Gold

Gold and most precious metals are still gaining from the bounce they received after the U.K. voted to leave the European Union and most bankers and analysts expect that to continue. In contrast, European aluminum premiums are falling.

Poll: Gold’s Brexit Bounce Has Legs

Britain’s vote to leave the European Union has led analysts to raise their gold price forecasts again this year, after the decision shook up financial markets and sparked a rally in the precious metal to two-year highs.

Free Download: The July 2016 MMI Report

A poll of 25 analysts and traders over the last two weeks returned an average price forecast for this year of $1,280 an ounce, up from $1,209 in a similar survey in April, and nearly 15% higher than a poll at the start of the year.

European Aluminum Surcharges Keep Falling

Surcharges for physical aluminum in Europe are expected to gradually extend their recent decline due to sluggish demand as metal is released from warehouses when finance deals become less lucrative.

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The premiums, which consumers pay on top of the London Metal Exchange cash price for immediate delivery, were quoted at $115-$120 a metric ton for duty-paid metal in Rotterdam, down some $10-$15 in recent months and from $140-$150 in early February.

Every single price point across the precious metals tracked by the MetalMiner IndX — gold, silver, platinum and palladium — increased over the month of June, helped mainly along by the boon that Brexit has been (for precious producers, anyway…more on that below).

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As a result, our monthly Global Precious MMI for July shot up 8% to 83, the index’s highest value since June 2015.

black and gold precious metals price index chart

Exit Britain, Enter Gold Price Increases

Britain’s vote to exit the E.U. left the pound Sterling in turmoil, with the British currency recently troughing at a new 30-year low, with no end to the bleeding in sight, while the Euro has also suffered. We all know what that means: investors flocking to safe-haven assets, such as gold. Which, in turn, means producers will be able to justify keeping near-to-medium-term mine production levels and exploration status quo (at least).

The U.S. bullion price of the yellow metal jumped 8.7% month over month, a significant increase. (Correspondingly, US silver bars shot up 17.2%.) Just after the Brexit vote results came in, HSBC analysts predicted that gold will breach $1,400 per ounce. It has already been flirting with the high $1,300s the past couple weeks and, according to HSBC Chief Precious Metals Analyst James Steel, “the drive higher may be more than 10% in the longer term if there were to be broader concerns about the future direction of the E.U. after the vote,” as originally reported by Kitco News.

Investors Go Long

Adding more fuel to that fire, hedge funders increased their net long positions in COMEX gold and silver contracts to record highs by the end of last week, further showing their bullishness in the safe-haven asset, according to Reuters.

Another major driver of the gold price has been the U.S. bond market. As my colleague Raul de Frutos has written, treasury prices soared and yields plunged to four-year lows as investors continued to seek haven assets. The benchmark 10-year Treasury yield fell as low as 1.45% two weeks ago, the lowest level in four years. Bond yields not only fell in the U.S.; British 10-year government bond yields sank below 1% on Monday for the first time ever. Similarly, Japanese bond yields fell below 0.1% for the first time, reflecting unprecedented long-term pessimism.

The lower the yield, the lower the returns investors get from their bonds. That’s important, because in periods where yields are near zero, many investors prefer to buy gold rather than bonds. In this manner, in the current stock market turmoil, part of the money that would normally go to assets paying a yield is going to gold instead.

Negative interest rates worldwide also help gold’s case.

Big M&A News: Centerra Gold + Thompson Creek Metals

All this Brexiting has prepped large Canadian miner Centerra Gold to pull the trigger on acquiring Thompson Creek Metals last Tuesday, based in Denver, as reported by Reuters.

The price tag: $1.1 billion, including debt.

Compare Prices With The June 2016 MMI Report

The main reason: Centerra owns and operates its main asset, the Kumtor gold mine, in Kyrgyzstan, and seeing as how the Asian nation wants a bigger cut of Centerra’s pie lately, the Canadian miner wants to reduce its exposure in Asia while boosting its footprint in North America.

