Articles in Category: Investing Hedging

From being the darling of the bulls at the beginning of the year with supposedly the best fundamentals of any of the major non-ferrous metals, zinc is now the second-worst performer, kept from the bottom only by a historic fall in nickel.

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In large part, the market price is being driven by inventory changes as a raft of recent articles from Reuters and the FT underlines. First, how and where have they changed? The visible inventory changes the market is seeing are all on the London Metal Exchange and nearly all at New Orleans underlining that these have nothing to do with end-user demand and everything to do with financial and trade parties activities.

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Source: Kitco

As zinc stocks dwindled, the market took it as a sign of constrained supply meeting rising demand. As stocks declined, prices rose at least until the big sell off in the Spring when all metals prices fell off. Read more

Chart of the Week, Zinc PricesZinc prices are in a falling channel, meaning that prices are falling and bounded by an upper and lower trend line. After 2 years of deficit, zinc supply has outpaced demand so far this year. Prices have plunged 33% in only 5 months. We might see zinc prices hitting a 6-year low soon.

US stocks fell again yesterday as the Chinese economy again failed to impress investors. Mexico also announced it would pursue new steel anti-dumping duties.

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US stocks plunged Tuesday, extending a tumultuous period for markets into another week amid new evidence that China’s stubborn economic slowdown is damaging global commerce.

The trouble started with a weak reading on China’s manufacturing sector and was amplified by a 14.7% drop in South Korean exports for August, the first evidence of a decline in regional trade since China devalued its currency Aug. 11.

The Dow Jones Industrial Average tumbled 469.68 points, or 2.8%, to 16,058.35, its biggest one-day percentage loss since Aug. 24, when the blue-chip index plummeted nearly 600 points, or 3.6%.

Mexico Pursuing Anti-Dumping Duties Against China

Mexico will conduct an anti-dumping probe into steel wire rod from China, the economy ministry said on Wednesday.

Three companies operating in Mexico had asked the government to investigate, claiming that fast-rising imports, sold at lower prices than domestic-made steel, was hurting the local industry, according to a notice in the official gazette.

Last Week: Latest Metal Price Trends in the August MMI Report

The companies that asked the government to examine possibly anti-competitive trade practices are ArcelorMittal Las Truchas, Deacero, and Ternium Mexico, the gazette said.

A continuation of the sell-off in Chinese shares, worries about bearish commodities markets with crude oil at $40/barrel and a dash of Federal Reserve rate-hike fear, made US equity investors throw in the towel in August.

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US stocks suffered their worst losses in four years.

S&P 500 since 2014

S&P 500 since 2014. Graph: MetalMiner.

We recently analyzed the fall in US shares and how both stocks and commodities markets seem to be linked now that all eyes are on China.

Chinese Sentiment Still Bearish

It looks like, for the coming weeks, investors’ sentiment will be driven by what comes out of China.

CRB commodity Index since 2014

CRB commodity Index since 2014. Graph: MetalMiner.

Interestingly, both commodities and US stocks bounced last week after the big drop. These rallies are normal price fluctuations after a sharp drop.

Free Download: Latest Metal Price Trends in the August MMI Report

However, this rally doesn’t look convincing, making us suspect that the fall in U.S. equities and commodities might not be over.

China Ishares (FXI) since 2014

China Ishares (FXI) since 2014. Graph: MetalMiner.

Meanwhile Chinese shares keep making new lows and nothing suggest that we’ve reached a bottom.

What This Means For Metal Buyers

China’s stock market crash doesn’t look like it’s over yet. Further declines in Chinese shares could propel more price declines in commodities and US stocks as China seems to be driving investors’ sentiment at this moment.

After the market tumult of last week, many expected things to calm down and that China’s stock market would finally calibrate to the new, devalued yuan/renminbi while equity markets elsewhere would bounce back from Friday’s big sell. Heck, maybe even the beleaguered commodity markets might recover some of their losses, right?

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Wrong. Oil reentered a bear market on Tuesday extending the previous day’s losses, when Brent crude — the international benchmark — recorded its biggest one-day sell-off since February. After dropping more than 6% on Monday, Brent fell a further 2% in the next trading session to $55.40 a barrel. It is down more than a fifth from its year-high of $69.63 a barrel reached during intraday trading in May.

