Articles in Category: Investing Hedging

Over the past few days, several analysts have said the recent metals rally was purely speculative, without a fundamental justification for the price swings. But what’s speculation?

Two-Month Trial: Metal Buying Outlook

Speculation is the act of trading an asset, with the risk of losing part of all of the capital invested, in the expectation of a substantial gain. For traders to trigger a price rally there must be a fundamental reason justifying that the risk of loss is more than offset by the possibility of a significant gain; otherwise, there would be very little motivation to speculate. So, in reality, every price movement, especially in commodity markets, is speculative.

Iron Ore and Steel Rebar Prices Fall

Steel and iron-ore futures traded in China have gone into sharp decline, reversing the huge price run-up seen this year. Analysts believe that the rally has retraced because of new measures taken by exchange officials. In late April, Chinese exchanges raised margin requirements on iron ore, hot-rolled coil and steel rebar. That is, they raised the amount that investors need to deposit to trade these assets.

Steel-rebar and iron ore prices year to date

Steel rebar and iron ore prices year to date. Source: Wind Info.

But are higher margins a reason for a price fall? I don’t think so. Higher margins only mean that investors enjoy less leverage, that’s not a justification for a sustainable decline in prices. Higher margins can reduce the volume traded (as investors need to deposit more money per trade) but that doesn’t necessarily cause a change in price direction. Read more

A major fight between the OECD and the IEA might finally lead the organizations to separate. Big, multinational commodity houses are all seemingly refocusing on their core businesses.

OECD and IEA Might Separate

The West’s energy watchdog, the International Energy Agency, faces a possible legal split from its parent body following decades of friction and fresh disagreements over cooperation with China, a document seen by Reuters shows.

Two-Month Trial: Metal Buying Outlook

Any divorce from the Paris-based founder, the Organization for Economic Cooperation and Development, might complicate funding and confuse governance of the IEA, whose role includes coordinated stocks releases to address global oil shortfalls.

Big Commodity Trade Houses Change Strategy

Commodity trade houses are going back to their roots and focusing on what they know best, whether it’s energy, metals or agriculture, while shedding peripheral activities.

Free Download: The April 2016 MMI Report

From the world’s largest independent energy trader Vitol‘s retreat from agricultural markets, to trade house Gunvor pulling out of metals and Archer Daniels Midland disposing of its chocolate and cocoa businesses, traders are concentrating back on their historically strong activities.

The Silver Institute released its “World Silver Survey 2016” Thursday, reporting both tightening supply and increaing demand for the precious/industrial metal.

Two-Month Trial: Metal Buying Outlook

According to the report, the silver market saw record demand in 2015, with the jewelry, coin and bar, and photovoltaic sectors posting new highs, helping to boost total silver demand to 1.17 billion ounces last year. Overall silver supply to the market was lower, led by the continued weakness in silver scrap sales. Last year’s supply and demand scenario led to the third successive annual silver market deficit, reaching 129.8 million ounces, more than 60% larger than 2014 and the third largest deficit on record.

You can install PV panels on our roof, collect a tax credit and bring down your own electricity bill. A wind turbine? Not so much. Source: Adobe Stock/rob245.

More silver panels this year, but less silver per panel. Source: Adobe Stock/rob245.

“We expect the silver price to average $15.90 this year and that’s going to be defined by an overall upward trend,” said Erica Rannestad, precious metals demand senior analyst for Thomson Reuters GFMS, who contributed to the report. “We’ve seen prices reach highs last week and we expect that trajectory to continue through the 4th quarter of this year.”

Rannestad said in an interview that the bargain buying of the last two to five years, in the silver market, has largely given-way to more sophisticated investing as a weak dollar has heightened the white metal’s demand. Read more

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

Two-Month Trial: Metal Buying Outlook

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.

Free Download: The April 2016 MMI Report

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.

Two-Month Trial: Metal Buying Outlook

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.

Free Download: The April 2016 MMI Report

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.

Free Sample Report: Our April Metal Buying Outlook

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.

Free Download: The March 2016 MMI Report

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.

Free Sample Report: Our March Metal Buying Outlook

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.

Free Sample Report: Our March Metal Buying Outlook

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.

Free Download: The March 2016 MMI Report

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.

Free Sample Report: Our March Metal Buying Outlook

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.