Precious Metals

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.

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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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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.

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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.

Monthly Metal July_Final-220Read all about the implications of Brexit and other recent developments for metals markets in our July Monthly Metal Buying Outlook.

Our Monthly Metal Buying Outlook allows you to receive short- and long-term buying strategies with specific price thresholds. If you would like to trial our metal price forecast, click below to get two free months of reports.

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.

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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.

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.

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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.

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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.

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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.

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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.

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