Precious metals prices were pressured sharply lower again this morning, each falling by more than 1% in early trading this morning. The metals, especially gold, continue to get bashed in the mainstream media after losing ground on 7 of the last 8 trading sessions. We are entering the deepest trough of the summer doldrums in the commodities cycle, as a general slowdown of global economic activity this year is weighing heavily on all kinds of raw materials. At the same time, however, stocks are also trading lower today on the back of what investors are perceiving as underwhelming corporate earnings reports from tech firms like Apple and Microsoft.
Yesterday in the Markets
The precious metals each rose modestly on Tuesday, recovering some of their steep losses over the previous 6 trading sessions. Gold closed just above $1,100/oz while silver came up just shy of $15/oz. U.S. stock indices each fell: the Nasdaq lost about 0.2%, the S&P 500 fell by about 0.4%, while the Dow Industrials sank 1%. 10-year Treasuries saw demand as yields fell 7 bp to 2.33%, and the dollar lost ground slightly on its peers, still closing above 97.0 on the DXY.
Factors Affecting Gold Today
In addition to market sentiment regarding the precious metals being attacked from every angle by financial pundits, the stocks of major gold miners like Newmont and Barrick have also been tanking. Shares are down 20% to 25% across the industry just in the last month. In many cases, a gold price below $1,000/oz is where mining companies can no longer profitably extract the metal from the ground when all of their production costs are taken into account. This means that, at minimum, these miners are going to cut production until prices recover or, at worse, they will have to shutter operations altogether—which can delay a resumption of gold production for more than a year when the time comes to bring a mine back on-line.
Palladium in particular has been the weakest performer among the metals of late thanks to a wave of bearish sentiment that has swept investors out of precious metals; since palladium and platinum typically see their strongest demand as alternatives to gold, they therefore suffer the worst losses during a downturn. The fundamentals for palladium, however, may point to a solid recovery, considering a supply shortage promises to remain in place through this year and next. Remember also that, until recently, palladium had outpaced the other metals as they’ve fallen over the past two years, holding near $800/oz until the middle of this summer.
The rout in commodities this summer may eventually factor into the Federal Reserve’s decision to raise its benchmark interest rate. Though the first rate hike is expected to come in September, it’s been clear from the start that the central bank would like to err on the side of caution (and easy credit) for as long as is possible before investors lose all faith in the Fed’s credibility. The sharp drop in commodities prices will keep inflation measures capped, which has been one of the Fed’s overarching criteria for judging if the time is appropriate for rates to go up. Don’t be surprised if, due to “transitory” influences in the markets (low commodity prices), the Fed chooses to publicly push back its expectations for the first rate hike until December.
Even when the Fed isn’t in the picture (which isn’t often), the stock market never seems to know which way it wants to go. Apple posted better than 30% revenue growth during Q2, but the tech giant “disappointed” by not beating analysts’ expectations by even more, especially regarding the company’s sales of its new iPhone. Microsoft announces its quarterly earnings today as well; an underwhelming report could push the technology-heavy Nasdaq Composite further off its all-time high today. Although falling stocks and declining commodity prices are driving some demand for government bonds and other traditional safe havens, the precious metals retain the dual advantage of being the truest safe haven in an investment portfolio and currently trading at depressed prices.
European shares traded lower this morning as investors await the vote in Greece on approving a second round of austerity measures that the country’s creditors require for the disbursement of more financial aid. Though centrist opposition parties in Greece are expected to help push the measures through, the political rupture in the governing left coalition, Syriza, could spell an ouster for Prime Minister Tsipras and his inner circle. The Greek premier already dismissed a group of party officials who were seen as unwilling to compromise with political moderates. In other news, the Russian central bank has continued to stockpile gold, buying another 25 tonnes last month. This adds to the world’s 6th-largest gold reserves, though is the result of the central bank snatching up all domestic production, a protectionist policy to mitigate the effects of slumping spot prices.
Weekly jobless claims will carry the day tomorrow as far as news is concerned, though the EIA natural gas report and the Kansas City Fed manufacturing index will also be released.