Prompted by a post on the Cantor Metals & Mining Daily from which most of the figures below have been taken, although a few have been added in the Indices table, it is worth looking at the performance of the metal commodities and major Indices over the first six months of the year. If you’d invested in palladium you’d have done particularly well, or in iron ore particularly poorly.
Gold and copper have pretty much inversely tracked the US dollar with the USDX Index down 7% while gold and copper are up between 7 and 8% over the time period. Silver has, perhaps, been the big disappointment as it usually performs better than gold in a rising gold price scenario, but with the gold:silver ratio approaching 76 – it’s been as low as just below 68 this year at the end of Q1 – we suspect it may play catch-up in the second half of the year, particularly if gold makes more of a recovery in H2 as many observers suspect.
Miners – and particularly precious metals miners – as can be seen from the Indices table below – have underperformed the major general stock indices, but there’s considerable doubt out there as to whether the general equities markets can sustain their current levels – particularly as the major central banks appear to be moving away from their Quantitative Easing programmes and beginning to implement interest rate rises, albeit small ones.
Table 1: 1H17 commodity prices (% change)
- Gold: +7.9%
- Silver: +1.4%
- Platinum: +2.5%
- Palladium: +24.4%
- Aluminium: +11.4%
- Copper: +7.4%
- Lead: +14.6%
- Nickel: -7.3%
- Tin: -4.3%
- Zinc: +7.5%
- Iron ore 62% Fe: -21.3%
Table 2: 1H17 indices (% change)
- Dow Jones IA: +8.0%
- S&P 500: +8.2%
- FTSE 100: +7.6%
- US Dollar Index: -7.0%
- FTSE All Share Mining: +4.0%
- S&P TSX Global Mining: +1.9%
- S&P ASX 300 Metal & Mining: +4.5%
- HUI: - 4.3%
- XAU: 3.7%
So where do we go from here? We are entering the northern hemisphere holiday season which usually means relatively thin markets, particularly in the precious metals sector which makes it easier to move markets on much smaller volumes, but whether this will prove to be positive, or negative, remains to be seen. Precious metals bullion demand in North America has been muted this year anyway. Historically the markets tend to make their main move when the U.S. holiday season ends in early September after Labor Day (September 5th this year). We have seen some pretty dramatic precious metals moves after recent Labor Days – will that happen again this year?
And how about Asian Demand? Indian demand has been running really high so far this year, but July to September tend to be weak months as the post monsoon harvest is brought in and the market only tends to start reviving in October in the run up to the Diwali and Dhanteras Festivals and the start of the wedding season. There are mixed messages out there at the moment with respect to Indian gold demand though. It is felt that dealers and jewellers restocked ahead of the Goods and Services Tax (GST) announcement at the beginning of this month. In the event, for gold, this was set at 3% - lower than some had feared but perhaps still high enough to give a boost to smuggled gold and under-the-counter jewellery sales. Some reports suggest an immediate fall off in gold demand but this may well be to allow people to get to grips with the new GST processes. There are also reports that banks, which had stopped importing gold ahead of the GST announcement due to lack of clarity in the post GST regulations, will be resuming imports later this month.
When we talk about Asian demand this is usually hugely dominated by India and China – the world’s two most populous nations with both seeing rising wealth and an individual citizens’ propensity to buy and hold gold as insurance against possible adverse financial eventualities. China too tends to see weaker gold demand over the July to September period but again tends to see a pick up towards the end of the year. So far this year demand has been holding up at marginally above the levels of H1 2016, although still well below that of the record 2015 year’s figures. However with the ever-continuing flow of gold from west to east, and the huge growth in importance of the Shanghai Gold Exchange (SGE) in setting a global gold price benchmark, we are beginning to see a major change in the predominant price driver towards Shanghai. Given the SGE and the Chinese banks are state controlled then the influences on gold pricing could well take on a new perspective given the amount of gold held by private individuals in the nation. A higher gold price could be seen as boosting the economy in terms of empowering a feeling of growing wealth and thus boosting the domestic economy.
On balance we would suggest that rather than drifting lower during the northern holiday season the gold price could move higher, although not necessarily significantly so, as Shanghai seizes the opportunity to play an even stronger role in the price setting mechanism.