Precious Metals

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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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.

Two-Month Trial: Metal Buying Outlook

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.

Two major exchanges have teamed up to offer gold and other precious metals contracts in China and stubbornly low copper prices have claimed another

New Chinese Gold Contracts Coming

Hong Kong Exchanges and Clearing Limited and the Shanghai Gold Exchange have teamed up to possibly develop precious metals contracts and boost links between markets, the bourses said on Wednesday.

Free Download: The March 2016 MMI Report

The exchanges signed a memorandum of understanding “to consider various potential areas of mutual interest, including joint development of precious metals products and cross-market connectivity,” the companies said in a statement.

The move comes as China is close to establishing a yuan/renminbi price fix on gold, which could give buyers in Asia more power over the bullion trade.

Chile Copper Exploration Forum Canceled

An exploration forum slated to take place next month in Chile as part of one of the copper industry’s biggest annual events has been canceled. The continued fall in the copper price has hurt demand, organizers said on Wednesday.

Free Sample Report: Our March Metal Buying Outlook

The Exploration Forum, which would have been in its ninth year, was due to take place in Santiago on April 4. It has become the traditional opener to the CESCO/CRU week, a copper-focused event that draws attendees from across the global industry.

The World Platinum Investment Council Ltd. (WPIC), an authority on the physical platinum investment market based in London, has brought out its sixth quarterly report appropriately entitled Platinum Quarterly Q4, 2015.

Free Download: The February 2016 MMI Report

We don’t mind saying it’s a must for anyone remotely connected with or interested in the platinum market. Packed within the 22 pages of the report — produced for the WPIC by independent research house SFA (Oxford) — is an analysis of supply, demand and market trends that, with this sixth edition, builds up an unparalleled level of granular detail on market trends for this most interesting of metals.

What Drives Platinum Demand?

Speaking with MetalMiner, WPIC Director of Research Trevor Raymond threw additional light on the dynamics driving supply and demand for platinum as it reacts to its multiple roles as an industrial, jewelry, investment and green pollution-reducing product.

Just about every authority would agree the platinum market has been in deficit for a number of years, for any other metal this alone would have been enough to support prices, but platinum’s role as an investment product has ironically contributed to it’s price weakness since 2011.

Many had expected the miners’ strike in South Africa to constrain supply so that prices would rise, but a combination of significant producer inventory and a cooling appetite, generally, for precious metals as an investment product led to a net outflow of metal from what Trevor Raymond refers to as liquid-vaulted holdings.

Although ownership of such inventory is understandably opaque, the WPIC probably produces the best estimates of inventory, suggesting above-ground stocks have fallen dramatically in recent years, partiallly fueled by a misplaced investor perception that platinum prices should move in tandem with the wider precious metal market. Also, partially, by the perception that demand is heavily linked to growth in China. Neither of assumption is wholly correct.

Quarterly Platinum Market Report: Existing Supply

By the report’s estimation, inventory has fallen from 4.14 million ounces just a few years ago to 2.315 million ounces today. With the prospect this year of further labor unrest in South Africa over wage negotiations, and the closure of a mine shaft due to fire supply, is expected to reduce output by some 225,000 ounces with only producer stocks able to make up the shortfall, such inventory is likely to dwindle further.

To understand just how crucial South Africa is to the platinum supply market, this graph from SFA (Oxford) illustrates what a crucial role this increasingly unstable source plays, in spite of recently rising supply from Zimbabwe and relatively stable by-product supply from Russia that is linked more to Norilsk Nickel‘s production than sole platinum demand. The world remains heavily reliant on South African supply and, as a result, it is expected to fall in 2016.

Source SFA (Oxford)

Source: SFA (Oxford)

Supply, though, has recovered well since the 2014 strikes, rising 8% overall last year to 7.825 million ounces, mainly on the back of recovering supply from South Africa. But while primary supply increased last year, secondary supply fell as declining metal prices reduced recycling of both jewelry and auto-catalysts. Read more

MM-IndX_TRENDS_Chart_February2016_FNL-TOPVALUE100

The trends from our February Metal Price Index were more flat than down in February and it still looks like a bearish market for most of the metals we track.

Free Sample Report: Our February Metal Buying Outlook

Only the Renewables and GOES sub-indexes had price increases for the February MetalMiner IndX reading.

Many producers are seeing their profits decline to the point where capacity shutdowns are necessary. Freeport McMoRan’s stock price fell 45% in the first two weeks of January, after it hit a 13-year low in December.

Alcoa, Inc. — already in the process of splitting itself into two companies and curtailing its smelting business — saw its shares reach a seven-year low this month.

Brazilian miner Votorantim Metals announced in January its intention to suspend two nickel operations. In Australia, Clive Palmer’s Queensland Nickel said it would lay off 240 workers near Townsville. These announcements are definitely a sign that mining companies are starting to struggle because of the low prices.

