The global commodity markets are showing no signs of breaking out of their prolonged slump with more pressure from the dollar and unfavorable weather patterns around the world. (The weather may be a weak explanation for poor consumer spending—think last winter—but unavoidable as a factor influencing resource extraction.) The precious metals followed the broader commodities markets lower again on Monday morning, though gold has at least outperformed nearly all of its counterparts in the sector.
The precious metals each closed down last Friday, and continued to slide at Monday's open. After sinking to $1,068/oz, spot gold spiked back up from these early lows to $1,074/oz around 9:45 am ET. Silver recovered early losses but remained near 6-year lows below $14.30/oz. Palladium was the worst of the bunch, falling more than 2% to just $550/oz.
Unfavorable Climate, Literally and Figuratively
The markets have not shined favorably upon commodities throughout the year, especially in the case of energy resources (oil, natural gas) and industrial metals (copper, nickel, iron, zinc). This was true even before an abnormally mild winter and the cyclical El Nino seasonal weather pattern began to throw off mining and farming production around the world.
Copper has fallen to a 6-year low, as the price for the nearest futures contract is only a hair above $2/lb. Although zinc saw a nice surge on Monday due to the proposed shutdown of several major zinc mines, the metal is still down 29.5% year-to-date. This has been much the case around the industry; gold, by comparison, is down just 9% YTD. Meantime, a brief rally for crude oil was snuffed out overnight, as both Brent crude and WTI crude remain stuck below $45 per barrel.
Commodities in general got a bit of encouraging news when it was revealed that regime change in Argentina could prompt farmers to open up huge stockpiles of grains and soybeans for export that have been sitting in storage. Taxes on most crop exports over the last 10 years have forced these farmers to hold back billions worth ($8 billion, according to Bloomberg) of soybeans, wheat, and corn. Newly elected leader Mauricio Macri has promised to do away with such restrictive economic policies. Although an increase in supply for these commodities will depress prices in the short-term, the re-entrance of Argentine foodstuffs onto the markets should clear up certain supply-demand dislocations and volatility disruptions in the longer run.
The main takeaway: With energy and industrial metal prices both so low, the sign is that demand for new construction and energy consumption (i.e. economic growth) is still weak.
Weaker commodity prices are having a profound effect on emerging market currencies. As these economies generally rely heavily on commodity exports (like Russia and Brazil), the purchasing power of their currencies is tied to the beleaguered commodities markets. A rising dollar is also contributing to softer prices for raw materials (commodities are traded in dollars). The DXY index was up to 99.67 on Monday, its highest reading since breaking 100.0 back in March.
This pressured the euro lower as well, as the EU's common currency tested the $1.06 range. With the Federal Reserve set to raise rates and the ECB moving the opposite direction, it seems only a matter of time before the euro and dollar come into price parity for the first time since 2003.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.