The Adventures of Tin, Tin, Tin

The industrial metals have been mired in a downward cycle over the past year. For much—if not all—of 2015, the market for industrial metals has been rather unfavorable and analyst expectations haven’t provided much hope for their improvement, either. However, the one outlier in July has been tin.

tin_canCurrently, tin is used for a variety of purposes. These uses are mostly limited to home construction, outdoor home decor, and electronics. In particular, tin is used in sheet metal, roofing materials, gutters, lighting devices, and as fire protection on wooden doors. The metal’s high resistance to corrosion from moisture and oxygen means that it is typically used as a coating for other metals or as an alloy with other metals.

Tin Outperforms

However, amid a near-stagnant metals market, tin has gained 15% this month. This rise in the tin market is surprising not only because of its recent idleness, but also because of the meager movement in the other base metals.

Tin has been the only industrial metal to advance in the past month and it’s chiefly due to export regulations from one of the globe’s largest producers of the metal. While China may hold the largest influence on commodities in general, this has not necessarily been the case for the month of July.

Indonesian Supply

The export regulations in Indonesia have made it more difficult to obtain speedy deliveries of tin, not to mention that they’ve made it more costly to do so. The new restrictions have made rush deliveries more expensive than the standard three-month wait and have caused a delay in already-scheduled shipments. The resulting backwardation (when futures trade lower than current contracts) could be a sign of a short supply of tin.

Flag-map-of-indonesia

China’s influence on the metals market shouldn’t be entirely forgotten, though. Indicators of China’s development point to little or no increase in the tin market. The Chinese economy doesn’t only impact the tin market: Investors link the growth of China to many other base metals, as well as the platinum and palladium market. Any positive signs from China could influence other market predictions.

Assessing the Platinum Group Metals

One such case regards the outlook for the Platinum Group metals. In comparison to the performance of tin in this past month, platinum and palladium have barely eked out incremental gains as gasps of breath between steep downtrends.  Currently, platinum has been listless at $989 per ounce and palladium has made a barely-noticeable change at $623 per ounce.

palladiumPlatinum Group metals are used in catalytic converters, a device in vehicles which converts pollutants into less toxic emissions. These metals are also known and valued for their resistance to corrosion, much like tin. However, because of their industrial applications, their prices are largely on track with that of the auto industry; even as precious metals, platinum and certainly palladium see only modest retail demand as jewelry or bullion.

A forecast on catalytic converters up to 2019 anticipates global growth in auto sales. At an expected 6.4% increase in automotive production, Europe has the lowest prospects for potential growth for Platinum Group metals. The two top-performing regions are expected to be Asia and North America, at an expansion of 8.6% and 7.5%, respectively. Most of the growth in the automotive industry from North America is expected to be in Canada and Mexico.

It Isn’t the Stock Market in China That Should Worry Investors

While the high volatility in Chinese stocks recently has drawn a great amount of attention from the financial press as well as the ruling party in Beijing, the threat a bear market on the Shanghai Exchange poses to the global economy may be overstated.

Even though the Chinese stock market has dropped 30% since June, it’s still up 14.5% for the year, compared to -0.45% for the Dow and +2.4% for the S&P 500.

What has caused the (over)reaction from the Chinese government is more a matter of political credibility than economic necessity. State-run media have been urging citizens to buy into the stock market to build a new prosperity. With things recently turning sour, public sentiment could turn against the ruling Communist Party. A recent Wall St Journal report noted that “mainland bourses are abnormally speculative, restricted and unconnected to the real economy when compared with other stock markets.” The pain of trillions of dollars of stock losses hasn’t really affected the average Chinese citizen, as only 7% of the population are invested in the stock market.

It’s the Economy, Stupid

A greater peril to China, and to the world economy in general, is a stumble in market reforms as the government attempts to move the nation from dependence on exports and government spending to a consumer-driven economy that allows private enterprise.  This is a rocky path, filled with political and economic pitfalls. Although the Chinese middle class is growing, state-own industrial and financial sectors provide most of the muscle. GDP in China is projected to growth at 7% this year. While most of the industrialized world would love to see growth anywhere near that, it represents a 25-year low for China. This illustrates how difficult the path ahead will be.

