Dogma and Doubt in the Diverging Metals Markets

Overall year-to-date commodity sentiment has been downright miserable. Although the lukewarm global-demand picture and stronger U.S. dollar have made front page headlines, the bigger concerns seem more big-picture in nature with traders talking about massive and chronic oversupply and a general reset of the global supply / demand picture.

Commodities tend to be cast in the same wide net and, throughout the Fed's quantitative easing programs, the penchant to wrap them together as one would make sense as price action was – to a large degree - chiefly influenced by QE and its entrails, followed by distinct, underlying fundamentals. What we appear to be witnessing now is a return to fundamentals. The market is attempting to find equilibrium for each commodity. Its hard to dismiss the fact most bulks (iron ore, steel) and agriculturals (corn, soybeans) have been decimated this year.  However, buried deep beneath the headlines, you will see runaway year-to-date performance from live cattle, coffee, and palladium. It’s called divergent price action – something we haven’t seen in a very long time.

“Dogma” derives from the Greek word dokein, “to seem” or “appear”.  It is the word used to designate that which seemed good to a competent authority and was broadcast as such.  The below narrative is just that – dogma:  what seems or appears to be driving deep beneath the surface of the metals markets.

Dogmatic Drivers – Industrial, Base, & Bulk Commodities

The negative drivers of 2014 year-to-date price performance have been well advertised and include: Abundant supplies in nearly all metals markets, Chinese growth rate slowing, and shadow metal stocks (e.g. copper) due to financing deals. This is offset by the point that economic indicators in the developed markets are clearly tepid yet expansionary. China is growing, but from an extremely high base, and many (not all) metal prices are trading below cost support. Bottom line:  Markets are currently sifting through the implications of slowing demand growth from China and deciding whether this can be moderately offset  by demand growth elsewhere, and if China will continue to import more raw materials and fewer refined one. The answers to these questions could add or subtract to the severe price-performance deviation the markets have witnessed so far in 2014.

Dogmatic Drivers - Gold

Gold continues to trade within a very broad and volatile trading range. It began the year with an enormous bounce from $1,207/oz. to $1,392/oz. by March – chopped around for a few months and ultimately succumbed to approximately the same price where the year began. Market bulls have been absolutely dumbfounded as gold was unable to sustain any strength, notwithstanding geopolitical tensions in Ukraine and Iraq or, more recently, the ECB’s decision to cut rates and open the door to asset purchases. Gold bears continue to dwell on the overall normalization of U.S. monetary policy – creating a hard ceiling over gold's head. The bottom line here is China demand continues to weaken but, from a very vibrant pace, India is a very willing buyer yet, there seems little hope in undoing import restrictions imposed just one year ago. Gold volatility remains tragically low, exchange traded fund (ETF) flows unpredictable – all pointing to a continued choppy and listless market.  One that is less bearish than more bullish.