After shuttering its grain-oriented electrical steel operations, Allegheny Technologies, Inc., further signaled it would not supply commodity-grade stainless steel at all this year.

With all of these cutbacks one would think that supply, eventually, would have to be constrained but it’s difficult to measure just how much overcapacity is truly out there.

China’s propensity to dump — and the resultant export market saturation — has still not been curtailed in any significant way. China is producing too much steel, aluminum, copper, solar panels and other goods such as plate glass and chemicals for the domestic market, and usually exports the excess at cut-rate prices. This was reflected in our metal price indexes in this month.

How to purchase at the right time in such an environment? Become a member and follow our metal price index.

Neither palladium nor platinum had a good start of the year. Within the first three weeks, palladium prices have fallen 17%, hitting a new five-year low.

Palladium hits 5-year low

Palladium hits a five-year low. Source: @StockCharts.com.

Platinum prices are not performing any better. The precious metal is down 7% so far in January and it’s at the lowest levels in seven years, just above the lows of 2009.

Platinum hits 7-year low

Platinum hits a sevn-year low. Source: @StockCharts.com.

Car Sales Didn’t Help

Auto sales in US hit a new high in 2015, with sales topping 17 million units. In Europe, where diesel powered cars dominate the market, vehicle sales were also strong, growing by 9.3% in 2015 to 13.7 million vehicles. Lower oil prices in 2015 helped the increase in car sales, but it still didn’t move the needle for catalysts such as platinum and palladium.

Free Sample Report: Our January Metal Buying Outlook

Meanwhile, China, with the largest vehicle market in the world at 24.6 million vehicles sold in 2015, saw a 4.7% rise year-on-year in auto sales, marking another all-time high.

Chinese Car Sales Not All That They Seem

Despite China’s vehicle sales hitting a new record in 2015, the world’s biggest car market decelerated in 2015. The annual growth rate in 2014 was almost 10%. Moreover, the Chinese market grew thanks to a strong last quarter, which came from a 50% tax cut for small cars, serving as a stimulus measure rather than a sustainable longer-term demand increase.

Free Download: New! The January 2016 MMI Report

If it wasn’t because of those inflated numbers, China’s auto market would have probably seen its first down year in 2015.

Palladium and Platinum: Victims of China’s Market Slump

The recent stock market selloff in China, which caused global tumult, is what’s really hurting palladium and platinum. A strong dollar is not helping matters, either. Despite analysts calling again for deficits in palladium and platinum markets this year, it’s hard to imagine these two metals rising while China keeps driving everything down.

Gold sinks (yellow) as dollar surges (green) simultaneously. Source: MetalMiner analysis of @StockCharts.com data.

Gold sinks (yellow) as dollar surges (green) simultaneously. Source: MetalMiner analysis of @StockCharts.com data.

The price of gold hit a fresh five-year low on Friday after closing at $1,056 per ounce, the lowest level since February 2010.

Brazil’s government got more aggressive about penalizing the owners of what it says is its worst mining disaster ever and India wants to unlock the potential of its citizens hoarded gold

Samarco Disaster Lawsuit

Brazil filed a lawsuit on Monday against two of the world’s largest mining companies for 20 billion Brazilian reals (about $5 billion) to clean up what it says was its worst environmental disaster, caused by the collapse of a tailings dam at a joint venture iron ore mine the two operated.

Free Sample Report: Our Annual Metal Buying Outlook

The governments of Brazil and those of two states hit by the damburst sued iron ore operator Samarco and its co-owners, the world’s largest miner BHP Billiton Ltd. and the biggest iron ore miner Vale SA.

India Wants Citizens To Sell it Their Gold

India is discussing changes to a scheme to unlock the country’s massive stash of gold at a high-level meeting this week, after a muted response to the program in the first month of its launch, according to banking sources.

Free Download: The November MMI Report

Prime Minister Narendra Modi launched the plan on Nov. 5 to lure an estimated 20,000 metric tons of gold hoarded in households and temples into the banking system. But only 400 grams trickled in over the first two weeks as low returns and worries over income tax kept Indians away.

This Thanksgiving Holiday, all of us here at MetalMiner would like to share what we’re thankful for this year.

(Mostly) Transparent Markets for the Metals You Buy

While it’s been a great year for buyers, with low commodity prices across the board, we are constantly reminded that prices are only as correct as the information behind them.

Free Sample Report: Our Annual Metal Buying Outlook

This is the first full year for the new LBMA gold and silver prices. More open and transparent processes for precious metal prices can only help purchasers in the long run by giving them more information about what goes into the prices they are quoted. We are thankful for market transparency in all its forms.

Happy Thanksgiving from MetalMiner!

Happy Thanksgiving from everyone here at MetalMiner!

That’s why our own MetalMiner IndX is updated daily with over 600 price points from domestic and multiple international markets. We’re always happy to add more open and transparent price points. Read more