Gold buyers doubt FOMC rate hike projections
Gold prices touched a three-month low after the US Federal Reserve kept rates unchanged but went onto project two more rate hikes before the end of the year. Fed chair Powell referred to the July meeting as “live” for a rate-hike discussion and went on to say that the FOMC will make its decisions meeting-by-meeting. So far, however, the market is questioning the hawkish talk by pricing in less than one hike during the stated timeframe – with the risk of a recession forcing a change in focus and direction. An inverted yield curve typically signals an impending and often gold-supportive economic recession and, in the week following FOMC meeting, the 2yr – 10yr US yield spread has inverted by 94 basis points, the most since the March banking crisis.
The further delay of peak rates combined with a stock market on a tear – reducing the need for alternative investments such as gold – has resulted in total holdings in ETFs backed by bullion declining continuously for the past 13 trading sessions. During this time, investors have cut holdings by 18 tons to 2913 tons, but overall, the total remains up 57 tons from the three-year low reached in March just before the banking crisis triggered surging demand for bullion.
Gold managed to climb back to unchanged on the week with the lack of selling interest below $1935 giving traders enough confidence that the FOMC projection of two more rate hikes may not come to fruition amid the above-mentioned recession focus. In addition, the dollar sliding to a four-week low provided an additional layer of support. Gold is currently trading back above its 21-day moving average, and it may signal fresh upside momentum, confirmed with a break above $1984, a recent high.
Copper breaks higher amid stimulus boosts
Copper prices traded higher for a third week with the rally seeing an acceleration after breaking through an area of resistance around $3.82/lb. The recent rally has been supported by stimulus speculation and reports showing a weekly decline in stocks monitored by the three major exchanges in New York, London and Shanghai to 265,000 tons, not least in China where a six-week decline has reduced stock levels to a six-month low.
Additional Chinese stimulus or not, we view this month-long drift lower as a correction given the green transformation theme in the coming years will continue to provide a strong tailwind for copper, the best electrical-conducting metal for the green transformation -including batteries, electrical traction motors, renewable power generation, energy storage and grid upgrades. Producers will face challenges in the years ahead with lower ore grades, rising production costs and a pre-pandemic lack of investment appetite as the ESG focus reduced the available investment pool provided by banks and funds.
Major mergers and acquisition activity across the mining industry these past few months highlights how miners are trying to position themselves for a decade of strong demand amid the growing focus on the green transformation. Copper is increasingly considered a highly-prized asset that mining companies want to include in their product line. A recent example being First Quantum Minerals Ltd., one of just a handful of pure-play copper miners, who recently rebuffed an informal takeover approach from Barrick Gold Corp, the world’s second-largest producer of precious metals. Earlier this year, BHP also offered a 49% premium to acquire OZ Minerals Ltd, a producer of gold and copper.
Having climbed back above the 200-day moving average, last at $3.815/lb, the attention now turns to consolidation as resistance at $3.95 is unlikely to be broken until the market receives more news about the Chinese stimulus and its potential impact on markets.