Articles in Category: Investing Hedging

Our monthly Aluminum MMI rose to 73 points in March, its highest reading in four months.

Compare Prices With The February 2016 MMI Report

After a period a period of price stability, aluminum prices are finally showing the first signs of strength, thanks in part to a weaker dollar in February. Indeed, in our monthly outlook we already recommended subscribers to buy up in volume.

Aluminum_Chart_March-2016_FNL

So what is suddenly causing this strength in aluminum prices?

First, before we get too bullish, let’s remember that aluminum prices are still near historical lows. This price bounce comes after significant declines in previous months and, not only aluminum, but all base metals have risen in price recently. However, some indicators within the aluminum industry are giving aluminum producers some reasons to become more optimistic.

China’s Exports and Production Down

In January, China exported 380,000 metric tons of aluminum, down 12% from the same month last year. This is good news for international markets but, to be fair, one month doesn’t tell much of a story and certainly the aluminum exports will have to continue to come down if the aluminum market wants to see a deficit this year.

In January, China produced 2.5 million mt of aluminum, down 4.5% from January 2015. This was the second consecutive month where Chinese aluminum production fell on a year-on-year basis. Aluminum producers are getting quite optimistic on the combination of lower Chinese exports and production.

Surplus or Deficit?

Although aluminum has been in a surplus for almost a decade, there is not a divided opinion on whether aluminum will continue to be in surplus this year or not. Alcoa, Inc. seems the most optimistic of all, foreseeing a record aluminum deficit this year with demand outpacing production by 1.2 mmt. Other producers are less optimistic and major brokerage houses such as Goldman Sachs even have a bearish forecast for 2016, predicting a record surplus this year.

What This Means For Metal Buyers

The trend in Chinese aluminum exports and production is a key factor to watch for the next few months. The slowdown in aluminum exports might have been driven by the steep decline in aluminum prices last year. As prices recover from January lows, we could see an uptick in Chinese exports.

Free Sample Report: Our March Metal Buying Outlook

Weakness in the US dollar is another key factor to watch, so is the performance of the rest of the industrial metals. Finally, China’s worsening slowdown has been ignored over the past month, however it could bring the bearish sentiment back. If the Chinese government is unsuccessful in boosting its economy and global economic activity cools off further in the coming months, industrial metals might start to lose the recent upside momentum.

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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.

Free Download: The February 2016 MMI Report

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

I’m really tired of hearing the word “bull market” every time some metal rises in price by 20%.

Free Download: The February 2016 MMI Report

The common definition of bull market is an increase of 20% from a low and that, to me, is a very bad definition. However, even well-known sources such as The Wall Street Journal or Bloomberg keep using this definition, which only demonstrates a complete lack of understanding of what a bull market is. We saw this when the WSJ called bull market on China’s stock market and last week Bloomberg declared a zinc bull market.

3M LME Zinc

3-month London Metal Exchange Zinc. Source: MetalMiner analysis of Fastmarkets data.

Is Zinc in a Bull Market?

You don’t have to be a hedge fund manager to realize that there is nothing bullish in zinc’s chart. Yes, zinc rose in February and so did other base metals, part of it due to a weaker dollar and the fact that they all deserved a short-term rally after many consecutive months of declines ( also known as  bargain hunting).

Although February brought a good opportunity for zinc buyers to buy some volume, prices are not yet ready to make a substantial upside move. Under the current bearish commodity environment, this rally might just fall below resistance levels.

What’s Really a Bull Market?

To me, a bull market means price strength in an atmosphere where funds are creating a tailwind. The kind of environment in which bearish news is dismissed and bullish news is enhanced. An environment that enhances the likelihood of a metal price to continue to rise. In conclusion, an environment where metal buyers want to be hedging/buying forward.

Free Sample Report: Our February Metal Buying Outlook

That’s not really the case with zinc. First, zinc is showing momentary price strength after a huge decline, the kind of price strength caused by bargain hunters. Second, the current macro environment doesn’t favor prices continuing to rise. A slump in oil prices, a bear commodity market, China’s widening trade surplus and its ongoing stock market crash are not factors that would favor a rising trend in zinc prices going forward. Moreover, despite some production cuts, there is a lot of zinc sitting in warehouses and off-exchange storage that could also prevent prices from rising.

What This Means For Metal Buyers

If you call bull market every time a metal rises 20% you are going to be right at some point but the definition is useless when it comes to having a good purchasing strategy. The point is to identify when your metal is showing price strength, backed up with strong fundamentals and under a bullish macro environment that will help prices to continue to increase, so you can start hedging. Zinc is just not at that point yet.

Gold has had a barnstorming start to the year, rising 17% since January 1st to its peak of around $1,260.

Free Download: The February 2016 MMI Report

The dynamic behind the rise in prices has been a heightened risk aversion and panic over… well, just about everything really. Without fear to drive demand, gold suffers from the cost disadvantage of storage and finance costs but without the corresponding income stream of dividends.

