Precious Metals

Our November metal price trends report showed an industrial metals complex buoyed by strong Chinese demand and bullish on the future, thanks to the election of republican presidential candidate Donald Trump who promises to curtail regulations on metals producers and the energy suppliers that provide power for smelting, steelmaking and mining.

MM-IndX_TRENDS_Chart_November2016_FNL-TOPVALUE100

While some of the metals turned in a flat performance during the month of October, almost all quickly took off after the election. Now, as our lead forecasting analyst, Raul de Frutos, recently wrote, the industrial metal bulls are in full charge.

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The minor metals remained flat, but that’s no surprise to any buyer at this point. The fact that rare earth miner Lynas Corp. received a lifeline from a hedge fund and a Japanese state-owned enterprise was a minor (metals) surprise itself.

It’s a good time to be a producer of base metals as it looks like the bulls may continue to run in 2017. For more information on how to plan your purchases well into the New Year, consult our monthly metal buying outlook.

Last night, Republican nominee and developer Donald Trump was elected the 45th President of the United States.

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Gold jumped nearly 5% to $1,337.40 an ounce early Wednesday to its highest in six weeks as investors snapped up safe havens. This was gold’s biggest single-day gain since June 24 when it rose as much as 8% when Britain decided to leave the European Union. It closed up 4.8% that day. However, prices almost immediately began to retreat this morning. It’s back below to $1,281.50/ounce as of this writing (10:45 AM Central), near its closing yesterday of $1,275.80/ounce.

A Trump win, which many believe leads to economic and global uncertainty, may also push the  Federal Reserve to hold off from raising interest rates next month.

MetalMiner’s Global Precious MMI dropped 5.8% to a value of 81 for November, the sub-index’s lowest level since June.

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In the midst of worries over the U.S. presidential election and the Federal Reserve‘s interest rate moves, precious metal prices have been on the rise over the past week.

Global-Precious-Metals_Chart_November-2016_FNL

Many investors are girding for a Brexit-like jump if Republican contender Donald Trump wins; the U.S. palladium price, for example, coming off $700/ounce-level highs from early October to just around $600/oz at the start of November, jumped back up to $630 mid-last week.

Focus on Palladium Prices

While some more short-term spikes are undoubtedly coming, longer-term structural concerns continue to swirl around the PGM markets in particular.

In just last month’s analysis of another MetalMiner monthly sub-index (the Automotive MMI), my colleague Jeff Yoders brought up excellent points about the state of the platinum group metals:

“The increasing cost of PGMs was keeping the Automotive MMI in positive territory for most of the first three quarters of 2015. The pullback in precious metals prices could pull the rug out from under automotive, too. The catalyst metals never took off for investors the way that gold did and that’s bad news for their prices as supply was never really in much doubt without more investor interest.”

Now, it looks as though that’s coming true.

Bloomberg reports that palladium futures “tumbled to the lowest in more than three months amid signs of weakening investment and physical demand for the metal used in auto pollution control devices.”

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Phil Streible, a senior market strategist at RJO Futures in Chicago, told Bloomberg that “demand is really starting to fall.”

“You’re going to see that as interest rates go up in the U.S., auto loan rates will rise and you’re probably going to see automobile sales decline,” according to Streible.

The Rest of the Precious Metals

Platinum, silver and gold prices fell across the board from October to November, across geographies including the U.S., China and India.

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Financial markets are beginning to believe the Federal Reserve is finally serious about increasing interest rates.

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At least, that’s the simplest explanation for rising treasury yields and the U.S. dollar index, which measures the greenback vs. a basket of major currencies, hitting the highest level in seven months.

US Dollar Index hits 7-month high

The U.S. dollar Index hits a seven-month high. Source: @stockcharts.com.

While the Fed has repeatedly pronounced its intentions to raise rates, markets took those announcements with a grain of salt, pricing in a lower future rate than what the Fed was promising.

Fed Turns Hawkish

However, since October, the 10-year Treasury yield has risen significantly as markets now see a 67% chance of a rate hike in the December meeting. Higher interest rates make the dollar more attractive to yield-seeking investors. Moreover, the dollar rose as most other major world currencies slid, particularly the British pound, which was depressed by Brexit concerns.

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A rising dollar has a negative impact on metal prices. Metals are priced in dollars and when the value of the dollar rises, it takes more more of them to buy metals. Another reason is that when the value of the dollar rises, foreign buyers have less buying power, typically causing demand for metals to shrink.

Gold plunges as dollar rises

Gold plunges as the dollar rises. Source: MetalMiner analysis of @StockCharts.com data.

