Industrial metals traded lower with the rising cost of fuel and signs of a slowdown in China hurting sentiment. The Bloomberg Industrial Metal Index retraced to a five-week low with HG Copper testing but once again finding support ahead of the key area around $4 per pound. Widespread power shortages in China and the debt crisis within the property sector, together with regulatory risks and anti-pollution measures, have reduced industrial activity, thereby potentially lowering the short-term demand outlook for copper and other metals such as nickel, tin and zinc. The mentioned developments helped drive the first contraction in Chinese Manufacturing PMI in 19 months during September.
Precious metals: Gold had a reasonably good week, at least on a relative measure, considering the limited negative impact of a surging dollar and rising Treasury yields. Some mid-week weakness was led by silver which temporarily dropped below key support in the $22 area. With close to half of the overall silver demand coming from industrial applications, the current worries about a Chinese slowdown has hurt sentiment more than gold as investors look for hedges against rising price pressures seen almost everywhere, most recently in the surging cost of energy.
Gold is not only a metal which tends to respond to movements in the dollar and yields, both of which continue to be price negative. It is also used by fund managers as a hedge or diversifier against risks across financial assets, and following a year of fading interest due to financial assets and market valuations trading near all-time highs, we may see this trend start to reverse given increased uncertainty about the short-term direction of the global economy and with the stock markets and volatility.
For investors believing the current market confidence and subdued inflation outlook to be misplaced, signaled through the bond market, the cost of buying insurance against it continues to get cheaper with gold presently trading near the lower end of its year-long range. Over the coming weeks we will watch yield developments closely with rising yields potentially raising renewed uncertainty across other asset classes, such as interest rate-sensitive growth stocks. Also, the continued surge in the cost of most energy sources may ultimately support our non-transitory views on inflation, and provide gold with the support needed to challenge and eventually break above $1835.