Fear Can Be a Great Gold Price Driver

With Japan becoming the latest country to offer negative interest rates, investors sitting on cash are figuring out the sums on gold carry costs. Adrian Ash, head of research at BullionVault, is quoted as saying: “Negative deposit rates in the Eurozone and Japan are now approaching commercial storage charges on physical bullion, while Swiss Libor and the Swedish Riksbank’s deposit rate already exceed even the higher fees of gold-backed exchange traded funds (ETFs).”

Are gold prices really going to keep rising? Source: Adobe Stock/Nikonomad.

Are gold prices really going to keep rising? Source: Adobe Stock/Nikonomad.

The cheapest major ETF is the iShares Gold Trust, says Ash, which charges 0.25% per year, while the biggest gold ETF is the iShares SPDR, which costs 0.40%. “Commercial storage rates for large-bar gold are nearer 0.10%,” says Ash. Read more

Equities finally made some gains last week after five horrible weeks for stock investors. The recent rally looks prone to fall short, though, followed by more declines around the corner.

Not Enough Buying Interest

S&P 500 Index

The S&P 500 Index. Source: MetalMiner analysis of FastMarkets data.

So far, the rally seems like a normal price reaction after a big fall. Moreover, stocks are going up in low volume. Now, you may ask, “what do you mean by low volume?”

Free Sample Report: Our February Metal Buying Outlook

Volume means the number of shares traded. When prices rally in low volume, it means that not a lot of people are participating in the price move which is the same as saying that demand for stocks is not strong.

When prices actually find a floor, they tend to bounce in higher volume, showing that buying interest is necessary to move markets higher. In this case, we are not being enough buying interest, suggesting that more selling pressure will soon come to prevent prices from rising more.

Beaten Down Stocks Lead Rally

Major stock indexes are getting a boost thanks to a rebound in beaten down stocks such as energy and material sectors. Last week, stocks of oil producers rose as oil prices rebounded back to $30 per barrel. Companies in the materials sector such as Freeport-McMoRan also rebounded last week.

Freeport-McMoRan (FCX) soars in February

Freeport-McMoRan (FCX) soars in February. Source: MetalMiner analysis of @StockCharts.com data.

The fact that downtrodden stocks are leading this rally is not a good sign. For markets to turn around fresh leadership should emerge. So far, we haven’t seen anything of the sort.

Weak Chinese Trade Data

China’s January trade data showed more weakness in the global, as well as in Chinese, economy. China’s exports, which for some are a good barometer of the global economy minus China, fell by 11.2% year-over-year in January. The decline signals weak global growth and demand and the fact that China is not succeeding at fighting its domestic slowdown through exports. Even though China took steps to weaken the Chinese yuan, exports have continued to fall.

However, China’s import data was even worse, with imports tanking by 18.8% year-over-year. Lower imports underscore weakness in the Chinese economy. Global equities, however, rose on the weak trade data since it probably increased hopes of more stimulus from the Chinese government. Although, we must remember that previous government attempts to spur the economy weren’t successful.

Money Still In Safe Haven Assets

Gold price still near 1-year high

The gold price is still near 1-year high. Source: @StockCharts.com.

While equities scored some gains last week, money hasn’t really rotated out of safe-haven assets such as gold or bonds. That’s not a good sign. A strong rally usually moves money out of these assets and into stocks.

Free Download: The February 2016 MMI Report

Overall, we are not buying this stock market rally. Investors are not jumping into stocks, companies in leading sectors are not causing the rally, weak trade numbers keep coming out of China and money hasn’t really rotated out of safe-haven assets.

U.S. oil drillers, reeling from an 18-month price rout, have cautiously begun hedging future production this week, fearing this may be their best chance yet to lock in a $45 a barrel lifeline for 2017 and beyond.

Free Download: The February 2016 MMI Report

As oil markets rebounded from 12-year lows this week, U.S. shale companies — for the first time in months — started inquiring and placing new hedges for the next few years, Reuters reported according to three market sources familiar with money flows.

ATI Begins GOES Layoffs

Allegheny Technologies, Inc., will begin laying off 241 workers at its Gilpin and Harrison operations in Pennsylvania April 3 as the Pittsburgh-based specialty steel producer exits the business of making grain-oriented electrical steel.

Free Sample Report: Our February Metal Buying Outlook

The company detailed the layoffs in a notice to state officials required under the federal Worker Adjustment and Retraining Notification (WARN) Act.

The news this year has been full of volatility for stock and commodity prices, as fear has gripped investors and sovereign wealth funds have dumped shares to raise cash.

Free Download: The February 2016 MMI Report

Stock markets have had the worst start to a new year since 1980 and gold prices have reversed a four-year decline to give those nursing painful losses cause for some hope that there was some sense in holding onto the yellow metal.

