Articles in Category: Exchange Traded Funds

As gold continues to flirt with $1,300 an ounce, some major investors are making opposite bets on the investment metal in the SPDR Gold ETF.

Paulson or Soros Will Be Wrong About Gold

Gold bull John Paulson slashed his bets on bullion while billionaire investor George Soros and other big funds returned to the metal for the first time in years, filings showed on Monday, as prices staged their biggest rally in nearly 30 years.

Two-Month Trial: Metal Buying Outlook

New York-based hedge fund Paulson & Co., one of the world’s most influential gold investors, slashed its investment in SPDR Gold Trust, the world’s biggest gold exchanged-traded fund (ETF), by 17% to 4.8 million shares, Securities and Exchange Commission filings showed on Monday.

China’s Largest Private Steelmaker: We Need Even More Gov’t Support

Jiangsu Shagang, the listed unit of China’s biggest privately-owned steel producer, said on Monday the Chinese government should provide steelmakers with even more support in their efforts to export products and shift capacity overseas. China’s massive steel sector has come under growing international scrutiny, with foreign steelmakers accusing the country’s firms of flooding the global market with cheap, subsidized steel and driving them out of business.

Gold prices jumped this week, extending their best start to a year in more than 30 years, the Financial Times reports.

Two-Month Trial: Metal Buying Outlook

Encouraged by a sharp fall in the dollar and a doveish stance by the Federal Reserve, the metal climbed 1% to $1,262.77 an ounce as the dollar fell over 2% against the yen after the Bank of Japan decided not to further ease monetary policy.

Source: Financial Times

Source: Financial Times

Gold had continued a long decline last year from it’s peak in Q3, 2011, but along with all other metals it has rallied some 19% so far this year as investors have plowed back into gold-backed exchange traded funds, encouraged by a relaxation in the Fed’s stance on interest rates and, from that, the prospects for inflation in the medium term. Read more

After a disastrous year in 2015, industrial metals started off on the right foot in 2016. Indeed, every single base metal is up in price on the year-to-date.

Free Download: The March 2016 MMI Report

But, is this price rally just another dead cat bounce or the start of new bull market? and, what factors do we need to watch for more clues?

Sharp Rallies Are Usual in Bear Markets

Industrial Metals ETF - Price rallies during bear market

The Industrial Metals ETF – Price rallies during bear market (2011- today). Source: @StockCharts.com.

Since the commodity bear market started in the spring of 2011, we’ve had several price rallies in industrial metals (see the graph above), that made some people think that a new bull market was underway. It wasn’t. Sharp price rallies are not unusual in bear markets and, although base metals are showing strength, we need more evidence before confirming that this won’t be another bounce followed by further declines like we’ve seen before.

Crude Oil and Base Metals Move Simultaneously

The main driver causing metal prices to rally this quarter is the oil price recovery that’s been happening since February. Lower fuel prices have compounded the longest commodity slump in a generation as oil is also key input in the cost of producing industrial commodities. Read more

World central banks are under pressure to provide monetary stimulus and to keep interest rates low in response to volatile financial markets, low oil prices and a slowdown in China and emerging markets.

Free Download: The March 2016 MMI Report

Japan’s central bank surprised markets in January when it lowered interest rates into negative territory for the first time in its history, as the country tries to fight deflation. Meanwhile, markets expect the Federal Reserve to leave short-term interests rates flat at their next meeting on March 15-16.

On Thursday, in a new conference, the European Central Bank said it would provide more stimulus measures including additional bond purchases and extremely cheap loans for banks. However, the bank also pointed out that it probably won’t lower interest rates more.

Stocks Down, Euro Up

How did the market react?

Euro Index rose after ECB conference

The Euro Index rises after the ECB conference. Source: MetalMiner analysis of @StockCharts.com data.

First, European stocks ended the day sharply lower signaling that investors were not impressed with the larger-than-expected stimulus measures. Second, the euro strengthened as the central bank said its emphasis would shift away from interest rates and toward other policy measures. Read more

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

Gold has had a barnstorming start to the year, rising 17% since January 1st to its peak of around $1,260.

Free Download: The February 2016 MMI Report

The dynamic behind the rise in prices has been a heightened risk aversion and panic over… well, just about everything really. Without fear to drive demand, gold suffers from the cost disadvantage of storage and finance costs but without the corresponding income stream of dividends.

Fear Can Be a Great Gold Price Driver

With Japan becoming the latest country to offer negative interest rates, investors sitting on cash are figuring out the sums on gold carry costs. Adrian Ash, head of research at BullionVault, is quoted as saying: “Negative deposit rates in the Eurozone and Japan are now approaching commercial storage charges on physical bullion, while Swiss Libor and the Swedish Riksbank’s deposit rate already exceed even the higher fees of gold-backed exchange traded funds (ETFs).”

Are gold prices really going to keep rising? Source: Adobe Stock/Nikonomad.

Are gold prices really going to keep rising? Source: Adobe Stock/Nikonomad.

The cheapest major ETF is the iShares Gold Trust, says Ash, which charges 0.25% per year, while the biggest gold ETF is the iShares SPDR, which costs 0.40%. “Commercial storage rates for large-bar gold are nearer 0.10%,” says Ash. Read more

Morningstar recently published its Basic Materials Outlook. Like most analysts, Daniel Rohr, director of basic materials research is bullish on the overall commodities sector and cautions investors that the transitioning Chinese economy will continue to depress both prices and consumer spending.