This is particularly true in the case of gold and something we mentioned in September. Recently, gold prices fell to a four-month low as the dollar rose.

What This Means For Metal Buyers

The dollar is not the only thing that moves metal prices but it is important. If the Fed raises rates this year that would likely strengthen the dollar, adding pressure to metal prices. On the other hand, if future Fed decisions disappoint, that would weaken the dollar, having a bullish effect on metal prices.

According to SIMA data, steel imports fell in September and gold is seeing a bounce back as bargain hunters take advantage of its low price.

Steel Imports Fall

Based on the Commerce Department’s most recent Steel Import Monitoring and Analysis (SIMA) data, the American Iron and Steel Institute (AISI) reported today that steel import permit applications for the month of September totaled 2,846,000 net tons.

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This was a 7% decrease from the 3,066,000 permit tons recorded in August and a 5% decrease from the August preliminary imports total of 2,989,000 nt. Import permit tonnage for finished steel in September was 2,090,000 nt, down 9% from the preliminary imports total of 2,307,000 nt in August.

For the first nine months of 2016 (including September SIMA permits and August preliminary data), total and finished steel imports were 24,808,000 nt and 19,691,000 nt, down 20% and 22%, respectively, from the same period in 2015. The estimated finished steel import market share in September was 25% and is 25% year-to-date.

Bargain Hunters Buy Up Physical Gold

Physical gold demand in London jumped after this week’s big price drop, dealers said yesterday.

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Bargain hunters came to the market because of the metal’s technically-driven slide. Online gold trading platform BullionVault.com saw its heaviest trading day on Tuesday since its all-time record on June 24, the day of the U.K. referendum result on European Union membership.

Our Global Precious MMI was up a point this month, climbing to 86 from 85 last month, an increase of 1.2%, but this may be the last increase we see for awhile as gold experienced its biggest single-day post-Brexit drop yesterday. It closed at $1,268.40 an ounce, a slide of 3%, down from $1,311.20 on Monday. It’s around $1,275 as of this writing.

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The yellow metal was dragged to its lowest point since the Brexit vote in June which was driven mainly by a bounce in the U.S. dollar after upbeat data triggered a break of key support at $1,300 an ounce. As speculation grows that the Federal Reserve may finally raise interest rates in December, the dollar has been given a boost and a selloff in gold has ensued. Losses in silver and platinum group metals have followed, although none fell as dramatically as gold this week.

Global-Precious-Metals_Chart_Ocotber-2016_FNL

We warned, earlier this month, that the first half investment appeal of precious metals was waning. The relatively tepid increase in September was a sign that the metals, as a group, simply could not keep the momentum of the first half. Most are blaming this pullback on the dollar, and that certainly has a lot to do with it, but the fact that economic fears about the U.S. economy have been quelled might be the real culprit.

U.S. manufacturing rebounded in September after contracting in August. New orders and production at factories increased, although employment fell. The Institute for Supply Management said Monday that its manufacturing index rose to 51.5 in September from 49.4 in August. Any score above 50 is a net expansion in manufacturing activity.

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While gold is the most for-investment metal of the group, the others are experiencing similar effects as gold and their supply/demand fundamentals aren’t much better. Silver is more industrial, but acts as a safe haven, too, a veritable poor man’s gold. Platinum and palladium are more tied to the automotive and other catalyst markets. Still, they are moving largely in lock-step right now and have been doing so since the dollar bottomed out in May. Platinum is receiving a particularly cold shoulder from investors. The metal is well-supplied even if investment demand increases.

What Does This Mean for Precious Buyers?

A stronger dollar and better economic data about the U.S. economy is bad for the investment appeal of precious metals. More data will come out in the days leading up to the presidential election but precious metals’ gains of the first half are likely a thing of the past.

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The IMF has downgraded its U.S. growth outlook and Canada’s Goldcorp has been forced to shut down one of its largest mines in Mexico.

IMF Downgrades U.S.

The International Monetary Fund is downgrading its forecast for the U.S. economy this year and warns that political discontent threatens global growth.

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The IMF on Tuesday cut its estimate for U.S. economic growth in 2016 to 1.6% from the 2.2% it had predicted in July. The American economy grew 2.6% in 2015. The fund’s dimmer outlook for the U.S. occurs even as the Federal Reserve is thought to be preparing to raise interest rates in December.

The global economy will expand 3.1% this year, it said — the same as forecast in July.

The IMF described worldwide growth as “subpar,” with a slowdown in the U.S. and other advanced economies being offset by slightly stronger output in developing and emerging nations.

