All quiet on the precious-metals front this month, as our Global Precious Metals MMI stood pat from May to June at a reading of 84.
Since we tend to keep a closer eye on the platinum group metals (PGMs) due to their automotive applications, the U.S. platinum price tracked by the MetalMiner IndX posted only a negligible gain, while the U.S. palladium price suffered only a negligible loss … reflected directly in the wash that was the sub-index’s June performance.
Interestingly, gold has been getting hot as of late. More on that below.
What’s Going On in the Background?
Although the Global Precious Metals MMI did not reflect it in the May-to-June time period, the U.S. gold price increase after June 1 has turned some heads. As my colleague and new MetalMiner Editor Fouad Egbaria reported earlier this week, “gold neared its year-to-date high on Tuesday,” according to Reuters. “The rise comes in a climate of political uncertainty, with an election in the United Kingdom, former FBI Director James Comey’s testimony before the Senate Intelligence Committee on Thursday and a European Central Bank meeting this week,” Egbaria noted.
Back to platinum. As a reflection of the metal’s dawdling short-term pricing, South African producer Lonmin has been struggling. Reuters reported earlier this week that the company is “pulling every lever to try to restore confidence in its ailing business, including reopening a major shaft and expanding its biggest operation,” according to Lonmin’s CEO. Low prices and skyrocketing costs have reportedly conspired to present the company with a cash problem over the past near-decade.
What Metal Buyers Should Look Out For
Platinum specifically has had a low-price problem this year — but that’s obviously less of a problem if you’re purchasing metal. While we’re unsure of when prices will swing back up — mainly because output cuts in South Africa and elsewhere have seemingly not helped — it may be hard to discount current windows for smaller spot buys.
Exact Prices of the Key Movers and Shakers
Again, the dog days of summer have seemingly started early for the precious metals tracked by our sub-index. Gold, silver, platinum and palladium prices only marginally ticking up, down or remaining flat.
The U.S. palladium price dropped 1.3% to $816 per ounce.
Meanwhile, U.S. platinum ticked up only $3 to end up at $947 per ounce.
Our Indian silver price ticked down 0.5%, settling at $619.15 per kilogram.
This morning in metals news, the strike at Freeport McRoRan’s Grasberg copper mine was extended for a second month, oil prices rose in expectation of supply cuts, and silver prices reached a three-week high.
Freeport Indonesia Strike Extended
This past Saturday, the union representing thousands of workers at Freeport’s Grasberg copper mine in Papua, Indonesia announced that the ongoing strike will be extended beyond May 30, Reuters reported. As union industrial relations officer Tri Puspital told Reuters, “We will extend the strike for 30 more days.” Approximately 9,000 workers are participating in the strike.
The reason for the strike revolves around employment. Last month, Freeport laid off about 10% of its 32,000 workers to cut costs, which accrued to the tune of millions thanks to an ongoing dispute with the Indonesian government over rights to the Grasberg mine. “With this problematic combination of protests from workers and tensions with the Indonesian government,” wrote MetalMiner analyst Raul de Frutos earlier this month, “it’s no wonder that investors are concerned about further supply disruptions this year.” It looks like supply disruptions will continue.
A Key Week for Oil
One hopes that this will be the only time when news source after news source mentions Saudi Arabia and glowing orbs in the same headline. In more important news, Bloomberg reported yesterday that Saudi Arabia has received Iraq’s support to extend oil output cuts for nine months, after Saudi Minister of Energy Khalid Al-Falih flew to Baghdad to talk to Jabar al-Luaibi, his Iraqi counterpart. Read more
Our Global Precious Metals MMI inched up a point in April. However, this year the index seems to be struggling near 84 points. Let’s take a look at gold and palladium, two of the precious metals integrated in this index, to better understand the ongoing trend in precious metals.
Some analysts are saying that gold is up this year on its safe haven appeal due to rising geopolitical instability. But that’s simply not true. Otherwise, we would see it reflected in stock market indexes, which are trading at record highs. Not only the U.S. but also Europe, China and other emerging markets are seeing their stock markets hit multi-year highs. Investors are confident about the prospects for the global economy, and until something proves them wrong, gold is lacking any appeal as a safe haven.
