Articles in Category: Precious Metals

The British pound slumped to its lowest level since 1985 early this morning as results of the U.K.’s vote on European Union membership came in with the leave campaign winning the vote by close to a 2% margin.

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The currency tumbled to as low as $1.3460 on Friday, which was its lowest level in 31 years.

It fell about 10% from the 2016 high of $1.50, which it hit just hours earlier when most polls suggested the remain campaign had a slight polling lead. That was before polls closed.

As of this writing, Dow Jones Industrial Average futures are down 600 points, nearly 3%, hours before U.S. markets open. Japan’s Nikkei Average, which was open and trading as the votes were counted, dropped 8% while the U.S. dollar briefly fell below 100 yen to a dollar.

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Investors fled to safe havens as gold climbed 5% and briefly hit $1,330 an ounce. We will update this post in the morning as this story develops.

A federal judge has ruled the federal government cannot set rules for hydraulic fracturing or “fracking” on public lands and, no matter what the U.K. decides in its EU Brexit vote, gold’s bull run is likely over.

Judge Tells Interior Dept. it Can’t Set Fracking Rules

A federal judge in Wyoming made permanent a temporary block of an Interior Department rule setting stricter standards for hydraulic fracturing on public lands, a blow to President Barack Obama’s environmental agenda in the sunset of his administration.

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U.S. District Judge Scott Skavdahl issued a ruling late Tuesday invalidating the regulation, saying the Interior Department lacked the authority to issue it. The same judge last year issued a preliminary injunction blocking the rule until he made a final decision.

The rule, issued by department’s Bureau of Land Management in March 2015, applies to oil and gas drilling on federal lands, which produce 11% of the natural gas consumed in the U.S. and 5% of the oil, according to government data. The government can appeal the ruling.

Brexit Vote Likely to End Gold’s Run

No matter if the U.K. votes to stay in the European Union or leave, Gold’s sharp gains on uncertainty over its membership are likely to come to an end after Thursday’s referendum.

Free Download: The June 2016 MMI Report

Prices hit their highest since August 2014 last week as the $5-trillion a year gold market rose with other “safe” assets, such as German bunds, the Swiss franc and Japan’s yen.

Gold is recovering its strength this month. Prices last week rose to the highest levels in almost two years. We already pointed out last month that prices had upside potential.

Free Download: The June 2016 MMI Report

There are mainly three factors contributing to the price move:

Gold hits new highs on falling bond yields and economic fears. Source: Stockcharts.com

Gold hits new highs on falling bond yields and economic fears. Source: @Stockcharts.com

Economic Fears

The yellow metal is being bought as a hedge against falling global stocks. The unusually dovish comments from the Federal Reserve last Wednesday showed a lot more pessimism on the U.S. and global economy while investors fear that central banks are losing their ability to boost global stocks or economies. Moreover, this week’s British Brexit vote is causing a lot of global volatility.

NYSE Composite Index acting like 2007’s top. Source: MetalMiner analysis of @StockCharts.com data.

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

As we warned in May, stock markets pulled back in June. There is no guarantee that the worst has passed. Indeed, so far we are just witnessing choppy action.

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The Global Precious MMI joined most of the other sub-indexes this month in experiencing a 6% loss as a broad metals correction hit most markets.

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Unlike the base metals, however, our precious metals are not facing bifurcated markets where U.S. tariffs are keeping domestic prices high. As almost always with precious, this month’s fall was a global phenomenon.

Global-Precious-Metals_Chart_June-2016_FNL

Johnson Matthey is weathering the storm as best as it can this year as platinum group metals prices are starting to lose the momentum the first half of the year promised.

Production Surplus Stubbornly Lingers

According to Thomson Reuters‘ “GFMS Platinum Group Metals Survey,” a rebound in mine production last year pushed the platinum market back into a marginal physical surplus, despite improved demand.

