Articles in Category: Investing Hedging

Global stock markets continue to rise as we noticed last month. Stock markets have already made up for their losses following the U.K.’s decision to leave the European Union.

Two-Month Trial: Metal Buying Outlook

This recovery suggests that investors are turning more positive on the health of the global economy, which bodes well for industrial metals demand growth.

The Chinese stock market ETF hits a nine-month high. Source: MetalMiner analysis of @Stockcharts.com data.

The Chinese stock market ETF hits a nine-month high. Source: MetalMiner analysis of @Stockcharts.com data.

This is especially true when China’s stock markets rally. China’s stock market is possibly the best benchmark for China’s economy or at least investors’ sentiment about the Chinese economy. The slowdown in the Chinese economy (weak demand with too much capacity) explains why industrial metals peaked in 2011.

China’s stock market bottomed out earlier this year (coinciding with a bottom in metal markets) thanks to China’s stimulus measures that fueled demand growth. Chinese shares have risen rapidly this month to the highest levels in nine months as investors expect its central bank to ease monetary policy again.

Caixin’s PMI measure of manufacturing in China moved above the boom-bust line of 50 last month, for the first time since early 2015 while China’s Q2 GDP growth came at 6.7%, beating the market’s expectations.

Industrial Metals Continue to Climb

Industrial Metals ETF rises to a 13-month high. Source: MetalMiner analysis of @Stockcharts.com data.

Industrial Metals ETF rises to a 13-month high. Source: MetalMiner analysis of @Stockcharts.com data.

Not surprisingly, the trend in industrial metal prices looks pretty similar to China’s stock market. The recent rally in global stock markets, particularly in China, favors a continuation of this year metals’ bull market.

Free Download: The August 2016 MMI Report

Some industrial metals have benefited from a bull narrative of supply shortfall this year but, on top of that, they have also benefited from higher demand coming from China which is being reflected in the surge in Chinese imports this year.

After a gap of 30 years, the London Metal Exchange is, in collaboration with the World Gold Council, getting back into precious metals. Not just because it sees an opportunity, but because the industry is in desperate need of an efficient and professional marketplace following the departure of principal banks from London’s Gold Fix in the wake of the Libor scandal and suggestions the Gold Fix could be manipulated.

Free Download: The July 2016 MMI Report

The LME announced this week it will launch centrally cleared gold and silver contracts on a platform called LMEprecious in the first half of next year, followed by platinum and palladium.

Gold bars

Gold will trade on the basis of London good-delivery 99.5% bars in 100 ounce lots. Source: Adobe Stock/misunseo.

According to Bloomberg, the new contracts are designed to complement London’s $5 trillion over-the-counter gold and silver market and will include contracts for spot, daily and monthly futures, options and calendar spread contracts, according to the statement.

Who’s Got the LME’s Back?

Trading house OSTC and banks Goldman Sachs Group Inc., ICBC Standard Bank Plc, Morgan Stanley, Natixis SA and Societe Generale SA will co-own the LMEprecious platform and will act as liquidity providers and some 30 firms have expressed a desire to be engaged from the initial offering. Read more

If you want a succinct analysis of activity or developments on the LME you have no further to look than posts by Thomson Reuters columnist Andy Home.

Two-Month Trial: Metal Buying Outlook

For years Home has bought clarity to the wider metal community around the goings on at London’s metals market. Often tinged with a certain witty tone, his observations are rarely off the mark. His latest article is no exception, reviewing the thorny question of how to justify the high cost of storing metal in a London Metal Exchange warehouse and the options the LME has to tackle what nearly all stakeholders agree is a long-running problem fraught with the risk of unintended consequences and the potential for legal challenges in multiple jurisdictions.

For a wider review check out the article link, but, in short, the conclusion is the LME’s preferred option is likely to be a rent cap. The alternative is changing the contract to free-on-truck, essentially wiping out load-out charges, a so-called nuclear option. It would have been fraught with risk of litigation under the multiple legal jurisdictions across the LME’s network.

Capping Rent: What is it Good For?

So, what would a rent cap do? In the short term, nothing. LME rents are so far above off-market rates the probable move to cap rent isn’t going to attract metal back into the LME system anytime soon. That, apparently, is part of the attraction. A rent cap does not constitute a dramatic change in the economics of warehouse operators’ business models.