Gold CME contract. Source: MetalMiner analysis of stockcharts.com
If you held gold this year, don’t thank rising political tensions; simply thank a weaker dollar and some dip buying. This year’s rally in gold follows a 18% price slump in Q4 of last year. But prices are back to their average and just 8% below $1,380/oz, a level that has been a ceiling to gold prices for four consecutive years. This means that investors will have to find good reasons to chase prices higher. Given the ongoing strength across global stock markets and the rather neutral picture of the dollar, we wouldn’t expect gold investors to get a good return on their money for the balance of the year.
As I’ve written earlier on MetalMiner, “palladium prices rose to a two-year high in April, making it the biggest gainer among precious metals. Last month we outlined some of the factors contributing to the palladium price rise: a growing auto sector; a strong South African currency; a falling dollar; and bullish sentiment across industrial metals. However, as prices continue to climb, it’s time to question how high prices can go. Despite a still solid outlook, there are some reasons to believe palladium prices could be nearing their peak.”
One of them is a potential slowdown in demand for cars. U.S. car sales declined in April, following a disappointing month of March. Markets suspect that the car industry boom that has run since 2010 has now come to an end.
Meanwhile in China, car sales are still going strong, but the pace is not the same as last year. As I wrote before, “weaker sales tax incentives have put pressure on demand this year and are expected to slow down demand even more next year. Buyers of cars with engines up to 1.6 liters paid a 5% purchase tax last year, but they are now paying a 7.5% rate. Buyers are still finding incentives to rush on buying cars this year since the rate will increase to 10% in 2018.”
Palladium nears long-term resistance levels. Source: MetalMiner analysis of stockcharts.com data
Finally, as with the case of gold, palladium might need the stronger fundamentals to lure investors to chase prices higher. Historically, palladium has peaked in the range of $850-$900. Prices closed in April at $827.
Gold bears have had quite a ride since the start of this year. The price spiked to $1,286 per ounce last week, a rise of 11% since the end of last year as this chart courtesy of the Financial Times shows.
Source: Financial Times
Despite a gradually improving global economic picture, geopolitical tensions have increased in recent months first with Syria and more recently with President Donald Trump’s announcement that he was prepared to take military action in North Korea.
In Europe, investors looking to protect themselves against the political risk associated with the first round of the French presidential elections where the fear of a shock victory by the far right leader Marine Le Pen was considered a distinct possibility. During this same period, the U.S. dollar has weakened somewhat in value and with gold inversely correlated to the currency, as the dollar falls gold, and other commodity prices, rise.
Well, what a difference a week makes. North Korea has shown itself to be less capable and in the face of a tougher stance from America, less belligerent than during previous bouts of posturing.
In the French elections, the least bad option, Emmanuel Macron, has emerged victorious from the first round over Marine Le Pen with nearly all observers expecting he will win through in the second round of voting on May 7. Later this week we should hear President Trump’s tax policies which are widely expected to include substantial reductions in personal and corporate tax rates. On the back of solid U.S. and global economic growth, such inflationary fiscal stimulus will only hasten further U.S. Federal Reserve rate increases. Not surprisingly, Goldman Sachs is not alone in predicting further weakness in the gold price, which weakened promptly on the news of the French elections and is targeted by Goldman to fall to $1,200 per ounce this summer. While not a universal truth, Goldman Sachs predictions do tend do have an element of being self-fulfilling simply because so many investors take their advice into consideration when making investment decisions.
These gold bears haven’t had as big a run as their metals brethren. Source: Haribo
Of course, there remain counter arguments as to why the gold price may yet rise. Trump’s presidential decrees are easier to make than getting legislature onto the statute book. Proclamations this week over the tax reduction will likely meet a more favorable Republican response than there was the case with healthcare but, even so, may be much delayed or watered-down before having any impact on the economy.
Likewise, U.S. growth could slow reducing the impetus for the Fed to deliver on its three expected rate increases this year. The Fed has frequently undershot rate rise expectations over recent years. Finally, our friend in Pyongyang has the ability, and no doubt inclination, to still do something stupid despite pressure being brought to bear to back down by his Chinese bankers. On balance, though, gold bears have probably had as good run this year as they are likely to get and profit-taking is now inevitable for all but long-term holders of the yellow metal.