China Debt ConceptPast growth in China has been fueled by massive amounts of debt, and a blind eye towards the unprofitability and excess capacity of state-run industries. As exports decline and growth slows, that tsunami of toxic debt looms over the country. Forbes quoted hedge fund billionaire Paul Singer as saying “This is way bigger than subprime.” However, others believe that Beijing’s intervention in the stock market, using billions of dollars of government cash reserves to stabilize the market, is a sign of how any “Chinese Lehman Moment” will be handled. Since so many large banks are still owned by the government, it is speculated that the contagion can be contained by the government tapping into nearly $4 trillion in cash reserves.

The Piper Must Be Paid

However, the Communist Party has been pushing off substantive economic reforms, either from an aversion to political costs, or getting distracted while putting out “brush fires” such as the stock market slump. Further delays in reform could drag economic growth in China to levels where the spillover into other major markets become a global concern. Emerging market nations have already been substantially damaged by the slump in commodity prices this summer.

stormWe could see a “perfect storm” of a Chinese credit implosion and recession fueling an already-strong dollar to suppress American exports to the point where the U.S. is dragged down as well. With benchmark interest rates already practically zero, central banks will have few options for come to the aid of the markets.

 

Value to be Found in Struggling Gold ETFs?

As one of the most popular means for investors to allocate some of their portfolio to gold exposure, the various gold ETFs are often used as a proxy for judging the status of the gold market at large, especially as a gauge of investor sentiment regarding the metal’s outlook. Moreover, since most ETF investors never take physical delivery of their metals, instead settling these contracts in cash, it’s much easier to bounce in and out of positions without incurring the costs of transport and storage.

goldminerEven though they don’t necessarily follow the gold price in lockstep because they are largely comprised of shares in gold mining and processing companies, these exchange-traded products haven’t been immune to the precipitous downturn for global commodities, underwhelming inflation, and falling gold prices that characterized the second quarter. In fact, the ease with which investors can close out ETF positions means that action in major gold ETFs like GDX, GLD, and GLTR often run ahead of movement in the spot price of gold, not the other way around.

ETF Securities Precious Metals Basket Trust ETF (NYSE:GLTR) saw more than 3.5x its average volume in yesterday’s trading, when over 77,000 shares traded hands. GLTR has lost 6.4% in July, like most securities tied to commodities. Share prices have spent the week bouncing from dips below $55, as there seems to be strong support at this level. Though the downward slide for spot gold has forced many miners to shutter the windows until prices recover back above their cost to extract the metal from the goldmineground, there are several large companies in gold mining that can remain profitable with gold as low as $800/oz.

Meantime, SPDR Gold Trust ETF (NYSE:GLD) set a new 52-week low barely above $100 earlier this week. Shares have dropped from over $112 at the beginning of the month, and volumes have increased as gold prices continued to fall; although the outlook remains bearish over the medium-term, the fund has some technical support to rise slightly in the near-term on bargain hunting. GLD is down over 0.75% this afternoon, pushing it just below $104 per share.

The Market Vectors Gold Mining ETF (NYSE:GDX), which includes a basket of gold mining stocks, is trading between 3% to 4% lower today to under $13.50/share as gold miners continue to feel the pain, even as the opportunity presents itself for contrarian support for gold with the bottom appearing to be in for spot prices. Yet, the fact that gold miners are still being hit harder may make them an even better bargain than other ways of increasing one’s exposure to gold. Unlike GLD and some other funds, GDX (like GLTR) holds physical gold in its portfolio rather than futures contracts.

Comparison of the most popular gold ETFs. Courtesy of Bloomberg.

Comparison of the most popular gold ETFs. Courtesy of Bloomberg.