Not the Oil That Made Jed Clampett Rich

Not such a good time for oil companies but, at the very least, gas prices are down here in the US and costs for everything from construction to automobile production is down, too, right, so we must be on to step three, profit, right? Oh no, not even close. Construction material prices are down, but new construction spending isn’t exactly picking up, either. Not here and not in China, where lack of demand has led lead and zinc to five-year lows.


Jed Clampett made $9.5 billion in oil and gas. That likely would not have happened with today’s prices.

Incidentally, Forbes estimated Jed’s net worth at $9.5 billion, 4th on its “Fictional 15” list. That’s more than weapons tycoon Tony Stark (#6). Not bad for wealth based entirely on oil and gas discovered while hunting possums.

A Rebound in Stocks… Of Sorts

The Dow Jones Industrial Average has been back in positive territory, though, saving our collective retirements and paring the losses we saw last week. The Dow gained 369 points yesterday, alone, curbing the big losses from Friday and Monday. It’ll surely last, right? Ummm, no promises. While our own Stuart Burns acknowledged the rebound in western markets, he also cautioned that aftershocks from China’s economic crisis could be forthcoming.

“With (Chinese) GDP growth widely believed to be lower than the official government number of 7% it is hard to see how domestic consumption can pick up as households lick their wounds,” Burns wrote.

Free Download: Latest Metal Price Trends in the August MMI Report

So, in short, expect more volatility as China spares the rod of economic depression while spoiling the child with purposely devalued currency.

What Does This Mean for US Buyers?

Expect to pay less for Chinese steel. We know, it’s already dirt cheap as foreign imports were up 5% in July. The job of policing foreign dumping into the US market just got tougher.


Nickel has already halved its year-to-date value after peaking in May 2014.

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This week, prices fell below the $10,000 per metric ton, a physiological resistance level. Prices are now approaching the record low of 2009 when prices hit $8,850/mt. If so, nickel would be the first industrial metal to fall below recession levels.

3M LME Nickel below $10k and approaching record lows

3-month LME Nickel below $10,000 and approaching record lows. Graph: MetalMiner.

The slump in prices made some producers cut output and we’ve heard people talking about a price spike as producers are underwater. But as you are aware, production costs do not determine prices, investors do.

Free Download: Latest Metal Price Trends in the August MMI Report

The bearish momentum in China’s stock market and the commodities markets will keep a lid on nickel prices and, in our view, prices could keep sliding. Why not? They’re already nearing the lows of 2009.

Stock markets around the world have rebounded after Monday’s dramatic falls, even so pension and investments funds have been severely depleted even after the bounce back.

Free Sample Report: Our Monthly Metal Price Outlook

In China, though, where it all started, the market has continued to fall, down another 7.6%. When the Shanghai Market last “corrected,” Beijing stepped in with a $400 billion fund to buy stocks, ordered state-owned companies to buy shares, banned large shareholders from selling and even launched a criminal investigations into short sellers in a desperate effort to prop up the market.

Chinese Stocks Still Falling

Clearly, although that bought a temporary calm it has not lasted and the market went into free fall again this week. Tellingly, Beijing has not stepped in this time, acknowledging that even China does not have the funds to turn global equity markets. Li Jiange, vice chairman of state-owned investment company Central Huijin is quoted by the Washington Post as saying “The trade volume of the market can reach 2 trillion yuan ($300 billion) a day, which means if it collapsed no one could save it,” adding “The issues of the market should be handled by the market itself.”

US dollar vs. RMB

Beijing’s way out involves producing in yuan and selling in dollars.

This time, the Peoples Bank of China have simply cut interest rates, for the fifth time in nine months, by a quarter percent to 4.6%. It also cut its one year deposit rate to 1.75% in a vain attempt to bolster the economy, and reduced banks reserve requirements in another attempt to get them to lend more. Read more

Well for one thing it means our retirement funds will likely be worth less, at least in the short to medium term. On the plus side, our mortgage will likely stay cheaper for longer and metal prices will remain lower for longer.

Free Sample Report: Our Monthly Metal Price Outlook

Why? well if the Fed was worrying about a China slowdown in July, they must be in full-on panic mode by now. If the Federal Reserve was to raise rates next month, to stave off the possibility of inflation picking up next year, it would strengthen the dollar, making imports more attractive and making life tougher for US exporters.

