Gold

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.

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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.

 

A major bank cut its last time with commodity trading and global stocks are still falling due to the situation in China.

Deutsche Bank Leaves the Commodity Business

Deutsche Bank will sever its last link with commodity trading by resigning as a clearing member of the London gold and silver over-the-counter business, two industry sources close to the matter told Reuters on Thursday.

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The move leaves five banks:  Barclays, HSBC, Bank of Nova Scotia, JP Morgan and UBS to settle daily bullion transactions between dealers, amounting to more than $5 trillion worth of metal each year.

Stocks Still Falling

Signs of a sharp slowdown in the world’s second-largest economy, China, have unnerved investors since Beijing surprised markets last week by devaluing its currency. Shares in the US, Asia and Europe have tumbled along with commodity prices as investors worry about waning Chinese demand.

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The US Court of Appeals for the District of Columbia Circuit in April 2014 upheld the bulk of the Security and Exchange Commission’s then-new Conflict Minerals Rule, but ruled a key disclosure requirement violated the First Amendment because it forced a company to “confess blood on its hands.”

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The same federal appeals court ruled against the disclosure requirement a second time Tuesday, saying an investigation requirement is fine, but disclosing that material remains untracked does not require an admission tantamount to guilt, when it comes to receiving raw materials from war-torn areas.

Disclosure of Unknown Origin

The Dodd-Frank Wall Street Reform and Consumer Protection Act required companies to disclose whether any tin, tantalum, tungsten or gold (commonly known as 3TG), in their supply chains is connected to violent militia groups in Africa.

An SEC spokesman said the commission is reviewing Tuesday’s decision.

The three-judge appeals panel split 2-1, effectively siding with business groups in ruling that forcing companies to designate which products “could not be found to be ‘DRC conflict free’” is tantamount to requiring firms to criticize their own products.

Two judges appointed by Republican presidents voted in the majority and a recent appointee of President Barack Obama dissented.

Conflict Minerals Rule Still Intact

The court’s rulings did not overturn the entire Conflict Minerals Rule, it actually upheld requirements such as having companies investigate whether their products include the minerals and a requirement to file public reports on their investigations, a process that began last year.

One situation where a respondent could not confirm that all of its raw materials were DRC conflict free, was party supply retailer Party City, a company that filled out a conflict minerals compliance form and asked their suppliers where, exactly, all of the materials for their mylar balloons and other party supplies came from. Party City reported it received little response from its supply chain.

That was one of many cases that highlighted the difficulty of actually vetting and confirming supply chain compliance for the wide range of businesses that the Conflict Minerals Rule covers.

What Does This Mean For Conflict Minerals Compliance?

In a statement after the initial ruling against the SEC last April, the regulator indicated that companies are not required to identify products as “DRC conflict free,” having “not been found to be ‘DRC conflict free’” or “DRC conflict undeterminable.” The SEC also indicated that, pending further action, an independent private sector audit (“IPSA”) will not be required unless a company voluntarily elects to describe its own product as “DRC conflict free” in its Conflict Minerals Report. That statement is likely to remain in effect pending the outcome of further litigation. It also looks unlikely that the private sector audits will be required this year and, barring a legal settlement, likely most of next year.

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The SEC can petition the entire DC Circuit Appeals Court to hear the case en banc, a request that the court can decide whether or not to grant. The SEC can also appeal to the US Supreme Court no matter what the outcome is at the circuit court level. The business groups that challenged the Conflict Minerals Rule can ask the court to stay the entire law, as they did after the April decision, but it’s not likely that the court would grant such a request as a stay was not allowed after the initial decision.

Most larger companies — in a variety of industries — intend to continue implementing their 3TG traceability and responsible sourcing initiatives no matter what the outcome of the case concerning the DRC measure.

A major gold bull reduced its investment in the largest gold ETF just in time, and a specialty steel maker locked workers out over healthcare contributions this week.