Macroeconomics have continued gold’s roller coaster ride this month. Before Federal Reserve Chairwoman Janet Yellen dialed back expectations of an interest rate hike this week — after a bad jobs report — a strengthening U.S. dollar dragged gold prices down for much of May. Now, though, with a dovish Fed, gold is strengthening again. Silver has taken a similar ride.

Perfect Storm

The investment and industrial metals, globally, saw prices fall this month as a storm of both bad economic data for the investment metals and oversupply for the industrial metals came together. Yet, even as I write this gold and silver are strengthening again as the dollar weakens in light of that horrid jobs report. But it might just be that neither industrial demand nor monetary policy will be the story of the last six months of 2016 in precious metals.

Compare Prices With The May 2016 MMI Report

Jessica Fung, a metals strategist at BMO Capital Markets, said in the Wall Street Journal that slowing global growth should help push gold higher and likely bring silver with it.

“We believe focusing on the Fed alone is simplistic and only drives very near-term sentiment and volatility,” Ms. Fung wrote in a note. “The potential impact of sluggish global growth on the U.S. economy should not be ignored.”

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“The World Silver Survey 2016,” an annual report published by The Silver Institute, said Asia’s silver mine output went up last year by 1% to 165.1 million ounces, following a 3% drop in 2014. A major part of the decrease originated from lead and zinc production sources with a lesser drop from primary silver mines. The bulk of the loss could be traced to mines in China and Kazakhstan.

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For India, silver production showed a “notable rise” last year, of over two-fifths, or by 3.6 million ounces, to reach a record production total for the country of 12.0 million ounces.

Indian Silver Production

Higher ore volumes and grades from the country’s Sindesar Khurd mine in the second half of the year were behind much of the gain, amid a period of otherwise lower output as the company’s flagship Rampura Agucha moved from open pit to underground mining.

Total physical demand in 2015 saw a 3% increase in 2015, driven by higher retail investment, jewelry and silverware fabrication and solar and ethylene oxide catalyst demand.

Also, last year, silver retail investment and jewelry fabrication hit a record high. Jewelry fabrication, for example, increased for the third consecutive year and hit a fresh record high of 226.5 millions ounces. Again, strong growth in Indian and North American fabrication offset a near one-third drop in Chinese fabrication.

The silver market, according to the report, realized an annual physical deficit for the third consecutive year in 2015. The market’s deficit of 129.8 million ounces was more than 60% larger than the previous year’s deficit of 78.6 million ounces and the third largest on record, the survey recorded. Silver prices averaged $15.68/oz, down 17.8% from 2014, the fourth consecutive annual drop. Prices were pushed lower by investor expectations for an interest rate hike in the United States and a weakening Chinese economy.

Silver bullion trade in 2015 continued to be dominated by flows to India, where total imports reached an all-time high of 256.0 million ounces, rising by 16% from the 2014 level.

In India, scrap supply declined for a third consecutive year falling by 14% from 2014 to 2.5 million ounces, the lowest in more than 15 years. This decline was largely attributed to three consecutive years of falls in annual average prices, which last year had dropped by 14%.

Physical Bar Demand

Compared to the previous year, global physical bar investment rose to a record 158.2 million ounces in 2015, a 24% surge. The declining silver price drove bargain buying higher, particularly in India and the U.S., where bar consumption rose 31% and 25%, respectively, said the survey. What also gave a boost to silver bar demand was a strong demand for official coins and the corresponding shortfalls of coin supply, as investors sought an alternative to satiate investment demand.

Last year, physical bar investments in India increased by 31% to 82.5 million ounces, the highest since 2008. In India, a large part of this form of investment comes from short term hoarding to benefit from lower prices or to profit from a differential in the spot and futures market. This type of build-up of positions eventually returns to the market as disinvestment when the price rallies.

Such disinvestment during price rallies resulted in local premiums (the price at which the metal is sold by a domestic trader after buying from importing agency) falling to a low of 2 cents and at times being forced to sell at discount, as against a lower threshold of 3 cents observed in 2014.

