A visual roundup of Precious and Industrial Metals for the month
Researched and compiled by Quinten Bertenshaw, ETM Analytics
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BASELINE VIEW PRECIOUS METALS:
Gold remains underpinned by the geopolitical tensions brewing in Eastern Europe coupled with the longer-term fears surrounding a sustained period of high inflation globally. The topside has been capped by thoughts of the US Federal Reserve tightening monetary policy, which has boosted US Treasury Yields raising the opportunity cost of holding gold as it generates no yield itself. Longer term investors with a buy and hold strategy will find any levels below $1750.oo/oz attractive entry points to add to gold holdings, while those trading gold from a short term perspective, will find levels approaching $1875.00/oz somewhat stretched.
Palladium continues to outperform Platinum at the start of 2022. The risk for both metals is the threat of an all-out confrontation in Eastern Europe, which will hit global economic
sentiment. Investors in these metals are also keeping a close eye on monetary tightening, which can curtail economic dynamism. Consolidation is favoured for now.
BASELINE VIEW INDUSTRIAL METALS:
Currently, low inventory levels, Chinese demand, the threat of conflict in Eastern Europe and the potential sanctions that the US is looking to implement against Russia, coupled with tighter monetary policy from the US Federal Reserve, are the major factors driving the Industrial Metals prices. Several country specific idiosyncratic factors, such as copper supply concerns from Peru and mine nationalisation discussions in Chile are impacting prices. While Indonesia’s move to keep nickel at home will keep supply constrained and nickel prices at lofty levels. We see the current levels of base metals as sustainable and do not envisage a wholesale reversal.
The volatility in the gold market for January was subdued by comparison to previous months, recording a trading range of around $55.00/oz top to bottom, this compares to the likes of August 2021 where we had a range of $209/oz top to bottom. The tight range came despite the Fed confirming the tightening of monetary policy, which supported the dollar and raised US Treasury Yields. Higher global inflation and elevated geopolitical tensions, still hold the ability to send the gold price higher.
The fact that they have all come at the same time has effectively placed a cap and a floor on the gold price for now. Geopolitical tensions as the US threatens sanctions and military action following the build-up of Russian troops on the Ukrainian border coupled with structural inflation concerns are seeing strategic investors buy the dips.
At the same time, the topside has been capped by thoughts of the US Federal Reserve tightening monetary policy which has boosted US Treasury yields, raising the opportunity cost of holding gold as it generates no yield itself.
ETM View: Longer term investors with a buy and hold strategy will find any levels below $1750.00/oz attractive entry points to add to gold holdings, while those trading gold from a short term perspective, will find levels approaching $1875.00/oz somewhat stretched.
Palladium has had a stellar month recovering strongly in January. The noble metal cleared the $2300.00/oz handle and has consolidated above this level at the start of February. Equally platinum as had a good January however its gains have not been as large as those seen on the palladium desks. This however may not be the case for much longer as there is talk of the substitution effect taking place as automakers switch from palladium to platinum in auto catalysts to cut costs.
In the short term, there are concerns over supplies should Russia, the world’s largest palladium producer be locked out of the market over the Ukrainian standoff.
ETM View: Investors and users will look to accumulate on any dips in the price with a
recovery in the auto sector and geopolitical tensions create a bullish tailwind for now.
Industrial metals as a group have a structural tailwind at the moment. Following the rampant stimulus spending which allowed economies to recover post the COVID-19 hard lockdowns, we have a number of legislated programmes across the globe which are targeted at rebuilding infrastructure and creating new streams of growth. Equally we have the rotation towards green energy and the abolition of the use of fossil fuels which will require vast quantities of industrial metals as part of the roll out.
The Chinese Belt and Road plan remains on track where the Chinese seek to invest in nearly 70 countries and international organisations. Examples of current investments include ports, airports, dams, coal-fired power stations, railroads, skyscrapers and railroad tunnels. The Belt and Road Initiative is expected to boost the world GDP by $7.1trn per annum by the year 2040, granted this study was conducted pre COVID in 2019 but its relevance cannot be ignored.
Equally we have the European Union rolling out their Global Gateway endeavour while the US is supporting the Build Back Better World (B3W).
While at the face of it we will see some political jostling when it comes to who does what project, the global infrastructure deficit is so large that there is certainly space for multiple interests and there may be potentials for collaboration should political differences be put aside.
Over the past 18 months we have seen the global economy recover from the COVID-19 lows with manufacturing recovering swiftly as governments across the world injected liquidity and rolled out support programmes. We have seen the initial spikes in the Purchasing Manufacturing Indexes globally moderate and this could extend further as the Central Bank’s move ahead with rate tightening and stimulus removal.
One factor to note is that there is the potential for severe price volatility should the geopolitical tensions in Eastern Europe come to a head. The Russians have amassed 100 000 troops along the Ukrainian border. Moscow has accused the Ukrainian government of failing to implement and deal which would have seen peace restored in the east where in the region of 14 000 people have died in Russian backed rebel territory.
The west has responded swiftly with the US deploying additional troops in Eastern Europe and threatening the swiftest of actions including heavy sanctions should the Russians invade Ukraine.
Apart from the structural tailwind that copper is expected to enjoy over the coming years there are short term factors which are currently in the spotlight.
Copper inventory levels have fallen by some 60% and are currently sitting at 80025/tonnes at LME approved warehouses. The draw in inventories correlates strongly with smelting activity, global smelting activity hit a 13 month peak in January with operations in China ramping up sharply ahead of the seasonal construction demand.
Equally there are concerns over supplies, there is still no resolution to the standoff in Peru which has resulted in the halting of operations at the MMG owned Las Bambas mine. There is also talk of Chilean mine nationalisation as the socialists eye the country’s lithium and copper assets. We do not see this as having much success.
All of these factors have kept the spot price of copper at a premium to the 3m LME forward, but we have moderated sharply off the highs of Oct 2021.
ETM View: Looking at a chart of copper for the past twelve months we see that $9500.00/tonne is a strong pivot point with the red metal rarely dipping below this level for any extended length of time. Given the low inventories and the supply issues we expect investors to find $9500.00/tonne as a good level to accumulate.
Aluminum prices remain elevated as supplies remain constrained. The LME registered warehouse stocks are currently at 768 250 tonnes which is at a 12-month low. Supplies have contracted by 120 950 tonnes over the past month. The major driver here is that higher energy costs have caused the closure of a number of plants in Europe and China who have not been able to cut costs deep enough to sustain the business. In Europe Nat Gas prices are almost 5 times higher year on year given the cold weather and the drop in natural gas supplies from Russia. Smelters have taken in the region of 180 000 tonnes of annual production capacity offline in Europe, while China has closed or mothballed about 4 million tonnes of capacity.
Looking ahead, the risks are skewed towards sustained higher prices as energy prices have yet to show any signs of moderating, equally the tensions between Russia and the United States threaten to make things even more difficult.
The rise in aluminum prices will add another layer of additional cost for the auto industry who are already navigating complexities such as a global chip shortage which has hit production.
ETM View: Given the low inventory levels and constrained supplies we would view the lows of $2600.00/tonne seen in Nov and Dec 2021 as really stretched to the downside offering good value. The topside is still protected by the prior high at $3229.00/tonne.