Gold rises on rising US protectionism concerns
Gold prices rose on Wednesday to a one-week high on a weaker dollar following US Secretary of State Rex Tillerson’s sudden dismissal, which invigorated concerns of protectionist policies hampering global risk appetite.
Spot gold rose 0.12 per cent to $1,327.56 per ounce at 0402 GMT. It touched $1,329.22 an ounce during the session, its highest since March 7.
US gold futures for April delivery rose 0.09 per cent to $1,328.20 per ounce. On Tuesday, President Donald Trump fired Tillerson after a series of public rifts over policy on North Korea, Russia and Iran, replacing his chief diplomat with loyalist CIA Director Mike Pompeo.
Risk aversion is back on the table following the unexpected news of Tillerson’s dismissal and the appointment of Pompeo, said OCBC analyst Barnabas Gan. “Pompeo is a supporter of Trump’s trade policy and could help advance his agenda of imposing it on US trading partners … all this uncertainty and risk aversion leaves gold as a safe haven option,” Gan added.
The US dollar wallowed against the yen and other major currencies after the dismissal of Tillerson. This killed off an earlier bounce in the currency. A weaker dollar makes bullion, which is used as an alternative investment during times of political and financial uncertainty, cheaper for holders of other currencies.
“With the US protectionist rhetoric likely to ring equity market alarm bells, gold should continue to be an ideal hedge in this highly unpredictable environment,” said Stephen Innes, APAC trading head at OANDA.
Asian shares eased on Wednesday amid fears of rising US protectionism. Meanwhile, data on Tuesday showed US consumer prices cooled in February amid a decline in gasoline prices and a moderation in the cost of rental accommodation, the latest indication that an anticipated pickup in inflation probably will be only gradual. Inflation is a key economic factor the U.S. central bank considers when deciding monetary policy.
A strong US inflation reading could raise expectations for future interest rate increases, which would put pressure on non-yielding bullion. “The 0.2 per cent increase in consumer price index suggests it won’t be enough to spur more rate hikes by the Fed than already expected,” ANZ analysts said in a note.
Spot gold may rise to $1,334 per ounce, as it has cleared a resistance at $1,327, according to Reuters Technical analyst Wang Tao. In other precious metals, silver rose 0.5 per cent to $16.62 per ounce. Platinum gained 0.3 per cent to $964.50 per ounce and Palladium edged 0.1 per cent higher to $991.47 per ounce.
Rising Commodity Prices Hide Longer-Term Challenges
Slower economic growth in China is a concern to producers and exporters worldwide.
By A. Gary Shilling
As major economies continue to expand moderately, it’s not surprising that commodity use is increasing and many prices are rising.
The Bloomberg Commodity Index is up 20 percent since early 2016. Crude oil prices have more than doubled since bottoming in February 2016. The MSCI World Metals & Mining Index of equities has risen about 90 percent since the start of 2016, topping the 30 percent gain for the MSCI All Country World Index.
Yet the rosy outlook presented by financial markets masks challenges for commodity producers from a broader transition in the economy: A greater share of economic spending is on services and a declining portion of outlays is for goods. In 1947, 61.6 percent of U.S. personal consumption expenditures was devoted to goods and 38.4 percent to services. In 2017, those shares were 32.3 percent and 67.7 percent, respectively. The same dynamic is at work in emerging economies such as China. In the services sector, consultants use some commodities via computers, but the vast majority of the output is in analysis and experience. Among goods, in contrast, vehicles are largely composed of commodities such as steel, aluminum and rubber.
Slower economic growth in China is a concern to commodity producers and exporters worldwide, especially since that country uses 40 percent to 50 percent of global production of many mineral and agricultural products, according to data from the National Bureau of Statistics of China. In fact, the ups and downs of the commodities market since 2001 can be tied to China’s decision to join the World Trade Organization at the end of that year. Although big miners of copper, coal and other raw materials collectively undertook new projects that cost $1 trillion in total to take advantage of demand from China, many producers failed to realize that China was not adding much to net global demand for commodities but rather absorbing more of the global total as manufacturing shifted there and to other developing countries from North America and Europe.
That became apparent during the recession that followed the financial crisis, when commodity prices collapsed. That left many commodity producers in sore shape with threatened bankruptcies. Capital spending budgets were axed, dividends were slashed or eliminated, and mines were mothballed. Prices have recovered from their lows, but the Thomson Reuters/Core Commodity CRB Index remains below its October 2000 level. Adjusted for producer price inflation, that index is down 31 percent over the 17-plus intervening years.
You might think that major commodity producers would use their profits to rebuild balance sheets while restraining capital spending. Instead, they are back to their old ways, apparently believing that the rebound in commodity demand and prices will last indefinitely.
Mining companies show confidence in further rises in commodity prices and their profits and growth in China by returning to capital spending. Outlays by major companies in the first half of 2017 were about one-quarter of the 2011-2012 boom levels, but could rise 30 percent in the second half of the year, the sharpest increase since 2012.
The cost of developing a major new copper mine can be $5 billion to $10 billion. But once those expenses are completed, the variable costs of mining and processing another ton of copper ore are small. Such economics encourage investment and expansion when profits are lush, often resulting in excess capacity and a drop in prices.
My analysis of commodity markets and their economics suggests seven strategies:
1 . Take advantage of current robust commodity markets.
