Silver

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.

 

Gold and silver are heading into a risky zone. Both precious metals have fallen for the past four years but it looks like more declines might be around the corner.

Gold since 2014

LBMA gold since 2014. Graph: MetalMiner.

Gold tried to rally this year but the rally wasn’t sustainable. Gold is now back to $1,150 an ounce and seems ready to hit another multi-year low. Despite all the global economic uncertainty, “gold’s safe heaven thesis” is not really playing out.

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A strong dollar and bearishness across commodities are what’s really driving gold prices down.

Silver since 2014

Silver since 2014. Graph: MetalMiner.

Not surprisingly, silver is following the same pattern as the same price drivers are applying. Indeed, silver is already hitting a multi-year low. Interestingly, the same thing happened last year when silver fell and then gold followed.

What This Means For Metal Buyers

The outlook remains bearish not only for base metals but also for precious metals. Gold and silver are approaching key support levels and if they are not able to hold, we could see prices sinking. The buying strategy to take on gold and silver is pretty clear: don’t buy on weakness.

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Silver came close to breaking a key low on Friday and an Iran deal could exacerbate the oil surplus.

Silver Close to $15/Ounce

US silver finished the day at $15.39 per ounce on Friday and it flirted with numbers close to $15 several times in the trading day.

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It is currently trading at $15.62/ounce.

Iran Deal Could Add to Oil Surplus

Any nuclear deal between Iran and six world powers loosening sanctions against Tehran has the potential to  flood an oversupplied oil market with more fuel. Other commodity sectors such as cement and steel would see a rise in demand as Iran works to revitalize its economy. Officials said on Sunday they were close to a deal that would bring sanctions relief in exchange for curbs to Tehran’s nuclear program.

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The US Mint ran out of silver eagle coins again this week and half of the new nickel smelters in Indonesia won’t open this year due to low demand.

Silver Eagles Sell Out

The US Mint said on Tuesday it temporarily sold out of its popular 2015 American Eagle silver bullion coins due to a “significant” increase in demand, the latest sign that plunging prices have spurred a resurgence in retail coin and precious metal buying.

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In a statement sent to its biggest US wholesalers, the mint said its facility in West Point, NY, continues to produce coins and expects to resume sales in about two weeks.

This is the second time the mint has sold out of silver coins in the past 12 months, it ran out of 2014-dated American Eagles last November. In 2013, the historic drop in precious metals prices unleashed a surge in global demand for coins, forcing the mint to ration silver coin sales for 18 months.

New Nickel Smelters Not Necessary

Nickel producers in Indonesia may only build half of the 12 new smelters anticipated this year and some may not commence production immediately due to low global prices, a senior industry official said.

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This week our metals faced off against a resurgent US dollar and, once again, lost ground.

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It’s enough to make a metals trader or buyer need a stiff cocktail. How about a nice Moscow Mule in a copper mug? Two ounces of vodka, four ounces of ginger beer and one ounce of lime juice just isn’t the same in glassware. How can your fizzy ginger beer be served in plain, old glassware? Well, badly.

Moscow Mule in a Copper Mug. This is a Vodka drink served with mint, and a garnished with a wedge of lime, The image is a cut out, isolated on a white background, and includes a clipping path.

Moscow Mule in a copper mug, the best medicine for low copper prices.

When vodka comes into contact with the walls of a copper mug, oxidation begins which boosts the aroma, and in turn s taste of vodka. Cold copper may increase the amount of bubbles in the ginger beer, offering maximum fizz to the cocktail. Even the taste of the lime juice is enhanced by cold copper, and it reduces the acidity of the drink to complement the ginger beer.

Served Better in Metal

The original Moscow Mules demanded strict eight-ounce copper mugs, even. Sadly, the mixology craze has not yet pushed enough copper mugs onto shelves to effect the Copper MMI. If prices stay low, perhaps more and more mules will be sold and more bars will invest in copperware causing a Friedmanian run on copper. Pass me another full mug, please.

Our Russian friend is not the only cocktail to be enhanced by delivery in a metallic vessel.