Over the last month, while GLD and GLTR have largely tracked on top of one another, GDX has sunk much further. Commodities ETFs in general have been getting hammered as commodity-dependent economies in South America go into crisis amid the deflationary trend in global commodities prices. Shorts on paper gold are near record highs not seen in 2 years, and options on gold became net short for the first time since COMEX merged with NYMEX over 20 years ago.

The ostensible “capitulation” of the gold miners and gold mining interests as metal prices have tumbled lower is being taken as a sell signal by many analysts; however, in many regards, this could be taken with equal justification to mean that the bottom is truly in for gold prices, which would render many gold mining stocks (and therefore funds with exposure to these miners) more attractive at current prices. At minimum, the chances for a brief surge amid the bear market have improved the further that gold ETF prices have fallen.

Gold Prices Steady, Approaching Crossroads

Deflationary trends across most of the global economy have not abated through the first half of 2015, dragging the gold price lower as the dollar remains the main beneficiary of such developments. July saw the largest monthly decline for spot gold in almost exactly 2 years, when the bear market that began in 2013 hit full swing.

XAU vs. DXY chart

1-Year chart of spot gold (blue line) vs. the DXY (orange line). Courtesy of Bloomberg.

Gold vs. the Dollar

As the comparative chart above indicates, the strong inverse correlation between the Greenback and the gold price has been especially clear over the last 12 months. The COMEX paper gold price was down about 1/3 percentage point this morning, below $1,089/oz, while the spot gold price for physical bullion fell by about twice that margin to just above $1,090/oz. Meanwhile, the dollar rose about 0.6% against a basket of its peer currencies according to Bloomberg’s DXY dollar spot index.

balance of gold and dollarAlthough the general drop in commodities over the past year’s down cycle, and especially over this summer, are having an impact on falling gold prices, the main driver is—and will almost certainly continue to be—the purchasing power of the dollar as the Federal reserve approaches its first adjustment to its benchmark interest rate since before the financial crisis. As the USD likely approaches its cyclical top and gold prices potentially bottom, that trend could entirely reverse by the end of the third quarter.

Role of the Federal Reserve

Though the momentum for a September rate hike by the Federal Reserve is predominantly seen as bullish for the dollar, the fact remains that inflation is running short of Fed targets, and tightening monetary policy will only create more deflationary pressure. The central bank (like most of its kind) is generally trying to spur inflation, which would run counter to the September (or even December) rate increase that the markets are expecting.

Keeping the interests of the Fed in mind, a shallower-than-expected rate increase, perhaps of 6.25 basis points (1/16%) rather than the 12.5 bp (⅛%) FOMC participants have projected, could have the effect of depressing the dollar and lifting gold. With seeming strength in the labor market and strong GDP numbers released today, the pressure on the Fed to adjust the near-zero federal funds rate mounts. This seems to be one logical way for the Federal Reserve to maintain the credibility of its calls to imminently put interest rates on a path toward normalization while still accomplishing its underlying goal of creating inflation.

Uncertainty in China

In addition to closely tracking central bank policy and the dollar, trading momentum in gold will also feel the effects of which direction the Chinese economy (the world’s second-largest) is headed. China is not only among the world’s leading consumers of gold, as is frequently publicized, but is also its most prolific producer of the yellow metal. The weakness in global commodity prices has coincided with the downturn in Chinese equities over the last month, not only raising concerns over investments in China but also prompting many large mainland shareholders to sell their gold holdings to cover piling losses in stocks. If the medium-term situation steadies in the Asia-Pacific markets—as China is the bellwether for the fastest-growing region on the globe—after weathering the volatility storm of July, don’t be surprised if gold prices enjoy a rally even amid the current bear market.

Wreckage of Doomed Malaysian Airliner Found

Analysis of photographs taken of a large piece of debris on Reunion Island in the western Indian Ocean point to the wreckage being from Malaysia Airlines flight MH370, which mysteriously disappeared on March 8, 2014 with 239 people on board. This is the first big break in one of the biggest aviation mysteries of the last 50 years. Months of searching by aircraft and ships with deep-sea sonar failed to discover the wreckage of the aircraft, which disappeared from air traffic control radars on its way from Kuala Lumpur to Beijing. (CNN timeline of the disappearance of MH 370).