China’s Deep Slowdown

The collapse of stock markets around the world has been precipitated by fears of a China slowdown becoming far deeper and more prolonged than previously thought – although why this appears to be such a surprise to investors today compared to 2-3 weeks or even 2-3 months ago I fail to see, the writing has been on the wall all year.

Traders in London

The signs that China’s economy could lose steam were there, but it still caused global stock market panic.

However, as the herd mentality sets in all those stop orders get hit and the fancy algorithms cut in selling stocks and becoming self-fulfilling as they drive prices down. Hedge funds have been aggressively shorting the market, not just for stocks but for commodities too. It would be a brave man who bet any pause was the start of a bounce back, markets could have a lot further to fall.

Back to the Fed and China: weaker demand from China will mean lower demand for commodities. For a few commodities, China has become a net exporter but across the board the world’s largest consumer is reversing what was once a one-way bet on demand. Read more

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Get your short- and medium-term buying strategy for industrial metals.

Less than one week away! Join us Thursday, August 27 at 10 a.m. CDT for the webinar, PREVIEW: MetalMiner Price Forecasts for September.

Can’t make it live? Register anyway and we’ll send you a copy of the slides and recording of the webinar for you to view at your convenience.

For the second consecutive month, we will be providing a behind-the-scenes look at our metal price forecasts and how we formulate our new Monthly Metal Buying Outlook reports. If you source aluminum, copper, nickel, lead, zinc, tin or steel and are in need of expert insight, market commentary and a medium- and short-term trend analysis for these base metals then this is the webinar for you!

Speakers to include:

lisa reisman metalminer headshotLisa Reisman, CEO, Azul Partners and executive editor, MetalMiner
Lisa has more than two decades’ experience in management consulting and direct materials sourcing. She previously owned and operated her own aluminum trading company, as well as served in past roles at Andersen and Deloitte Consulting.


john conolly metalminer headshotJohn Conolly, managing director, Azul Partners
John also has more than two decades’ experience, but in listed derivatives, trading commodities and client advisement on hedging commercial risks. He comes to us from the CME Group where he was director of product marketing, and has been featured on CNBC, Bloomberg and Fox Business News.

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RBC Capital Markets recently released updated forecasts for the gold and silver markets. Conventional wisdom says that safety plays such as precious metals outperform during periods of stock market weakness, but, as we’ve pointed out before, general commodity weakness is dragging down even traditional hedges such as precious metals along with their base metal cousins.

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With the market volatility of the last few days, one might think that silver and gold would see a rebound as investors, at least initially, abandon stocks and put their money into something reliable such as hard currency. Gold and silver are up, but the outlook for the precious cousins is still, at best, mixed.

Could gold's hedging value by renewed by falling stock values?

Could gold’s hedging value by renewed by falling stock values?

In the report, analyst Stephen Walker lowered his price targets for both gold and silver through 2018. RBC reduced its Q4 2015 forecast for gold from $1,300 an ounce to $1,150/ounce, a 12% reduction. For silver, RBC scaled back its Q4 2015 forecast by 15%, from $18/ounce to $15.25/ounce.

RBC believes that a Federal Reserve interest rate hike in a weak inflationary environment will pressure gold and silver prices. That hike got a little less likely, at least in the near term, in the last few days as the global stock market plunge happened. Cheaper imports from China mean lower prices and deflationary pressure in the US.

All of the precious metals we track on the MetalMiner Indx were up after Friday’s market selloff and gold held firm in a tight range on Monday in London, trading above $1,155 per ounce as China’s markets continued to plummet.

According to data gathered by Commodity Futures Trading Commission, last Tuesday the COMEX gold futures and options net position of managed money turned bullish for the first  time in five weeks. Silver’s net position of managed money also was bullish last week after seven bearish weeks. Treasury bonds, another safe haven, saw their yields fall, as well. The 10-year Treasury yield fell below 2% for the first time in nearly four months and traded 7.8 basis points down on the day at 1.976%, its lowest point since April 28.

Free Download: Latest Metal Price Trends in the August MMI Report

It is too early to tell if gold and silver will see their hedge appeal restored, but the conversation has significantly changed when it comes to interest rate hikes and weary investors may see silver and gold in a different light, depending on how long China’s market rout continues.