Gold and silver continue to exhibit troubling behaviour; stabilizing on falling yields, only to slump when they rise a bit. This week was no exception, with gold and especially silver getting dumped following a stronger-than-expected jump in US retail sales number. Higher yields drove a stronger dollar on speculation that stimulus could be reduced soon. Gold dropped below support-turned-resistance at $1780 while silver slumped to $22.60, its August low. A fund manager at BlackRock told Bloomberg that he had almost cut his exposure in gold to zero, a move that has been replicated by other money managers in recent months, as they bet on an economic recovery and normalizing real yields.
Until data proves otherwise the precious metals market will not be at the top of fund managers' buy list, so despite continued strong demand in the physical centers in India and China, and from central banks, the metal is currently stuck within its wide 200-dollar range between $1700 and $1900. Next week, the focus turns to the FOMC meeting on September 22 where the market will be looking for confirmation when the bank will begin tapering its massive bond buying scheme. The size and the speed of the reduction are likely to determine the short-term direction, and in order for the outlook to improve, gold needs a solid break back above $1835. Until that happens, which we still believe it will, there are no major reason to chase or add to any existing positions.
Iron ore, a key input to the production of steel and Australia’s biggest export, is experiencing its longest run of daily losses since 2018. Chinese steel production, which dropped to a 17-month low in August, remains under pressure due to the governments clamp down on highly polluting industries but also signs of weakening activity in the property sector, a development currently receiving increased attention given the mentioned problems at Evergrande. The futures price in Singapore has suffered accordingly and from a record high of $230 a tonne in May the price on Friday slumped to near double digits at $101.50 a tonne.
Industrial metals traded softer on the week but still up on the month led by the recent surge in aluminum and nickel, which are seeing tightening supply and booming demand, not least due to the clean energy transition and China’s crackdown on emissions in energy-intensive industries. Dr. Copper, used in everything from wiring and electronics to electric vehicles, continues to trade rangebound with a strong long-term demand outlook currently being challenged by growth worries in China’s property sector, a key source of demand.
The helicopter perspective shows copper, one of the kings of the so-called “green” transformation, still lingering in a downtrend but which at the same time has managed to put in a double bottom around $3.95/lb. While we wait for a higher high, initially above $4.63/lb, to attract fresh momentum buying, the risk of a deeper correction cannot be ruled out, but in our opinion, copper remains a buy on fresh strength and any potential additional weakness.
Surging container freight rates: Another development impacting the cost of, and ability to ship raw materials around the world is the ongoing surge in global container freight rates. This past week Denmark’s Maersk, one of the world’s largest owners of container vessels, upgraded its 2021 earnings for a third time citing an exceptional market situation. Freight rates are driven higher by persistent congestions and bottlenecks in global supply chains struggling to keep pace with the demand for goods and overcome labour disruptions caused by Covid outbreaks. These inflationary forces are not expected to reverse anytime soon with high rates currently expected to last towards 2023.