Goldcorp Shuts Down Blockaded Mexican Mine

Goldcorp Inc. said on Monday it was temporarily shutting down its Peñasquito gold mine in Mexico as it was unable to safely continue operations due to a week-long blockade by a trucking contractor, sending its shares down nearly 5%.

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The world’s No. 3 gold miner by market value said it was unable to bring in food, water and fuel for the 750 people on the site, which has been blockaded by a contractor concerned about losing business due to efficiency improvements at the mine.

Investors are still giving platinum the cold shoulder and oil production likely hit its recent high in September. Oil likely hit an output record in September.

Platinum Still Not Trusted

Investors bruised by platinum’s dismal failure to capitalize on a five-month strike in 2014 are not convinced that stocks of the metal have shrunk enough to justify a return to the market, despite positive supply-side news this year.

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Uncertainty over how abundant stocks of the metal are is continuing to curb investment interest in the metal, with holdings of platinum-backed exchange-traded funds (ETFs) falling to their lowest since mid-2013 this month.

Oil Likely Hit an Output Record in September

The Organization of the Petroleum Exporting Countries‘ oil output is likely to reach its highest in recent history in September, a Reuters survey found on Friday, as Iraq boosted northern exports and Libya reopened some of its main oil terminals.

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The increase comes despite lower output in top exporter Saudi Arabia and this week’s OPEC agreement in Algeria to limit supply to support prices.

A couple of developments made precious metals soar in the first half of the year.

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A falling dollar was the first development that helped gold, silver and platinum group metals soar. Second, the U.K.’s Brexit referendum. Since their January’s lows, gold, silver, platinum, and palladium rose 30%, 50%, 44%, and 50% respectively.

Yes, supply/demand fundamentals differ from one metal to another. Gold has a big role in jewelry and investments. Silver has more of an industrial role, while automotive catalyst demand makes up about 40% and 75% of platinum and palladium demand. These distinct elements can cause these metals to behave differently from time to time but, overall, there are more two more critical drivers to pay attention to. The dollar and economic fears:

Gold (in yellow) vs Platinum (in Blue). Source: MetalMiner analysis of stockcharts.com data

Gold (in yellow) vs platinum (in Blue). Source: MetalMiner analysis of stockcharts.com data.

  • Back in December the U.S. dollar peaked. Weakness in the currency lasted until May and boosted the price of precious metals.
  • In May, the dollar bottomed out and started to climb, having a depressing effect on precious metals. But the effect didn’t last too long as toward the end of June, the U.K.’s Brexit referendum took place. The economic uncertainty pushed safe haven assets higher.
  • Finally, during the third quarter, the U.S. Dollar has been pretty neutral as investors wait for the Federal Reserve to take steps on raising rates at the same time as economic fears ease. The result? Investors lack reasons to push prices higher and consequently prices are retracting.

What This Mean For Metal Buyers

Unless the upcoming monetary policies cause the dollar to weaken, or new economic fears bring back the appeal for these safe haven assets, it might take a little while until we see precious metals rising like we saw in the first half.

Welcome back to the MetalMiner week-in-review! This week we’ve got in-depth reporting on China and market economy status, India getting tough on aluminum imports and Canada… well, you’ll see what happened in Canada.

We Know Gold Prices Have Gone Up… Butt This is Ridiculous

The theft of about $140,000 worth of gold ($180,000 in Canadian dollars) from the Royal Canadian Mint, was supposedly an inside job… in more ways than one.

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After a trial that concluded in Ottawa on Tuesday, Leston Lawrence, a 35-year-old employee of the government mint in Ottawa, stood accused of foiling the facility’s high security and smuggling out 18 7.4-ounce pucks — this is Canada, after all — worth about $6,800 each. He sold most of the pucks, cooled into the size of a purity testing dipper used at the mint, to an Ottawa Gold Sellers retail store at a nearby mall. The accused criminal mastermind also had four more of the pucks in a safe deposit box.

AdobeStock_John_Takai_security_gold

“Go ahead, scan me with the wand. Nothing to see here.” Source: Adobe Stock/John Takai.

The question the Royal Canadian Mounted Police, or the Mint, couldn’t figure out is how he got past the state-of-the-art security that featured full-body metal detectors and secondary screenings with a wand for anyone that tripped the first scan?

Before Lawrence was fired from the Mint and arrested in 2015, investigators also found a tub of Vaseline in his locker. While the wand scanners can pick up even small pieces of metal in a person’s clothes, security officials from the Mint said they probably would not detect dipper-sized gold pucks that were forced between someone’s buttocks using the vaseline.

Ewww, Canada. Read more