metals - mkt summing up

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    Carnage and recovery in metals
    By: Barry Sergeant
    Posted: '10-DEC-04 07:00' GMT © Mineweb 1997-2004



    JOHANNESBURG (Mineweb.com) -- Markets wag gold dog The week’s sell-off of resources stocks contained the essence of key market trends that have been in place for about three years. The materials groups, of which resources form a key component, have been among global equity markets’ best performers over the period, in an inverse correlation to the dollar’s protracted bear market.

    Dollar metal and commodity prices tend to move in the opposite direction to the dollar. Fundamental supply and demand factors have, moreover, underpinned the roaring resources equity market. As Stephen Roach of Morgan Stanley has pointed out, the US and China accounted for an astonishing 45 percent of global economic growth from 1996 through 2003. China, the world’s production engine, has been handily mirrored by the US, the world’s consuming engine.

    However, there have been various inflection points this year where the numerous variables have converged on a common denominator: the dollar. This week, it was the European Central Bank (ECB) and 12 eurozone finance ministers who unofficially declared war on the dollar, infuriated by US officials’ apparent refusal to even acknowledge that the greenback is weak, never mind countenancing notions of intervention.

    All the while resources stocks have piled ahead. This is a global sector that has almost entirely escaped the era of corporate governance scandals, and is all but printing money. Take BHP Billiton, the world’s largest diversified resources company, with a market value of $70 billion: it is currently feeding $2 billion back to shareholders, over-and-above dividend payments.

    As market leaders, resources are naturally exposed to investors’ raw nerves. Following the ECB’s figurative declaration of war on the dollar, investors looked for every excuse to take profits ahead of the Christmas season, and to book profits in resources stocks. Gold bullion led the resources sector into the swamp.

    On Wednesday this week alone, gold lost $15 an ounce, days after topping fresh 16-year highs close to $460 an ounce, to settle just below $439. Silver fell more than 10 percent and January platinum on the New York Mercantile Exchange flaked off more than $55 an ounce, to settle at $813. Benchmark US sweet, light crude oil traded down to four-month lows at $40.45 a barrel. The rout was tied most closely to modest strength in the dollar, following the ECB’s missive. As such, it was truly unbelievable that on Tuesday the dollar had declined to a fresh all-time low against the euro, at $1.3469.

    However, it was Wednesday, October 13, that marked a truly memorable bloodbath for resources stocks. That blow off, the most compelling in years, was apparently triggered by a report from JP Morgan, the global investment bank, which warned on raw materials. Copper led the charge. After touching 16-year dollar highs the previous week, copper sustained the carnage of a single-day price fall not seen in 14 years. The sell-off, which set in during Asian trading on Wednesday morning, spread like a runaway fire fuelled by a hurricane into virtually all commodities, especially metals, which offer the most liquid of commodity markets.

    Billions upon billions of dollars were wiped from the market value of resources stocks across the globe. However, as in this week, nothing of consequence had changed in the fundamentals. To be sure, there is lots of focus on the next interest rates decision announcement by the Federal Reserve, the US’s central bank, scheduled for December 14. And there are rumours that China may revalue the yuan, pegged to the dollar for a decade. If so, that would make Chinese imports more expensive, and possibly temper its ferocious demand for raw materials. And so on.

    But by Thursday morning, most dollar metal and commodity prices were stable or rising, and resources stocks were on the rebound.
 
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