Platinum bar prices and a couple other precious price points led MetalMiner’s Global Precious Metals MMI to rise 2.4% for March 2017, landing at a value of 84.
Indeed, the U.S. platinum bar price, up by nearly 3% this month, has been on an upward trajectory for the past three months, starting the month out above the $1,000-per-ounce level for the first time since October 2016.
A Focus on Platinum
Worries over supply shortages of the namesake of platinum group metals (PGMs) are still behind the investment opportunities that the WPIC foresees — so much so that the Council is pushing new initiatives on two separate global fronts. Read more
A stronger dollar and expectations for economic growth drove investors out of the safe-haven asset. What’s now sending investors back into gold? and, is this gold rally the beginning of gold’s revival or just a dead cat bounce?
Buying The Dip
Gold rises in 2017. Source:MetalMIner analysis of @stockcharts.com data.
Although a 9% increase might look impressive, it really isn’t. Gold previously lost $180 per ounce in less than two months. After such a big slump it’s normal see a price rebound since many investors will see the significant dip as an opportunity to buy gold at a discount.
To me, this doesn’t mean that gold’s underlying fundamentals have improved. Prices still have yet to test stiff resistance near $1,300 per ounce. This rally could lose steam in March.
The US Dollar
The US Dollar Index since March 2016. Source: MetalMiner analysis of @stockcharts.com data.
Perhaps, the single factor contributing most to this year’s gold rally is a weaker dollar. Weakness in the dollar also comes because the currency rose very fast in the last quarter of 2016. In addition, President DonaldTrump made comments that he desires a weaker dollar and that has also weighed down the currency.
Last week, Federal Reserve officials said they plan to raise rates “fairly soon,” but “they left investors doubting that the central bank will act at its March meeting,” according to a piece on Dow Jones newswires. “The Fed raised interest rates in December and cited plans to raise rates as many as three times in 2017,” according to that story. Gold usually suffers under higher rates, since the precious metal becomes less “less attractive compared with yield-bearing assets when borrowing costs rise,” according to Dow Jones.
This month the dollar seems to be finding some support. We’ll have to wait and see if the currency can resume its bull market run, which would be quite bearish for gold prices.
The S&P 500 hits all-time highs. Source: @Stockcharts.com.
As a CNBC.com article puts it, “Trump has frequently told U.S. citizens he remains committed on both tax reform and regulatory cuts since entering the White House, which has created optimism among investors.” We already presented the case for a bull stock market back in January.
A Trump administration for the next four years might be just what the doctor prescribed to keep this aging bull stock market going, even with seven-plus years of gains behind its back. At least that’s what it looks like thus far. U.S. stock indexes are trading at all-time highs, which is not helping gold as a safe haven.
What This Means For Metal Buyers
The recent strength in gold prices is something to keep an eye on. However, keep in mind that this rally might just be a dead cat bounce. A rising stock market, a healthy U.S. dollar and gold prices meeting resistance are factors that could keep a lid on gold’s rally.
Our suspicions were confirmed when almost all of our sub-indexes had big price rebounds this month. The Automotive MMI jumped 12.2% Raw Steels 8% and Aluminum 6%. Even our Stainless Steel MMI only dropped 1.7% and has taken off since February 1 as nickel supply is even more in question now with both the Philippines and Indonesia’s raw ore exports in question.
The bull market is on for the entire industrial metals complex. Last month’s pause was necessary for markets to digest gains but the strong positive sentiment for both manufacturing and construction shows no signs of ebbing in the U.S. and Chinese markets.
India’s gold import bill was up 12% in 2015 reaching $35 billion. 2016 final numbers are expected to come in at about the same rate, although a sharp drop in demand during December — said to be due to Prime Minister Narendra Modi’s move to scrap 500- and 1,000-rupee banknotes as a “demonetization” crackdown on corruption and tax evasion — is said to have hit the largely cash-facilitated gold jewellery market hard in the short term.
