Investing Hedging

After taking a 4-weak break in February, the US dollar has restarted its ascent, skyrocketing again in March. The index recently hit a new multi-year high.

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Meanwhile, the Euro has fallen to its lowest level in more than a decade. Continued friction between Greece and its EU and IMF creditors and sluggish economies are all impacting the Euro.

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The London Metal Exchange continues to move forward with reform of its warehouse rules even if, for those unfamiliar with the situation, the reform appears to be going at a glacial pace.

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The challenge the 138 year old exchange faces is primarily one of trying to balance competition law across the 37 international locations in which it operates – what is legally enforceable in Baltimore may not be in Bremen or Busan. The LME has to move cautiously, give all parties the opportunity to discuss, review and agree to changes and, above all, try to avoid getting dragged into London’s High Court as Rusal so cynically did last year in an attempt to stall changes which it saw potentially damaging to the aluminum price.

Still in the cards are new rules to cap or ban rents for metal held up in exit queues, a move that, most agree, would result in a rapid deterioration of the load out queue as any incentive to keep the queue in place would evaporate the moment the rule change went into force. There is also discussion about capping the level of daily rents, possibly in recognition that millions of tons have been lost to the LME system as metal has flowed into non-LME warehouses under the stock and finance trade.

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China’s economy expanded at its worst pace in 24 years last year (7.4%). It’s been a rough 18 months for our friends in Beijing. They were happy to take the last week off and say goodbye to the year of the horse, which has left a big Charlie horse on their economy’s figurative leg. The weeklong Lunar New Year Celebration ushered in the year of the sheep. Or, if you prefer a different translation, the year of the goat.

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This is appropriate because China has been the scapegoat for everything that’s wrong with our metal markets. China’s shadow banking sector was blamed for falling copper prices last year. China’s rare earths export quota policy was blamed by the World Trade Organization for protectionist pricing, scarcity of rare earths and increasing prices for years until China finally gave in and lifted the quotas at the end of last year.

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For more than a year, you must have heard hundreds of analysts arguing that investors were moving money into precious metals and that global uncertainty would push these metals higher. Well, that hasn’t happened.

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If we look back in time, periods of economic concern do not always translate into higher rising precious metals price. Furthermore, the market is just fine in spite of all the economic news that keep coming up talking about global economic concerns. Market indexes such as the Dow Jones Industrial Average and the S&P 500 recently made all-times high and that is certainly not a sign of economic difficulty. It at least shows that investors (those that make prices move) are not that pessimistic about the economy.

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Something is certainly amiss in the copper market.

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For a market that is supposedly in surplus, the World Bureau of Metal Statistics estimates a 105-kiloton surplus for 2014. The forward prices are in sharp contango as this graph from the London Metal Exchange shows.

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Almost every metal buyer tries to buy forward, either increasing inventories or fixing prices with suppliers, when they see or they hear that their particular metal is “cheap.”

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This habit is completely intuitive. It’s the way human beings are wired. We tell our kids at a very young age to buy what’s on sale. However, that discount mentality is a very dangerous mentality to bring into the market.

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The decline in oil prices has come to an end….or not?

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At this point, I think we can all agree that no one knows what’s going to happen to oil throughout the balance of 2015. Although prices have stabilized since January, calling for a bottom right now would just be a guess. It would be no more reliable than flipping a coin, especially since it’s in a period of extreme volatility where the psychology of market participants is what determines the price. In the chart, the recent rise is still just a bounce that could fall to succeed.

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This month our base metals took a big tumble. Some industrial metal prices that faltered in January fell of a steeper cliff.

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The Copper MMI®, Raw Steels MMI® and Construction MMI® all recorded drops of more than 5% and only our Global Precious Metals MMI® and Rare Earths MMI® were able to post price increases this month as low oil prices continued to drag down other commodities.

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Several base metals are reaching the point where they’ll either start new trends or fall even further as we speak. Nickel, lead, aluminum and tin are all right there and copper, well, it’s gone so far past its sell-by date even the spoiled milk is looking down at it.

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In light of the bearish environment around our metals these days, we released several reports this week on how to tighten your corporate belt and achieve the cost certainty that will make your business run better. Executive Editor Lisa Reisman researched how trade automation can lock in prices and keep you from having to renegotiate international trades at the dock or the railway station.

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Nickel, aluminum, lead and tin are four base metals that are testing their ground.

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These metals are trying to find support in a bearish commodity environment. If they fall below these key levels, they will be hitting 6-year lows and from there we could see these metals diving further as copper recently did as soon as they break the floor.

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