Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
This week market relationships underwent a sea-change, with a sudden realisation that the global economy is in a deepening crisis. Equity valuations in the developed nations are falling sharply and corporate bond spreads are widening, triggering a flight to the relative safety of government bonds. Gold and silver prices have recovered somewhat this week, with gold now 9% up from its lows of six weeks ago, and silver 8%.
While this has been encouraging for followers of precious metals, it is probably realistic to describe their performance so far as evidence of a developing bear squeeze and not yet a sign of something more material. Bears being closed out should be evident from a fall in open interest on the futures market, and this may be true in silver, which is our next chart.
Note how open interest continued to fall after early August, despite the price recovery. Another reason for OI to drop off is the September contract is winding down, so spread positions were being reduced accounting for much of the fall. If this is so, then short positions in the managed money category will still be uncomfortably high.
This is not so evident in gold, which is next.
In this case, open interest has steadied since early August, only picking up slightly in the last few days. It could be that new spreads are being opened, rather than new bull positions, but we shall only know for certain when the Commitment of Traders Report is published this evening.
China’s series of minor changes to the yuan/dollar rate has triggered, or at least coincided with weaknesses in emerging market currencies, verging on a crash in some instances. The Khazak tenge lost 23% in one day as oil prices slid lower, and the Turkish lira, which has a poor history, has also fallen sharply on political turmoil. Other weakening EM currencies range from Brazil to South Korea, and Thailand to South Africa. Old hands are reminded of the Asian crisis in 1997, which started in a minor way with the Thai baht coming under pressure, spreading to other South East Asian currencies and becoming a full blown regional crisis.
Many of the factors that drove these currencies into a sharp devaluation are present today on a wider and larger scale, with nearly all equity indices firmly entrenched in bear markets. Investors are shifting their perceptions from chasing equity uptrends to protecting themselves, aware that if emerging markets sink further there is a risk of a full-scale rout developing. That being the case, gold prices should benefit considerably from accelerated buying of physical metal throughout Asia.
It seems improbable that the Fed and the Bank of England will persist in their desire to raise interest rates, particularly since the S&P500 and the FTSE are reflecting growing investor panic. Instead, unless equities stabilise of their own accord, there will be a growing likelihood of a new round of quantitative easing aimed at supporting the markets.
To summarise, precious metals prices are rapidly switching from an entrenched bear market to conditions that could drive prices significantly higher over the medium term.
Next week
Monday. Japan: Leading Indicator (Final). US: Flash Manufacturing PMI.
Tuesday. UK: BBA Mortgage Approvals. US: S&P Case Shiller Home Price, FHFA House Price Index, New Home Sales. Japan: PPI Services.
Wednesday. UK: CBI Distributive Trades. US: Durable Goods Orders.
Thursday. Eurozone: M3 Money Supply. US: Core PCE Price Index, GDP Annualised (2nd Est.), Initial Claims. Japan: CPI, Real Household Spending, Unemployment.
Friday. UK: Nationwide House Prices, GDP (2nd Est.). Eurozone: Business Climate Index, Consumer Sentiment, Economic Sentiment. US: Core PCE Price Index, Personal Income, Personal Spending, University of Michigan Sentiment. Japan: Large Retailers Sales, Retail Sales.
Weekly market report by Alasdair Macleod, Head of Research, GoldMoney
Disclaimer: The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.
GoldMoney
GoldMoney is one of the world’s leading providers of physical gold, silver, platinum and palladium for private and corporate customers, allowing users to buy precious metals online. The easy to use website makes investing in gold and other precious metals accessible 24/7.
Through GoldMoney’s non-bank vault operators, physical precious metals can be stored worldwide, outside of the banking system in the UK, Switzerland, Hong Kong, Singapore and Canada. GoldMoney partners with Brink’s, Loomis International (formerly Via Mat), Malca-Amit, G4S and Rhenus Logistics. Storage fees are highly competitive and there is also the option of having metal delivered.
GoldMoney currently has over 20,000 customers worldwide and holds over $1billion of precious metals in its partner vaults.
GoldMoney is regulated by the Jersey Financial Services Commission and complies with Jersey’s anti-money laundering laws and regulations. GoldMoney has established industry-leading governance policies and procedures to protect customers’ assets with independent audit reporting every 3 months by two leading audit firms.
Further information:
Visit: Goldmoney.com or view our video online