2 . Don’t count on long-term real commodity price rises. Since 1850, the inflation-adjusted CRB commodity price index has fallen 83.9 percent thanks to technological advances and substitutes that overcame perceived shortages.
3 . Watch the ultimate buyer of commodity-using products, especially North America and Europe, and put less emphasis on China and other commodity processors.
4 . Remember that shortages are temporary and overcome by human ingenuity and substitutes.
5 . Don’t increase financial leverage to levels that will be embarrassing during the next commodity decline.
6 . Restrain costs.
7. Keep plenty of cash and borrowing power in order to buy assets cheap in the next downturn.
London copper climbs on China data, but US tariff worries drag
(Reuters) – London copper prices climbed on Wednesday on better-than-expected Chinese industrial production figures for the start of the year, but concerns about an escalation in U.S. trade tariffs capped gains.
China’s industrial output expanded faster than expected at the start of the year, suggesting the world’s second-biggest economy has sustained solid momentum despite a crackdown on polluting industries and a campaign to reduce risks in the financial system.
“On the face of it, (the China data) looked fairly positive for me.
The fixed asset investment was obviously much better than expected and also the property investment as well,” said analyst Daniel Hynes of ANZ in Sydney. “For the moment, this cloud around the trade issues is going to weigh on sentiment.”
* LONDON COPPER: London Metal Exchange copper cut early losses to trade up 0.7 percent at $6,990 a tonne by 0702 GMT, adding to a 0.5-percent gain in the previous session, when prices edged up as the dollar fell. LME copper dipped to its lowest in a month at $6,777 a tonne last week.
* SHANGHAI COPPER: Shanghai Futures Exchange copper climbed by 0.8 percent to 52,330 yuan ($8,283) a tonne.
* U.S. TARIFFS: U.S. President Donald Trump is seeking to impose tariffs on up to $60 billion of Chinese imports and will target the technology and telecommunications sectors, two people who had discussed the issue with the Trump administration said on Tuesday.
* ALUMINIUM: China’s aluminum production fell 1.8 percent in January-February from a year earlier, data showed on Wednesday, as the country’s pollution crackdown and supply-side reform kicked in even as new smelters are due to come onstream this year.
* ALUMINIUM PREMIUMS: Tariffs on aluminum imports to the United States that will begin from next week have boosted U.S. aluminum premiums. Premiums have almost doubled to 19 cents per pound from 10 cents in late January.
* DEMAND: Japan’s core machinery orders rebounded in January from a steep decline the previous month, handily beating expectations in a sign that capital spending will continue contributing to economic growth.
* COPPER MINING: For years Rio Tinto has been the sole international copper mine operator in Mongolia, bound closely to a country where it has bet billions of dollars on the giant Oyu Tolgoi project. That is changing as a bunch of smaller players raise their exploration in the country.
Oil falls as rising US output outweighs strong China data
SINGAPORE (Reuters) – Oil prices extended falls from the previous two days on Wednesday as soaring U.S. production outweighed strong China data that makes more imports by the world’s biggest crude buyer likely.
U.S. West Texas Intermediate (WTI) crude futures CLc1 were at $60.65 a barrel at 0651 GMT, down 6 cents, or 0.1 percent, from their previous close.
Brent crude futures LCOc1 were at $64.47 per barrel, down 17 cents, or 0.26 percent.
Brent and WTI have shed around 1.5 and 2.4 percent since the start of the week, with prices hit by concerns over a relentless rise in U.S. crude oil production that has also been contributing to increasing inventories.
U.S. crude production C-OUT-T-EIA has soared by almost a quarter since mid-2016 to 10.37 million barrels per day (bpd), overtaking output by top exporter Saudi Arabia.
U.S. production is expected to rise above 11 million bpd by late 2018, taking the top spot from Russia, according to the International Energy Agency (IEA).
Rising output, as well as seasonally low demand, mean that U.S. crude inventories rose by 1.2 million barrels in the week to March 9, to 428 million barrels, the American Petroleum Institute said on Tuesday.
As a result, crude prices have not returned to their January highs of over $70 per barrel for Brent and almost $67 for WTI.
U.S. bank Goldman Sachs said in a note that there was a “potentially large increase in (U.S.) drilling activity in coming weeks”.
“The ever-expanding U.S. supply continues to pose significant downside risk to oil prices,” said Stephen Innes, head of trading for Asia/Pacific at futures brokerage OANDA.
Weekly U.S. crude production figures will be published by the Energy Information Administration (EIA) later on Wednesday.
The increases in U.S. production has this year exceeded the supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC), which have been in place since 2017 in an effort by the cartel, and supported by non-OPEC member Russia, to prop up prices.
Estimates by the EIA show global supplies will exceed 100 million bpd for the first time in the second quarter of 2018, while demand will only break through that level in the third quarter, implying a slightly oversupplied market.
That would be a reversal from a supply deficit in 2017 and early 2018.
Not all market indicators were bearish, however.
China on Wednesday reported January-February domestic oil production down by 1.9 percent on the year to 30.37 million tonnes, equivalent to 3.77 million bpd. At the same time, crude throughput rose 7.3 percent to 93.4 million tonnes, implying a need for more imports.
Rating agency Moody’s said it expected oil prices to “remain range-bound through 2019” in a price band of $45 to $65 per barrel.