However, the extent to which it does attract metal back in the future can only be a good thing for the LME and the market for each individual metal on the LME system becoming more visible as its movement can be tracked and gauged.

When the metal is off-market, it is invisible and large stock movements are probably occurring, with consequences for prices but with no way for the wider market to measure or understand those consequences. It may even have been driven in part by off-market movements of inventory, but we have little or no way of knowing if buy/sell trades on the LME are related to physical metal sitting in warehouses or are simply paper transactions.

Transparency is information and, for investors and traders, information is everything. Any move the LME makes that encourages financiers to store their metal in the LME system is a good thing. To remove the distortion that queues created is an added benefit that has, for the time being, largely already been achieved and was always a symptom of the financier’s game, anyway, not a direct cause of high physical delivery premiums.

Free Download: The July 2016 MMI Report

The LME’s efforts to control their warehouse operators’ activities have been going on since the market started. This is yet one more development in that ongoing process.

Global stock markets are finally showing some strength after a difficult period of almost two years when investors had a hard time making money off stocks. Following the U.K.’s decision to leave the European Union, global stock markets fell sharply but the sell-off didn’t last very long.

Free Download: The July 2016 MMI Report

The fast recovery following Brexit is very encouraging and it suggests that investors are turning more positive on the health of the global economy.

U.S Markets Make New Highs

S&P Index makes all time highs. Source:MetalMiner analysis of stockcharts.com data

The S&P 500 Index makes all time highs. Source:MetalMiner analysis of @Stockcharts data.

In the chart above, we see the S&P 500 index making an all-time high this week after the index had struggled for almost two years. Rising stock markets don’t necessarily mean rising metal prices, but it’s a good sign. Read more

The U.K.’s decision to leave the E.U. hasn’t really scared investors away from industrial metals. The metal complex continues to rally. As we explained in a webinar yesterday, Brexit had little to no impact on the supply and demand dynamics of industrial metals.

Two-Month Trial: Metal Buying Outlook

On the demand side of the equation, it is — not the U.K or even Europe — that is the world’s biggest consumer of industrial metals. Supply cuts amid low prices and this year’s boost in Chinese demand for industrial metals, thanks to stimulus measures, continue to be the key factors to watch. In this post we’ll look at the recent bullish price moves of individual base metals that appear to confirm that the bull market that we identified earlier this year is for real. In addition, we’ll look at the recent improvement in investors’ sentiments about China, which favors rising metal prices.

Aluminum Hits a One-Year High

3M LME Aluminum Hits a 1-year high

Three-month LME aluminum hits a one-year high. Source: Fastmarkets.com

Aluminum overcapacity is still an issue. In June, China and the U.S. failed to reach an agreement on how to address excess global aluminum capacity. But that hasn’t stopped prices from rising. On Tuesday, aluminum prices hit a one-year intraday high. Read more

If at first you don’t succeed try try again, the old saying exhorting stubborn determination goes, and so it seems the case for metals consumers who believe they have been unfairly forced to pay higher metal costs than should have been the case.

Two-Month Trial: Metal Buying Outlook

On this occasion, I speak not of aluminum consumers but of those buying its sister metal zinc. Last year a case for monopolistic and anti-competitive behavior was brought against the trading arms of JPMorgan Chase, Goldman Sachs and Glencore under antitrust law in New York citing the Sherman Act Section 1, and 2. Read more

Zinc prices are back above $2,000 per metric ton, their highest level in almost a year. The metal has gained over 25% since the start of the year, defying other metals such as copper, nickel or lead, which have barely moved up this year, amid overcapacity concerns.

Two-Month Trial: Metal Buying Outlook

We noticed zinc’s potential earlier this year and markets gave enough reason for buyers to place forward buys over the past few months at lower prices.

3M Zinc climbs above $2000

Three-month zinc climbs above $2,000. Source: FastMarkets.com.

Zinc investors have been drawn in by a narrative of mine closures and a resulting tightening of the supply chain. As the zinc prices weakened over the past three years, more than 1.5 million mt of mine capacity was either idled or closed permanently.

Free Download: The May 2016 MMI Report

These closures were further exacerbated when Glencore announced its plans to suspend 500,000 mt of production last October. Although many people called for a tight market in previous years, in 2016 it really seems to be happening while the development of new mines is being restrained by limited capital to invest in new projects.

