduction in October of new mortgage regulations

Our MetalMiner IndX saw positive growth last month in the Aluminum, Copper and Construction sub-indexes and the Global Precious MMI saw a 10% increase. Even the metals that have price increases held their value from February.

MM-IndX_TRENDS_Chart_March2016_FNL-TOPVALUE100
While the underlying factors boosting the MMI — Chinese steel production cuts and renewed
demand for iron ore and other raw materials — may help the supply/demand picture, we’d still like
to wait for more evidence of a sustained turnaround before calling this a bull market.

The oil price recovery was also a big factor in February. 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.