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SWOT Analysis: Tightened Supplies Could Be Good for Copper

Commentaries & Views

Strengths

  • The best performing metal this week was palladium, down just 0.41 percent. Holdings in ETFs backed by palladium have fallen by two-thirds in the last three years and are back to 2010 levels.  However, this is not the sign of a depressed market.  Hedge funds have been taking delivery of the metal and then loan the metal to the market at lease rates of 6 percent for just one week, twice the yield they can earn from 10-year Treasury bonds.  Money continued to pour into gold bullion ETFs this week, with $242 million of gains, compared with $35.2 million the previous week. Bloomberg reports inflation is gradually picking up, with U.S. consumer prices continuing firm in February. This could lead to a faster pace of interest rate hikes. Over the past three months, core inflation has increased at a rate of 3.1 percent. This is boosted by core goods, which is up 2.5 percent, after deflating for a majority of the past five years.

  • Another indication of inflation rising is that TIPS, Treasury Inflation-Protected Securities, saw record inflows in February, a sign of anxiety in the bond market with large tax cuts signed into law in January. Inflation has historically benefitted the price of gold, with investors using it as a hedge against uncertainty. According to Bloomberg, U.S. retail sales fell in February for a third month in a row, raising some concerns on economic growth.

  • Trader sentiment rose slightly this week after the dollar weakened following the news of U.S. Secretary of State Rex Tillerson’s sudden dismissal. A Russian cargo plane carrying precious metals accidentally spilled 3.4 tons of gold onto the runway when the hatch flew open during takeoff. Luckily, authorities were able to recover all 172 gold bars spilled and no one was hurt in the incident.

Weaknesses

  • The worst performing metal this week was platinum, down 1.61 percent as hedge funds cut their bullish outlook with the net-long position the lowest in two months. Incoming White House economic adviser Larry Kudlow made remarks this week that sent gold toward a weekly decline while buoying the dollar, reports Bloomberg. Kudlow signaled that President Donald Trump would support a strong dollar, against some risk-off sentiment in markets amid growth concerns, the article continues. Gold could see further swings as the Federal Reserve is expected to raise interest rates when it meets next week.

  • buy king dollar versus gold?

  • Gold gained as much as 4.7 percent in January, writes Bloomberg, but those gains have narrowed to less than 1 percent. With traders pricing in a 93-percent chance that the Fed will raise rates next week, demand for non-interest-bearing bullion is dampening. In a similar unenthused note from strategist Joni Teves at UBS, the group’s recent trip to Switzerland has revealed tepid gold interest there, according to a recent report. On one hand, Swiss gold investors acknowledge that the yellow metal remains a relevant diversifier and hedge against risks, but on the other hand the market “remains capped as there is no urgency to put on gold positions in the current macro environment,” Teves writes.

  • The breach of a tailings damn wall at Newcrest Mining’s Cadia gold mine will affect the company’s performance for fiscal year 2018, reports Western Australia Today, sending shares of Newcrest down 5 percent on the news. The dam wall incident comes only weeks following a report that the company saw a 58-percent fall in underlying profit for the first half of fiscal year 2018. A range of factors have attributed to Newcrest’s numbers including “lower gold and copper sales volume,” along with an earthquake that affected the Cadia mine las year.

Opportunities

  • Many signs are pointing to a weakening U.S. dollar, which has historically been good for the price of gold. According to Bloomberg Intelligence, the dollar is hitting lows that are lower than last year’s lows, despite a spike in rate-hike expectations. In speculating why the dollar is not appreciating, Bank Credit Analyst (BCA) writes that textbook economic models suggest a combination of import tariffs, expansionary fiscal policy and tightening monetary policy should create a bullish environment for the dollar. BCA also added that if the dollar continues to be used by the White House to shrink the deficient through protectionist trade policy, it would make dollar-based financial systems more unstable and dangerous. Chief Investment Officer of DoubleLine Capital, Jeffrey Gundlach, said during a webcast for his $51.8 billion bond fund that “the odds are good that the next big move in the dollar is lower.”

  • Steven Englander, writing for Bloomberg, said this week that the Treasury is flooding the market with short-term debt that investors are not interested in buying. Englander reports that since August 2017, Treasury bills maturing in one year or less make up 63 percent of the increase in bills, notes and bonds, which is a massive skew. He says this is stealth intervention, where the U.S. dollar would need to weaken to create demand for the low-yield debt that is currently being issued with effectively negative interest rates.

  • The copper supply may tighten this year, potentially leading to copper stocks performing well due to potential labor strikes at Chilean mines. In addition, the Democratic Republic of Congo signed a new mining code that raises royalties and taxes on mining companies, to as high as 10 percent, which would increase the cost of capital for new and existing projects in the mineral-rich nation.

Threats

  • President Trump’s response to China’s unfair trading practices is taking shape, including measures limiting Chinese investments in the U.S. and annual tariffs exceeding $30 billion per year. This potential policy could have a negative impact on real estate. New York, the largest destination for foreign capital in the U.S., might receive the biggest impact with Chinese investment into U.S. office buildings decreasing around 30 percent last year.

  • Bloomberg economists Jamie Murray and Tom Orlik write that if a global trade war begins, it could cost 0.5 percent of global GDP by 2020. Estimates show that if the U.S. raises import costs by 10 percent and the rest of the world retaliates by adding tariffs to U.S. goods, it could cost around $470 billion, with many countries suffering financially.

  • Caveat Emptor: it’s a term used in the pink sheet market to issue a “Buyer Beware” warning to investors who might be enticed to buy these shares.  We highlight this term because two news stories this week mention two separate companies that trade over-the-counter (OTC) in the U.S., each announcing a land acquisition that may contain in excess of $1 billion in precious metal value.  Typically, these promotions rarely work out as favorably for the investor. 
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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