Falling LME Stocks

1 year LME Stocks levels. Source: kitcometals.com

One-year LME Stocks levels. Source: kitcometals.com

Another driver supporting the price action is the ongoing decline in LME stocks. These currently stand below 400,000 mt, the lowest level since 2010 and down by almost 20% since the start of the year. Read more

I don’t know if any of you have been following the Sky Atlantic series “Billions” — it may be screened here in the U.K. later than the U.S. and is already history stateside — but after the first two episodes it is following an intriguing if well-worn path of the demon hedge fund manager pitted against the flawed but public-serving attorney general. Echoes of the big short and other films demonizing hedge funds come to mind, but it’s well done all the same.

Two-Month Trial: Metal Buying Outlook

This is not all Hollywood, or wherever Sky films its TV series, though. In the real world, we are seeing the impact of unbridled and largely unregulated hedge funds manipulating the market and our purchase costs, our cash flow, and, ultimately, our profitability every day. Read more

Tin and zinc were the base metals with the most bullish outlook this year. But tin’s outlook worsened after Indonesian tin exports recovered in April.

Two-Month Trial: Metal Buying Outlook

That leaves zinc as the favorite child among base metals both in terms of fundamentals and price performance this year.

Zinc production - usage

Zinc production – usage. Source: MetalMiner.

According to preliminary data recently compiled by the International Lead and Zinc Study Group (ILZSG), the global market for refined zinc metal was in surplus by 42,000 metric tons over the first three months of 2016 compared to a surplus of 143,000 mt over the same period in 2015. The numbers suggest that the metal is slowly moving into deficit territory. Indeed, that’s what the ILZSG forecasts. Read more

After scoring impressive gains earlier this year, gold prices retreated in May.

Free Download: The May 2016 MMI Report

The U.S. dollar strengthened amid new expectations that the Federal Reserve might be more aggressive than expected in raising interest rates. As we can see in the chart below, recent strength in the US dollar pulled gold down in May.

Gold (in yellow) weakens in May as US dollar index (in green) rises

Gold (in yellow) weakens in May as US dollar index (in green) rises. Source: @StockCharts.com.

Higher rates in the U.S. usually strengthens the dollar, which is bearish for dollar-denominated commodities, like gold. Moreover, higher rates make it harder for gold to compete as an investment against debts that yield interest. Finally, fears that the global economy is heading into recession have momentarily waned, which didn’t help gold in May.

The recent pullback in gold prices seems normal after the big run seen in Q1 when  we suggested that gold would need some time to digest those gains. So what could bring the bullish momentum back to gold?

Definitely not physical demand. Gold is the only commodity wherein physical annual demand is only a tiny fraction of total supply available and shortages of gold caused by physical demand never happen. Gold investors should pay attention to other factors:

Potential Panic in Stock Markets

Although stock markets stopped the bleeding in May, there is no guarantee that the worst has passed. Indeed, so far we are just witnessing choppy action. U.S. stock indexes have shown only back-and-forth action for more than a year now. This market action is typical of a market top. The smarter investors start to sell, while the not-so-savvy investors keep buying. This creates hesitation followed by up and down moves and some sharp declines.

NYSE Composite Index acting like in 2007’s top. Source: @StockCharts.com

NYSE Composite Index acting like 2007’s top. Source: @StockCharts.com.

Investors are still skeptical about China’s efforts to change, and with huge debts built up a Chinese recession would have global repercussions. This could trigger a significant sell-off in U.S. equities which, in turn, could bring some safe-haven money back into gold.

U.S. Dollar

Fed officials earlier this year warned that global economic and financial uncertainty posed risks to the domestic economy which justified a slower pace of rate hikes. However in their meeting at the end of April, the Fed said that those risks had receded, keeping its options open for a rate increase in June.

Two-Month Trial: Metal Buying Outlook

However, global uncertainties are still there and it’s yet to be seen if the Fed will actually increase rates two or three times this year as markets now expect. Now that expectations on future rate hikes are high, if they don’t materialize the U.S. dollar could get hit significantly. The dollar might have risen in May on new Fed comments but those comments are yet to be proven by any real actions.

What This Means For Metal Buyers

Gold prices pulled back in May but it’s too early to turn bearish on gold. Global stock markets are still troubled and the Fed has yet to prove those promised rate hikes. Gold buyers should keep a close eye on these markets.