PlanesAroundTheGlobe

photo from @PlanesAroundTheGlobe

The barnacle-encrusted part, which washed ashore on this small French-owned island 370 miles east of Madagascar in the western Indian Ocean, measures 6 feet long by 3 feet wide. Aviation experts who have examined the photos posted by local authorities believe that the part may be a flaperon from a Boeing 777. The flaperon is a large part on the trailing edge of the wing, situated near the fuselage. It can be used as an aileron to bank the plane, and also as a flap to give increased lift at low speeds when landing or taking off. MH 370 is the only Boeing 777 to be lost over water. if the debris is positively identified as a 777 flaperon, it could only have come from MH 370.

BBC-MH370

BBC photo of debris found on Reunion Island

Reunion Island is 2,300 miles away from the generally accepted area off the west coast of Australia where MH 370 is thought to have crashed, but oceanography experts note that the prevailing currents in the Indian Ocean could very well have transported the large piece of debris to Reunion over the almost 17 months since the crash.

A shredded suitcase was found Thursday on a beach near where the first piece of wreckage was found.

Debris dispersal path from supposed crash site of MH 370

Debris dispersal path from supposed crash site of MH 370

Officials from Malaysia’s aviation authority are en route to Reunion Island to examine the wreckage, as local officials scour the beaches and nearby waters for more debris. Once the part is taken to a forensic laboratory, it is hoped that detailed examination will yield clues that will point to what happened in the final moments of the doomed airliner.

Metals Cautiously Higher With Rate Hike Looming: Morning Market Update July 29

Markets will be closely watching the tone and specific language of today’s monthly announcement from the FOMC for signs about the timing of the Fed committee’s first increase to the federal funds rate since before the financial crisis. The changes to the FOMC’s forward guidance promise to be subtle, with the minor adjustment of key phrases like “risks nearly balanced” to simply “risks balanced” signaling a good chance that monetary policy tightens at the committee’s September meeting, as most market analysts predict. While stocks will predictably be hesitant until after the announcement at 2 pm EST, the precious metals opened mixed but perhaps cautiously on an uptrend: silver and palladium added about 0.15% and 0.30%, respectively, while gold and platinum opened trading unchanged, with the yellow metal just below $1,096/oz.

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Metals Calmer, FOMC Tomorrow: Morning Market Update July 28

Spot gold opened steady this morning at $1,095/oz as yesterday’s spillover from the plunge in Chinese equities looks to be contained today; although Shanghai lost another 1.7% overnight, stock indices in Europe and the U.S. pointed higher this morning. The precious metals also looked to bounce back: silver was 0.4% higher at $14.70/oz, and palladium (which has had an odd affinity with silver over the last month or so) gained $4 (0.65%) to $620/oz. Platinum, which has tracked lower with gold recently, was $4 lower at $982/oz.

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Global Equities Fall With Asian Shares: Morning Market Update July 27

Interestingly, stock tickers in China use green numbers to indicate losses, since red is the color of the regime.

Stock indices in Europe and the U.S. followed Asian stocks lower this morning as the entire region saw heavy losses on the exchanges overnight. Japan’s Nikkei 225 lost nearly 1%, the Hang Seng index (Hong Kong) slid by more than 3%, Taiwan’s TSEC index fell 2.4%, and Shanghai led the way at a staggering 8.48% lower—the worst single-day loss for the index in over 8 years.

Keep in mind this freefall occurred despite the rule that no individual share listed on the Shanghai exchange can fall more than 10% in a single trading day before it’s frozen. This helped pull European shares nearly 2% into the red this morning while U.S. indices pointed lower, likely tracking into the negative right along with their counterparts around the globe. The precious metals spot prices opened slightly in the red this morning: Gold: -$4 (-0.4%) to $1,096/oz; Silver: -10¢ (-0.6%) to $14.75/oz; Platinum: -$9 (-0.9%) to $983/oz; Palladium: -$3 (-0.5%) to $626/oz.

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