Metal Prices Have Fallen in Waves, Part One

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Source: Jeff Yoders/MetalMier

Industrial metals are in a bear market that has lasted 5 years so far. However, the decline in prices has steepened since summer 2014.

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Ever since then, three major events have contributed to the slump in prices.

DBB Industrial Metals ETF

The DBB Industrial Metals ETF has fallen consistently over the last year. Source: MetalMiner analysis of @StockCharts.com data.

As we can see in the chart above, these events helped to create three major selling waves:

Event 1: The Dollar Soars

The US dollar enters a bull market: In the summer of 2014 the dollar index (which measures the performance of the dollar against a basket of foreign currencies) rose 25% over the next nine months, hitting an 11-year high. A strong dollar is bearish for metal prices as it makes metals more expensive, as they are priced in dollars, limiting demand as they become more expensive overseas.

Dollar Index (in green) versus Industrial metals ETF (in black) 2014

Dollar Index (in green) versus the industrial metals ETF (in black) 2014. Source: @StockCharts.com.

Event 2: The Chinese Sell-Off

China’s stock market sell-off: Chinese shares plunged in May 2015. The sharp decline increased worries of a slowdown in the world’s largest commodity user. A slowdown in China’s demand has appreciated ever since. All this has exacerbated an already bearish commodity market that the bull dollar started, having an even more significant impact on industrial metals, which are even more sensitive to the slowdown in industrial demand.

In May 2015 metal prices fell (in black) with China shares (in orange)

In May 2015, metal prices fell (in black) with China shares (in orange). Source: @StockCharts.com.

Event 3: The Dollar Gains Even More

The US dollar bull market charges on: Last month, the dollar made another bullish move on expectations that the Fed would rise interest rates while other central banks are not showing even remote interest in a rate hike anytime soon, as their focus is to employ other easing measures to stimulate incremental growth.

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These actions have made investors focus on diverging monetary policy between the US and most countries overseas. Although the US economy is not growing at a fast pace, it’s still looking better than most major economies. Once the Fed raises rates, higher borrowing costs domestically would make the dollar more attractive to investors seeking yields than other currencies. That would potentially make the dollar keep appreciating against other currencies, having a depressing effect on metal prices.

Dollar Index (in green) versus Industrial metals ETF (in black) October 2015

Dollar Index (in green) versus Industrial metals ETF (in black) October 2015. Source: @StockCharts.com.

In the next part of this article we’ll analyze how each individual base metal is falling during this third selling wave.

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