With the recent upsurge in gold prices, times for miners such as Centerra are looking quite rosy.

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This week, we saw nickel prices reach an eight-month high as metals suddenly became a sexy pick for investors again. Gold hit a two-year high as worried stockholders abandoned markets and looked for safe havens after the tempest created by Brexit.

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This week was more about markets shaking out from the initial shock of the U.K. actually voting to leave the European Union. U.K. politicians tried to stress stability, assuring India’s Tata Steel that the nation is still offering a lucrative equity stake and pension relief deal to keep the company’s sprawling Port Talbot, South Wales, steelworks open. Of course, Tata’s not buying it. At least not yet, as the whole steel deal making landscape has shifted in Europe. Could be that Tata just realized it has all of the leverage right now and U.K. politicians will have to sweeten the pot to keep Port Talbot’s doors open.

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

Gold is up as investors look to shield their money from volatile stock markets.  Source: Adobe Stock/Nikonomad.

But things aren’t all unicorns and rainbows back in the E.U., either. Regulators in Germany are investigating the novel idea of a buyers’ price fixing cartel. You heard that right. Not a conspiracy of sellers to fix prices — like when Apple and several publishers colluded to set e-book prices and we all got Amazon credits for it — but one by German automakers and original equipment manufacturers such as BMW, Volkswagen, Robert Bosch, ZF Friedrichshafen and Daimler to somehow fix prices of the steel that they buy to create the cars they sell.

The fact that the buyers don’t have the power to set prices like sellers do did not deter the Federal Cartel Office, also known as the Bundeskartellamt, an independent “higher federal authority” established to protect competition in Germany.

Free Download: The June 2016 MMI Report

MetalMiner Executive Editor and Co-Founder Lisa Reisman pointed out that it’s highly unlikely that all six companies decided that they would collude to extract steel price concessions from Germany’s largest steelmaker ThyssenKrupp AG, leaving ThyssenKrupp without a home for all of that hot-dipped galvanized steel it’s trying to sell to automakers. In that scenario, where would Germany’s automakers go for all of their steel? China? The U.S.? Good luck with your investigation, Bundeskartellamt.

The British government insists that its pension and equity stake for Tata Steel U.K.‘s biggest operation in Port Talbot, South Wales, is still on the table.

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Gold also hit a two-year high today.

Government’s Port Talbot Deal Still Available

The British government’s offer of financial aid to Tata Steel U.K. and to potential buyers of its assets is still on the table — including its massive steelworks in Port Talbot, South Wales — business minister Anna Soubry told Reuters on Wednesday, despite Britain’s vote last month to leave the European Union.

Free Download: The June 2016 MMI Report

Seeking to avoid thousands of job losses, the government had offered millions of pounds in support for the company and its potential buyers. It also pledged to take a 25% equity stake in Tata’s U.K. branch and reform the British Steel Pension Scheme (BSPS).

Gold Hits a Two-Year High

Gold increased for a seventh straight session after touching its highest point in more than two years in the previous session as investors are still seeking safe-haven assets even as stock markets are tentatively bouncing back after the U.K.’s Brexit vote last month.

Gold prices hit a two-year high after the U.K voted to leave the European Union. Brexit has been doubly positive for the yellow metal.

Gold surges to a 2-year high following Brexit. Source:stock charts.com

Gold surges to a two-year high following Brexit. Source: @stockcharts.com.

Stock Markets Sell-off

Nasdaq Composite Index heading south. Source: stockcharts.com

The NASDAQ Composite Index heading south. Source: @stockcharts.com.

We already warned on June 1 that a global sell-off in stocks was on the table and that this would make investors rotate money from stocks to gold.

Free Download: The June 2016 MMI Report

Brexit was enough to shake markets and trigger a panic-driven stock market sell-off. Investors looked for safe-havens like gold, the Japanese yen, Swiss franc and bonds. Gold prices will continue to gain if markets get uglier, which we see as likely. Read more

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.

Free Download: The June 2016 MMI Report

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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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.