Paulson Partially Dodges Gold Bullet

Hedge fund Paulson & Co. cut its stake in the world’s biggest gold-backed exchange-traded fund in the second quarter of 2015, after holding it unchanged for six straight quarters, just before prices took a tumble, a filing showed on Friday.

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The move came just before spot gold prices tumbled 6.6% in July, their weakest monthly performance in more than two years after a steep selloff in Shanghai and New York, and on expectations for the Federal Reserve to raise rates as early as September.

Paulson & Co., led by longtime gold bull John Paulson, cut its stake in SPDR Gold Trust by 1 million shares to 9.2 million shares worth $1.04 billion in the quarter ending June 30, according to the 13F-HR filing.

The sharp reduction came as SPDR holdings fell by 3.5% in the quarter

ATI Locks Out Workers Over Healthcare Premium Contributions

400 Workers protested outside of Allegheny Technologies, Inc.‘s plant in Beaver County, Pa. The workers were picketing a lock out of 2,200 United Steelworkers of America-represented employees at plants in six states today.

The disagreement between ATI and the union centers on employee health benefits. ATI had proposed monthly premium contributions starting at $125 a month and increasing to $215 by the end of a proposed four-year contract. That would be coupled with higher deductibles and out-of-pocket maximums.

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Negotiations hit a wall last week when the Pittsburgh-based specialty steel manufacturer proposed a “last, best and final offer” to the union and threatened the lockout if workers did not accept the proposal by Monday.

The union balked at concessions sought by ATI.

 

Gold demand fell to a six-year low last quarter and US steel shipments jumped in June, although the 2015 numbers are still down year-over-year.

Gold Demand Plummets

Gold demand hit a six-year low in the second quarter, a World Gold Council report showed on Thursday, as sluggish prices and the prospect of better returns in equities curbed interest. Demand fell 12% to 914.9 metric tons, with declines in China and India accounting for nearly half of the drop, the WGC said.

US Steel Shipments Up in July

The American Iron and Steel Institute (AISI) reported that for the month of June 2015, US steel mills shipped 7,758,087 net tons, an 8.1% increase from the 7,175,211 net tons shipped in the previous month, May 2015, and a 6.4% decrease from the 8,291,823 net tons shipped in June 2014.  Shipments year-to-date in 2015 are 43,980,293 net tons, a 9.8% decrease vs. 2014 shipments of 48,777,146 net tons for six months.

A comparison of June shipments to the previous month of May shows the following changes:  hot-dipped galvanized sheets and strip were up 14%, hot-rolled sheet was up 12% and cold-rolled sheets, up 9%.

US companies shelled out roughly $709 million and 6 million staff hours last year to comply with regulations to disclose conflict minerals in their supply chains, according to recent research by Tulane University and Assent, a software and services firm that partners with companies to automate their compliance processes.

party city mylar balloons

Adorable possible violations of the Dodd-Frank conflict minerals compliance regulations.

A glance at the results of the study, which included 2015 Dodd-Frank 1502 form SD submissions, showed how each company performed according to Securities and Exchange Commission regulations and OECD due diligence guidelines. A team led by Tulane University’s Chris Bayer, PhD., ranked all 303 respondents according to both criteria. Assent has provided an excellent video explanation of the criteria for anyone interested.

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We have also written extensively about how US manufacturing firms can comply with the Dodd-Frank conflict minerals regulations and this study is the first major one to quantify the difficulty firms, large and small, face in confirming that their supply chains are conflict minerals free. Read more

The latest Chinese stock market sell-off is hurting commodities. Energy prices got hit the most with oil prices falling below $50/barrel, followed by precious metals. Gold prices hit a 5-year low, falling as much as 8% in July, silver of course, followed because metal price correlation is still an important factor to account for.

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Platinum prices fell as much as 12% this month:

Platinum price since 2013

Platinum price since 2013. Graph: MetalMiner.

Despite most analysts predicting a deficit, this precious metal has done nothing but fall during the past few years. The metal is down 35% this year.

Production Up

One factor putting the market under pressure is South African production of platinum, which accounts for more than 70% of the world’s supply, which has returned to levels above those of the five-month strike in 2014.