Goldman Sachs’ Terrible, No-Good Prediction

But has it all been a bit overblown? Goldman Sachs thinks so and recommends in a note to clients that they short gold, seeing it falling back from the recent peak of $1,260.60 to $1,100 in three months and $1,000 by the end of the year, according to Reuters.

Are they right? Is the global economy doing better than we are are fearing? From reading the news, one could be forgiven for thinking that the world has gone to hell in a handcart. Anything that could be taken in any way as bad news is given prominence while any good news is being almost entirely dismissed.

Goldman Sachs predicts that the Four Horsemen of the apocalypse will not only devour stock and commodity markets, but also laugh while your physical dollars burn in a lake of fire. Source: Adobe Stock/morrbyte.

Goldman Sachs predicts that the Four Horsemen of the Apocalypse will not only devour stock and commodity markets, but also laugh while your physical dollars burn in a lake of fire. Source: Adobe Stock/morrbyte.

The reality is the U.S. economy is still growing — not at the rate we would like, sure — but the number still has a plus in front of it and it has had that plus for some time now. Job creation and non-farm payroll numbers may not be quite as good as some would have hoped, but the numbers are still encouraging. Read more

Last week I watched “The Big Short.”

Free Download: The February 2016 MMI Report

The movie portrays, really well, how unregulated capitalism set itself on fire less than a decade ago during the meltdown of the housing market. As I was watching it, my mind would link each of the events that preceded and followed the housing crash to the commodities crash we are living through today and, if history repeats itself, I could even picture what comes ahead.

The Bubble Shapes

All bubbles share similar characteristics. It all starts with strong demand for some object, whether it’s stocks, homes, commodities or tulips. In a very simplified way, the housing bubble started as banks gave loans to any individual, regardless of their income. As anyone could get a loan to pay for their home, housing prices started to pick up as demand increased. But higher prices weren’t a reflection of growth, they were just caused by easy money given out by banks.

In commodities, a bubble formed on hopes that China’s rapid growth would feed an ever-expanding appetite for raw materials. Moreover, in 2008 China launched a huge $586 billion economic stimulus plan, leading to higher demand for commodities and, therefore, rising prices. But prices weren’t reflecting real growth, either. They were inflated as fake demand was created on the construction of excessively extravagant government buildings and uninhabited “ghost cities” in China.

The Bubble Gets Bigger

During the housing bubble, everyone was making money. Banks were making interest money from  their loans. House owners saw the value of their assets rise and everyone was pouring money into the housing market. Everything was built on hopes that housing couldn’t crash.

Similarly, everyone was making money as commodity prices rose. Huge infrastructure was built around the world to produce those commodities. Banks were making money on interest as producers took debt to build this new capacity. China was achieving its fake percentage growth rate and billions of dollars of capital investment were poured into commodities markets as an effective way to bet on China’s economic development. Everything was built on hopes that China would continue growing at that pace forever.

Prices Start Falling

Home prices (in balck) peaked in 2006 while stock markets (in blue) sold-off two years later

Home prices (in black) peaked in 2006 while stock markets (in blue) sold-off two years later. Source: MetalMiner analysis of @StockCharts.com data.

House prices peaked in April 2006. Over the next couple of years, people believed that the decline in home prices was only a setback. That housing in the US was strong and prices could only continue to go higher. It wasn’t until 2008 until the market really acknowledged that both the home industry and banks were in big trouble. Read more

You may be an investor in mining shares or you may be an investor in commodities, or you may be both, but your pension fund — if it’s any good — is almost certainly neither.

Free Download: The January 2016 MMI Report

Because, if it holds mining shares, it is nursing some heavy losses after the last 12 months.

Source: Telegraph Newspaper

Source: London Telegraph

Pension funds, thankfully, are cautious animals. They like solid dividend payers — as many in the mining sector have been for years — but they hate the combination of falling share price, high debt and low commodity prices that will almost certainly result in a cut in dividend payments this year even if mining companies are to survive the downturn. Read more

Stock markets are officially in bear territory. At least in Europe and Japan, they are, as shares fell more than 20% below their 2015 highs last week.

The US S&P 500, the Dow Jones Industrial Average and the NASDAQ composite briefly fell more than 3% to more than 10% below their prior peaks, meaning they entered a market “correction,” before recovering slightly. What caused such widespread chaos isn’t hard to find.

Equities have been dragged down by rising concerns over China, both growth and the falling yuan, by the wider global economic growth prospects, by sliding commodity prices, particularly oil, and questions over whether central banks remain willing to act as a backstop. With so much to worry about, investors dumped shares and bought safer government debt.

Resource Producers Hit Hardest

All markets have seen falls, but the most vulnerable and most resource-focused were hit hardest.

FT_Stockmarkets

Source: Thomson-Reuters Datastream.

All share groups have been hit, but mining and commodity related shares have been hit hardest as the Bloomberg Commodity index fell to its lowest since at least 1991, and crude oil prices fell below $27 a barrel during US trading. Read more