Silver and Mint Juleps

Mint Juleps are said to be better served in silver cups, again to enhance the taste of the mint and the bourbon, although this precious metal investment is a bit more pricy than the copper mugs of the pride of Moscow.

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Mint Juleps getting an extra kick from silver cups.

With summer upon us, it’s a good time to break out the metal drinking vessels, anyway, and get the best outdoor experience from your oxidizing and cold, metal vessels. That and it’s barbecue season. Even foodsafe stainless steel has gotten into the act. Hard to believe that there was a time when beers weren’t packaged in aluminum cans, isn’t it?

Make sure to enjoy your metal-cupped cocktails safely this summer. No one wants their next drink to come from a tin cup.

The US dollar index has declined 6% since its peak in mid-March.

Why Manufacturers Need to Ditch Purchase Price Variance

This decline gave a boost to commodities and, of course, precious metals were not left behind. However, their upside moves look anything but impressive. Despite the weaker dollar, it seems as if precious metals are having a hard time moving away from their lows:

Gold since 2013

Gold since 2013. Source: MetalMiner

Gold prices rose a shy 6% since mid-May. The yellow metal is still near record lows.

Silver since 2013

Silver since 2013. Source: MetalMiner.

A bit more encouraging is the move silver is making, up 12% since mid-May. The gray metal, however, is still near record lows as well. The metal is trading at $17.71/oz and we’ll see if it can break medium-term resistance at $18.5/oz.

Platinum since 2013

Platinum since 2013. Source: MetalMiner.

Platinum is up 7%. A very small movement compared to its huge decline since summer last year. The metal has a long way up to reach last year’s levels. Read more

US Sen. Lisa Murkowski, (R-Alaska), last week, introduced the American Mineral Security Act of 2015, a bill that promises “to prevent future mineral supply shocks and boost the competitiveness of our energy, defense, electronics, medical, and manufacturing industries.”

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The AMSA would require that the director of the US Geological Survey establish a list of minerals critical to the American economy and provide a comprehensive set of policies to address issues associated with their discovery, production, use, and reuse.

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This month our base metals took a big tumble. Some industrial metal prices that faltered in January fell of a steeper cliff.

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The Copper MMI®, Raw Steels MMI® and Construction MMI® all recorded drops of more than 5% and only our Global Precious Metals MMI® and Rare Earths MMI® were able to post price increases this month as low oil prices continued to drag down other commodities.

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Gold and Silver are significantly up since November. Although the move is worth watching, we need to remember that prices don’t move in a straight line, they zig-zag. Both metals remain in bearish territory and bounces like these are normal after prices fall significantly.

Gold (yellow line) and Silver (blue area) since 2014

Gold (yellow line) and Silver (blue area) since 2014. Source: MetalMiner.

We pointed out last week that gold was showing strength. However, silver seems weaker than gold. While gold is only off 5% from hitting a 10-month high (see orange arrow), the gray metal is still 20% off (see dark blue arrow).

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These two metals move together and usually when one of them is not following that makes the move less reliable. We saw this happen in August 2013 when silver was falling to catch up with gold.

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We have briefly covered Greece’s decision to vote in the far left “anti-austerity” Syriza party in posts this week, mentioning the short-term impact it has had on copper and gold prices.

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In truth, though, the outcome of the election had been largely priced into both commodity prices and foreign exchange rates, so although the euro weakened on the news it has not crashed. Switzerland’s removal of the Franc’s peg to the euro had more impact and the European Central Bank’s annnouncement of a quantitative easing program was equally disruptive. But Syriza’s election and formation of the government with the help of the far-right Independent Greeks party will certainly start a period of considerable volatility in European markets as negotiations are conducted in the glare of publicity, and no doubt behind closed doors, about Greece’s future in the European single currency.

The new Greek government has started positioning itself ahead of negotiations with Greece’s creditors and some would argue they have nothing to lose. There are many voices urging Greece to simply default on everything, leave the Euro and launch a new devalued Drachma but that is clearly the nuclear option and will be held as an unspoken threat during negotiations.

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