Commodities & Currencies
All precious metals have been in a tough bear market for several years. Rising rates and a strengthening Dollar have effectively blocked any recovery. The question then is when do they get cheap enough that it is a no-brainer buy? Perhaps right now. Gold’s ratio to silver just hit its highest point since 2008, making silver a buy. Silver has fallen 16% this year, almost double gold’s fall, making it the cheapest in a decade. Gold currently trades at over 80x silver, compared to a ratio of just above 30x in 2011.
FINSUM: The big question here is a catalyst. What would spark a rally? We are not specialists in precious metals, so we won’t comment, but we are sure it will take something significant to break a 6-year slump like this one.
For those paying attention, the metals market is sending some very worrying signs. Copper and other metals have been going through a rough patch, but yesterday seemed to really spell doom. Copper plunged into a bear market, zinc plummeted, and even gold took a big hit despite the panic across markets. Industrial commodities are a good bellwether for economic activity, and while the markets are partly plunging on worries over the Chinese economy, the big drops signal that the whole world could be in for a recession.
FINSUM: We are growing increasingly concerned about the message that metals markets are sending. The big drop across the board in industrial commodities is quite worrying. Hopefully it is a short-term overreaction to the trouble in emerging markets.
Those hoping the current turmoil in the technology sector may turn around the fate of gold will be upset by new data. Gold has suffered its worst start to a year in almost a decade despite the fact that the US equity market was in a correction for much of it. Now, economic data shows that demand for the shiny metal is at its lowest since 2009. The big drop in drop demand did not stem from industry, but instead from investment markets, with ETFs buying ~60% less gold in the last year than the year prior.
FINSUM: Gold is in a tough and interesting spot. On the one hand, it is easy to see why rising rates have depressed gold prices. But on the other, it seems gold have should have benefitted from all the geopolitical and market instability of this year.
The idea of bitcoin being a 21st century version of gold, a digital value store for the next generation, has become prevalent. However, Barron’s argues, and we second, the idea that Bitcoin can never be gold. The idea comes from a new paper out of the University of Chicago. The core reason why?: It is simply not as secure. If you pay close attention to the headlines, Bitcoin is being hacked and stolen left and right. Even worse, the more valuable Bitcoin becomes, the more it is stolen. The same cannot be said for gold.
FINSUM: The paper argues that bitcoin will never play more than a “bit role” in the global financial system because of its fundamental vulnerability to theft. It sounds like the cryptocurrency needs a digital Fort Knox.
The oil market is in an odd place right now. Generally described as “tight”—when supply and demand are very close, prices have risen considerably over the last several months. That said, prices have fallen steeply over the last week or so on fears of falling demand and rising supply. That is what makes today’s call on oil so bold. Barron’s, citing a senior research analyst on the oil market, says that prices may rise from their current high $60s range all the way to more than $100 this year. The core of the argument is that supply increases are not enough to offset growing global demand.
FINSUM: We don’t see oil going that high, but it could resume its bullish run. The core idea for us is that the oil market has many ways to increase supply (e.g. using strategic oil reserves, loosening sanctions etc), so we don’t see prices rising that sharply.
The commodities market is taking a wallop across the board today. It seemed to start earlier this week with oil dropping on fears over weakening Chinese GDP. Weaker growth would mean less demand for oil. Now, those fears have spread across most of the commodities market, with metals currently selling off strongly on the same fears. The renewed selling follows losses nearing 20% in industrial metals over the last month.
FINSUM: Remember that commodities markets are often a leading recession indicator, so this data does not bode well. Though in this case, it seems to be GDP data leading commodities, which is a bit back-to-front.