Mining Sector Offers Divergent Fates for Precious, Industrial Metals

January 7th, 2016 by

Even as gold and silver have rallied to begin 2016, the industrial metals have not followed their precious cousins. Instead, they have been dragged lower by the broader commodities sector.

Nonetheless, the mining sector as a whole directly impacts both the precious metals and the industrial metals. Within the scope of mining, how might this divergence between industrial and investment metals play out this year?

Focus On China

china_factoryLike many dynamics within the global economy, the price movement for the various industrial metals have tracked in almost perfect correlation with the state of the Chinese economy. Specifically, these metals—which primarily include copper, nickel, iron, and zinc—are strongly influenced by news and data about the health of China’s manufacturing sector.

Productivity in Chinese factories has been on a steady decline since the first hints of a slowdown began to creep up in 2014. The situation has only gotten worse in the time since. The impact on the industrial metals from this development in China are straightforward: less factory activity means there is weaker demand for these metals, and China makes up a huge portion of the global demand for them. Therefore, prices fall.

mine-cartThis obviously impacts how much of the metals are mined. Businesses and the market always need (or demand) some amount of copper and iron, but miners will usually slow their operations if prices are too low. This dynamic has actually applied to the precious metals fairly closely over the course of 2015: lower prices cause producers to slow operations. It is also true that, absent other factors such as rising demand for jewelry or safe haven fears, gold and silver will simply track lower with other commodities (especially other metals).

However, the end of 2015 and beginning of 2016 has indeed introduced one of these external factors: safe haven flight. Yes, gold and silver are dragged lower by weakness in China and manufacturing, but there is a certain threshold where the “bad news” helps lift precious metal prices, instead. This is not true of the industrial metals.

How Gold and Silver are Affected

The surge in safe haven demand for precious metals is partly due to short-covering, as the paper gold markets still had a record-high number of short positions just prior to the rally to the start the new year. In short, markets always overshoot to one side and then correct.

precious-metalsAs far as the performance of mining companies goes, most of the big gold and silver producers are actually primarily focused on an industrial resource like copper or coal. This means that their operations are still hurt, even as the precious metals diverge from their industrial cousins. Perhaps this augers well for the junior gold miners relative to their larger-scale peers, because the juniors aren’t encumbered in mining for other commodities and focus only on gold.

Its worth noting that a lot of the weakness for gold and silver is due to the dollar, and its central place in the global financial system. Despite a third straight year of losses for the precious metals in 2015, it was actually the second straight year that gold and silver posted solid gains when measured in most other currencies, like the yuan and euro. This consequence of how foreign exchange markets work does not have nearly the same sized effect on industrial metals, however; their losses have been so big this year that virtually any currency would reflect it.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.