Even so, Gold imports are a considerable burden on India’s balance of payments coming second only to oil in the demand it puts on India’s foreign exchange reserves. India imports 900 to 1,000 metric tons per year, but local gold output is just 2 to 3 mt per year. In the same way that the Indian government has encouraged onshore and offshore oil exploration, you would expect indigenous gold mining would be an industry the government actively encourages.
Although India has mines that go back more than 120 years, its annual gold production is miniscule. According to an article in the Hindu times that could be about to change. The Kolar gold field was forced to close in 2001 due to mounting losses at operator Bharat Gold. The state-owned company had been mining the Kolar reserves since independence in 1947 but the mines are deep — down to 3 kilometers — and Bharat was operating with outmoded technology and a large, unproductive legacy workforce. But Mineral Exploration Corp. estimates show reserves to be worth $1.17 billion in the mines, with another $880.28 million in gold-bearing deposits estimated to be left over in residual dumps from previous mining operations.
How Can India Mine More Domestic Gold?
It is debatable whether state-owned Bharat gold has the expertise to economically exploit such deep and relatively low-grade reserves, but established global miners such as Vedanta may hold more potential. In February 2016, the firm became the first private company to successfully bid for a gold mine in India — the Baghmara gold mine in Chhattisgarh — a mine with potential gold reserves of 2.7 mt of contained metal. Sure, that’s a fraction of Kolar’s 35-mt potential but a good start for a firm of Vedanta’s standing to start in India’s gold mining sector.
India is never likely to rival South Africa, Canada or Australia as a gold miner, but that’s not the point. Any contribution to the domestic market will lessen the impact gold imports have on the country’s balance of payments. With domestic reserves estimated at over 100 mt there appears to be scope, with the right state and government backing, for miners to reduce some of those imports and create domestic employment.
Here’s the deal with palladium in a nutshell, from MoneyWeek:
“Both U.S. and Chinese car sales have been solid of late, with the latter rising at their fastest pace in three years (in 2016) and the former potentially set for another boost thanks to President Trump’s fiscal stimulus. China’s pollution problem is forcing it to tighten car emission standards, adds Chen Lin on Equities.com, which implies a steady rise in demand for palladium over the next few years.
“On the supply side, South Africa, the world’s top supplier, is not expected to increase mined output much. Analysts reckon that dwindling sales from Russia’s stockpiles means they are probably nearly depleted. TD Securities thinks the market deficit could double this year.” Read more
However, for the January MMI reading, that price experienced a pullback, dipping back down under $700 per ounce (although not quite reaching November’s levels).
So, a correction in that price point’s journey is evident. The U.S. platinum bar price also had a slight drop-off, as did silver and gold prices across global markets tracked by the MetalMiner IndX.
What’s Happened Since October?
Short answer: a ton.
Trump. Cubs. Brexit. Syria. Refugee crises. Panama Papers. Pokemon Go. (We could keep going…)
But a few of those had a lot to do with what’s happening across precious metals markets right now — especially gold.
Gold in Focus
What’s causing gold prices to fall dramatically? The U.S. dollar.
Gold (in dark) vs the dollar index (in green). Source: MetalMiner analysis of @stockcharts.com.
Since mid-August the dollar started a bull run that is still in play. Three main factors are propelling the dollar’s bull run, according to MetalMiner’s Raul de Frutos:
Markets expected the Federal Reserve to raise rates by the end of the year. In December the Fed raised interest rates by a quarter point, as expected, but policymakers signaled a likelihood of three increases in 2017, up from prior expectations of two moves. While interest rates outside the U.S. stay near zero or even in negative territory, it’s no wonder yield-seeking investors are going after the greenback.
The ongoing political tensions in Europe are causing the dollar to appreciate against the euro. The ongoing refugee crisis in Europe, Brexit, terrorist attacks and political instability are some of the events causing investors to lose their appetite for the European currency this year.
Finally, the victory of Donald Trump has added fuel to the dollar’s bull market. The new president-elect has proposed new tax policies that will potentially make multinational companies bring their foreign profits back to U.S., increasing the demand for dollars. In addition, the dollar is perceived as a stronger currency since investors expect U.S. growth to get a boost.