Palladium prices fell as much as 14% this month:

Palladium price since 2013

Palladium price since 2013. Graph: MetalMiner.

Palladium was the best performer among precious metals until just about a year ago when it started to fall, too. The metal is down 32% this year with an impressive decline over the past two months.

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Unlike platinum, palladium finds more application in gasoline engines and is, therefore, more exposed to the Chinese and US automotive markets than to European markets. The slowdown of the Chinese automotive market over the past few months might help explain the sharp price decline.

The US House will not vote on the Senate’s six-year transportation bill and China’s economic crisis could cause gold imports to plunge there.

House Won’t Vote on Senate Transportation Bill

House Majority Leader Kevin McCarthy, (R-Calif.), says the House will not vote on the Senate’s six-year highway transportation bill. Funding in the federal government’s Highway Trust Fund will run out on July 31st without any further action.

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The House has already adopted a bill that pays for transportation construction through mid-December. The stumbling block appears to be the provision to reauthorize the Export-Import Bank that’s included in the Senate bill. House members will leave for their August recess on Thursday, and funding for Highway Trust Fund expires Friday. The Senate will be in session next week and could choose to vote on the House bill.

Chinese Gold Imports Hit by Lower Credit Rates

China’s gold imports could fall as much as 40% this year as demand for bullion used to back domestic financing deals decreases, the world’s biggest refiner Valcambi told ThomsonReuters. A lot of the gold China imported in the last three years was used to secure cheaper loans due to a liquidity crunch, but that is now flowing back into the market as lending rates drop there.

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Architecture billings hit an eight-year high this month and several large, Asian sell orders triggered the big gold sell-off on Monday.

ABI Strong in All Sectors

Paced by continued demand for projects such as new education and healthcare facilities, public safety and government buildings, the Architecture Billings Index (ABI) increased in June following fluctuations earlier this year. An economic indicator of construction activity, the ABI reflects an approximate nine-to-twelve month lead time between architecture billings and construction spending.

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The American Institute of Architects (AIA) reported the June ABI score was 55.7, up substantially from a mark of 51.9 in May. This score reflects an increase in design services (any score above 50 indicates an increase in billings).

This is the highest score for the ABI since 2007.

  • Regional averages: Midwest (57.2), South (54.9), West (50.7) Northeast (50.4)
  • Sector index breakdown: institutional (59.1), mixed practice (54.7), commercial / industrial (51.6) multi-family residential (47.0)
  • Design contracts index: 52.5

How Gold Dropped Below $1,100 an Ounce

In early Asian trading hours on Monday, when typically only tens of contracts of gold are traded, investors dumped more than $500 million worth of bullion in New York in four seconds, triggering the market’s biggest rout in years.

The sell-off began when one or more massive sell orders hit the price of gold on the CME Group‘s Comex futures index in New York a tenth of a second after 9:29 a.m. in Shanghai, triggering turnover of almost 5,000 lots of gold. That equates to 13 metric tons of gold, more than typically trades in hours this early in the day. The sales knocked the price almost $20 to $1,100 per ounce during those four seconds.

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Gold miners saw their stock values plummet with the price of the yellow metal on Monday. BHP Billiton is investing $240 million in its Western Australia iron ore tug boat and port business.

Gold Sell-Off Hits Miners Hard

The steep sell-off in shares of gold miners, tracking a plunge in the metal’s price, wiped out more than $8 billion from their combined market value on Monday and pushed a global index of gold stocks to a six-and-a-half-year-year low.

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The Thomson Reuters Global Gold index slumped 8.5%  to its lowest since late 2008, the biggest one-day percentage drop in two years, after gold prices sank.

BHP Investing in Infrastructure

BHP Billiton said today it will spend $240 million upgrading its marine iron ore facilities in Western Australia. The funds will be used to purchase six tug boats and build a new tug harbor in Port Hedland’s inner harbor, with construction due to be completed in September 2016.

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