Free Download: New! The January 2016 MMI Report

“You are already seeing a knock on effect from the slowing fixed-asset investment environment and deflation of asset prices on households’ willingness to spend,” Rohr said. “That would more broadly fit the pattern that you observe when you look back through history at prior episodes of profound economic rebalancings. Japan, Taiwan, South Korea all had spectacular investment-led growth. Once that growth came to an end, a rebalancing wasn’t accomplished by an acceleration in consumption and a deceleration in investment. In each and every case, consumption decelerated sharply as well.”

Divestment as a Strategy

Morningstar expects Chinese household consumption growth to decelerate from the trailing 10-year average. Rohr said companies are responding to tectonic shifts in the macroeconomic environment by reorganizing their portfolios.

ATI can still pay off for investors, according to Morningstar, once it settles its lockout and uses its new stainless production facility. Source: Adobe Stock/Jovanning.

ATI can still pay off for investors, according to Morningstar, once it settles its lockout and uses its new stainless production facility. Source: Adobe Stock/Jovanning.

Miners coping with poor Chinese demand and weak commodity prices are looking to sell assets and shrink. Agricultural chemical companies have taken a different approach. Faltering crop prices have prompted many to seek mergers in a bid to cut overhead and grab synergies.

Read more

There is a lot of confusion out there on the definition of bull and bear markets.

Free Sample Report: Our January Metal Buying Outlook

Most people declare a bear market after a drop 20% or more. But that’s not a good definition, the decline needs to be put into context. For example, a 20% decline after a huge rally doesn’t necessarily mean a bear market, while a 20% decline after a long period of flatness can be considered a bear market. The same goes when defining a bull market.

When Did it Start?

Recently, we’ve seen even “reliable” sources such as the Wall Street Journal horribly define the market we are in. For example, back in November the paper called for a bull market in Chinese stocks. We could only smirk at that news, as the rally looked like a dead cat bounce. Interestingly, last Friday the paper stated that China had fallen to a bear market. The truth is that China entered a bear market back in the summer and ever since it hasn’t got out of it. Now in February, it seems like a bit late to call for a bear market…doesn’t it?

20thcentury_Fox_leo_and_bear_550_011516

“Okay, fine! It HAS been a bear market since last summer!” Source: 20th Century Fox/The Revenant

Now, the newspaper states that the US stock market is entering correction territory. We have a different view on this. The US stock market entered correction territory back on December 18th and it’s starting to look more like a bear market than a correction.

Small Caps Enter the Bear

Indeed, we consider that stocks with a small market capitalization are already in a bear market, after falling last week to a new two-and-a-half year low.

Russel Small Caps Index Falls to 2-year low

The Russell 2000 Small Caps Index falls to a two-and-a-half-year low. Source: MetalMiner analysis of @StockCharts.com data.

Generally speaking, small caps are more sensitive to turns in the economy than large caps since smaller stocks are affected by economic weakness more quickly. Many stock leaders and small stocks have begun to break down this year, showing signs of overall economic weakness.The chart above shows the Russell index (includes 2,000 small securities). Last time the index fell to a two-plus-year low was in 2008. Read more

After its surprise devaluation last August, a number of daily fixes in the Chinese yuan’s exchange rate have followed.

Free Sample Report: Our January Metal Buying Outlook

As its economy slows down, China is trying everything it can to encourage growth such as weakening its currency to make goods more attractive abroad while accelerating import substitution at home. The proverbial kitchen sink has been thrown at the growth problem in China.

However, while China pursues its domestic goal, the country is also worsening the financial stability of other countries.

Yuan-dollar exchange rate 1 year out

Yuan-dollar exchange rate one year out. Source: Yahoo Finance.

As we pointed out back in August, a weaker yuan is bearish for industrial metal prices. Here are four reasons why:

It Encourages Chinese Exports, Expanding a Global Glut of Cheap Imports

When the value of the yuan falls, metals produced  in China become cheaper and more competitive in global markets. This helps to prop up exports of metals such as steel and aluminum products, potentially hurting prices around the globe. Read more

Last Wednesday, the Federal Reserve said that a December interest rate increase is still on the table. On top of that on Friday, data showed an addition of 271,000 jobs were created in October, with the unemployment rate dropping to 5%, beating expectations.

Free Sample Report: Our Annual Metal Buying Outlook

The good news greatly increased chances for a December rate hike. As a result, bond yields surged and the dollar appreciated against all currencies. The dollar index made a bullish move and is now at a seven-month high, breaking above resistance levels. The move suggests a continuation of the dollar’s bull market.

Dollar Index hitting 7-month high

The US dollar Index hits a seven-month high. Source: MetalMiner analysis of @StockCharts.com data.

Dollar Up, Metals Down

A rising dollar is something we’ve covered in previous articles. One of the side effects of a strong dollar is lower commodity prices since commodities are priced in US dollars and thus are negatively correlated to dollar fluctuations.

Free Download: The October MMI Report

Industrial metals are commodities and a strong dollar has a depressing effect on prices. In the next chart we can see the dollar index versus the Industrial Metals exchange-traded fund. Notice how the dollar started to rise in mid-October, making industrial metals fall to multiyear lows.

Dollar Index (in green) vs Industrial Metals ETF (in blue)
US dollar index (in green) vs. the Industrial Metals ETF (in blue). Source: MetalMiner analysis of @StockCharts.com data.

What This Means For Metal Buyers

On top of weak Chinese demand, we have a rising dollar. This is bad news for metal producers and  good news for metal buyers. For metal prices, we expected, and we still expect, more downward movement ahead.