Turnover on the Multi-Commodity Exchange of India (MCX) more than halved in 2014 as a result of the commodities transaction tax, which was introduced in July 2013. The marginal 1% year-on-year decrease in 2015, to a nominal 7,705 million ounces, might indicate that investors have gradually adjusted to the change.

Outlook

The survey said in the first quarter of 2016, although safe haven demand was the primary driver, the relatively stronger market fundamentals acted as a spring board for silver prices, given the continued higher demand for coins and concern around mine supply reduction.

Free Download: The May 2016 MMI Report

The report predicted that silver mine production would continue to suffer losses in 2016 as a consequence of supply cuts in lead and zinc production, in combination with lower forecast output from both the primary silver and gold industries.

Johnson Matthey’s full year figures illustrate what a challenging market it has been not just for the refiner and manufacturer of precious metal products, but for the range industries in which it plays.

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We tend to associate JM with simply refining platinum and being highly dependent on the European automobile market through their product’s exposure to emissions control technologies. The year-end figures are a good illustration of how far off the mark that impression is and how diverse the range of industries the firm is involved in.

The Year in Emissions Control

Emissions control equipment actually had a good year, up 15% in spite of the Volkswagen AG emissions scandal. Demand for diesel vehicles has not been badly dented and although the trend is expected to fall from about 50/50 today to 60/40 in favor of gasoline engines in Europe by 2025, the proportion of platinum needed has continued to rise following the introduction of stricter standard last year. 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.

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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.

As gold continues to flirt with $1,300 an ounce, some major investors are making opposite bets on the investment metal in the SPDR Gold ETF.

Paulson or Soros Will Be Wrong About Gold

Gold bull John Paulson slashed his bets on bullion while billionaire investor George Soros and other big funds returned to the metal for the first time in years, filings showed on Monday, as prices staged their biggest rally in nearly 30 years.

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New York-based hedge fund Paulson & Co., one of the world’s most influential gold investors, slashed its investment in SPDR Gold Trust, the world’s biggest gold exchanged-traded fund (ETF), by 17% to 4.8 million shares, Securities and Exchange Commission filings showed on Monday.

China’s Largest Private Steelmaker: We Need Even More Gov’t Support

Jiangsu Shagang, the listed unit of China’s biggest privately-owned steel producer, said on Monday the Chinese government should provide steelmakers with even more support in their efforts to export products and shift capacity overseas. China’s massive steel sector has come under growing international scrutiny, with foreign steelmakers accusing the country’s firms of flooding the global market with cheap, subsidized steel and driving them out of business.

The broad metals rally continued in April with all but three of our MMI sub-indexes gaining value this month and two of those holding their value from last month. Only the GOES MMI lost value and that had more to do with its specialized market.

MM-IndX_TRENDS_Chart_May2016_FNL-TOPVALUE100

The Aluminum, Raw Steels, Global Precious, Renewables, Stainless Steel, Automotive and Construction MMIs all increased in April amid a broad commodities rally. The U.S. dollar continued to weaken, hitting its lowest point in 15 months, pushing oil and other key commodities up in value and helping metals see their boat rise with the tide.

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In investments, both gold and silver are testing multiyear highs as investors look to them for a short-term safe haven from falling currencies.

Further dollar depreciation could increase demand for all dollar-denominated commodities and metals are currently in a sweet spot on the demand side, particularly because of China’s economic turnaround.

The China Front

Continued stimulus in China is increasing demand for steel, aluminum and other metals there. As we’ve previously reported, the People’s Bank of China has cut requirements for first-time homebuyers, cutting the minimum mortgage down payment from 25% to 20%, taking it to the lowest level of requirement ever.

This is just one of many stimulus measures that Beijing has undertaken in recent months. However, global steel and aluminum oversupply is still a top concern, and China’s role in that glut continues to be front and center.

Other Drivers

With U.S. home sales and the non-residential sector continuing to show strength, construction in both of the world’s largest markets has been a positive driver for metal, as has automotive demand.

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

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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