MORNING VIEW: Deteriorating geopolitical-economic backdrop boosts gold to new multi-year high; base metals consolidate

The economic and geopolitical clouds are getting more widespread and darker with unrest in Hong Kong and debt default concerns in Argentina adding to market concerns that are already stressed by the continuing US-China trade dispute, poor global economic data, stalemate over Iran and the potential for a hard Brexit.

Gold has pushed up to another fresh multi-year high on Tuesday August 13, but somewhat ironically the base metals are higher too, even though equity markets were under pressure on Monday and have been weaker in Asia this morning.

  • The Hang Seng led on the downside this morning in Asia with a 1.95% drop
  • Gold prices have set a fresh high at $1,524.60 per oz.
  • Supply fundamentals proving some support for most of the base metals on the LME

Base metals
On the London Metal Exchange, three-month base metals prices were for the most part firmer this morning. The exception was lead that was down by 0.6% at $2,042.50 per tonne - the rest were up by an average of 0.3%, with copper lagging behind with a 0.1% gain to $5,745 per tonne.

Volume has settled down to more normal levels with 4,986 lots traded by 6:55am London time, this after some high volume days in recent weeks.

Copper is supported by Glencore’s announced cut at Katanga and the Peruvian port strike; lead and zinc by the production difficulties at Port Pirie; nickel by concerns over whether Indonesia will bring forward its ban on the export of ores and aluminium by tight fundamentals that point to a supply deficit. Tin seems content to ignore the tight concentrate market and instead is focused on weak demand from the semiconductor/electronics industry.

In China, base metals prices on the Shanghai Futures Exchange were mixed, with October zinc and aluminium leading on the upside with gains of 1.2%, while lead’s September contract led on the downside with a 1.3% drop. October nickel is up by 0.6% and October copper is off by 0.2% at 46,620 yuan ($6,598) per tonne.

Spot copper prices in Changjiang were down by 0.1% at 46,470-46,540 yuan per tonne and the LME/Shanghai copper arbitrage ratio was firmer at 8.12.

Precious metals
Spot gold prices are up in new multi-year high ground and were recently quoted at $1,523.38 per oz – the fact dips are short-lived and shallow says a lot about how strong underlying sentiment is. Silver prices have followed gold higher and are challenging the peaks from January and April 2018. The platinum group metals continue to consolidate.

On the SHFE, the December gold and silver contracts were up by 1.7% and 2.5% respectively.

Wider markets
The spot Brent crude oil price is consolidating and was recently quoted at $58.21 per barrel, slightly lower than where it was ($58.35) at a similar time on Monday.

The yield on benchmark US 10-year treasuries has fallen further, it was recently quoted at 1.6208% having been at 1.7230% at a similar time on Monday. The German 10-year bund yield is also pushing further into negative territory and was recently quoted at -0.6100%, compared with -0.5800% at a similar time on Monday.

In equities, Asian indices were lower: Nikkei (-1.11%), Hang Seng (-1.95%), Kospi (-0.85%), the CSI 300 (-0.9%) and the ASX200 (-0.33%).

This follows a weak performance in Western markets on Monday : in the United States the Dow Jones Industrial Average closed down by 1.48% at 25,897.71 and in Europe the Euro Stoxx50 closed down by 0.22% at 3,326.55.

The dollar index is consolidating and was recently quoted at 97.56 - the recent range being 97.21-98.94. The yen (105.33) remains in high ground, the euro (1.1195) is consolidating after its recent rebound off lows, sterling (1.2050) is holding in low ground, as is the Australian dollar (0.6755).

The yuan continues to weaken and was recently at 7.0652, which will be winding up the US administration.

Key data
Data out already this morning shows China’s foreign direct investment rising to 7.3%, this after a prior reading of 7.2%, Japan’s industrial data continues to weaken, German consumer price index (CPI) held steady at 0.5%, but its wholesale price index dropped 0.3%. Later, there is UK employment data, followed by German and EU economic sentiment data from Zentrum fur Europaische Wirtschaftsforschung (ZEW). This is followed by US data on small business index, CPI and leading indicators.

Today’s key themes and views
Gold’s strength is a warning that all is not good in the global economy, but with some of the base metals seeing some lift, it does look as though the already weak base metals markets are getting some support from supply issues.

It will be difficult to get bullish until there is optimism on demand and that is likely to take some positive news on the US/China trade talks, which may be a long way off – although you never know when US President Donald Trump will change tack.

Overall, we expect choppy sideways trading in base metals, while gold looks on course to push higher.

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