Bears are ripping precious metals apart

Declines in the gold price after the Federal Reserve halted its economic stimulus program and struck an upbeat tone on the state of the US economy continued into Thursday.

In lunchtime trade on the Comex division of the New York Mercantile Exchange gold for December delivery was changing hands for $1,198.70 an ounce, down more than $26 or 2.1% from Wednesday's close.

In morning trade gold touched a low of $1,195.50, the lowest since October 3 and only the second time below $1,200 this year. Selling was heavy with more than 17.6m ounces traded.

Given the fact that hedge fund and large investors have cut back on bearish bets over the last two weeks, the possibility of a short covering rally is remote.

The gold-silver ratio has jumped to a five-and-half-year high

That means more selling could be in the offing – next technical support is at $1,180 an ounce, a level the metal tested twice in 2013 before recovering.

The Federal Reserve on Wednesday voted 9 to 1 to end the third round of its quantitative easing program known as QE3. The bank also signaled a much more hawkish stance towards interest rates explicitly stating that rates could be hiked earlier than "currently anticipated" should the economy improve at a faster rate.

The Fed hasn't raised rates, which have been hovering near zero since QE1, since 2006.

Higher interest rates and bond yields raises the opportunity costs of holding gold as the metal is not income producing.

Sister metal silver fared even worse on the day with December futures dropping to a day low of $16.33, down 5% on the day and at levels last seen in February 2010. The low for the volatile metal that year was $14.64 an ounce.

The ratio between gold and silver has jumped higher reaching a five-and-a-half year high above 73, which could mean that silver is oversold or that the gold price has further to fall.

Alan Greenspan: QE Failed To Help The Economy, The Unwind Will Be Painful, "Buy Gold"

It appears it is time for some Hillary-Clinton-esque backtracking and Liesman-esque translation of just what the former Federal Reserve Chief really meant. As The Wall Street Journal reports, the Fed chief from 1987 to 2006 says the Fed's bond-buying program fell short of its goals, and had a lot more to add.

Mr. Greenspan’s comments to the Council on Foreign Relations came as Fed officials were meeting in Washington, D.C., and expected to announce within hours an end to the bond purchases.

He said the bond-buying program was ultimately a mixed bag. He said that the purchases of Treasury and mortgage-backed securities did help lift asset prices and lower borrowing costs. But it didn’t do much for the real economy.

“Effective demand is dead in the water” and the effort to boost it via bond buying “has not worked,” said Mr. Greenspan. Boosting asset prices, however, has been “a terrific success.”

...

He observed that history shows central banks can only prick bubbles at great economic cost. “It’s only by bringing the economy down can you burst the bubble,” and that was a step he wasn't willing to take while helming the Fed, he said.

...

The question of when officials should begin raising interest rates is “one of those questions I cannot answer,” Mr. Greenspan said.

He also said, “I don’t think it’s possible” for the Fed to end its easy-money policies in a trouble-free manner....

"Recent episodes in which Fed officials hinted at a shift toward higher interest rates have unleashed significant volatility in markets, so there is no reason to suspect that the actual process of boosting rates would be any different, Mr. Greenspan said.

...

“I think that real pressure is going to occur not by the initiation by the Federal Reserve, but by the markets themselves,” Mr. Greenspan he said.

And finally - while CNBC's audience is told what a terrible thing gold is, "The Maestro", having personally created the financial cataclysm the world finds itself in following a lifetime of belief in fiat, Keynesian ideology and "fixing" one bubble with an even greater and more destructive asset bubble, has suddenly had an epiphany and now has a very different message from the one he preached during his decades as the head of the Fed.

Mr. Greenspan said gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.

What Greenspan failed to add is that it is thanks to his disastrous policies (subsequently adopted by Bernanke and Yellen) that gold is the "place to put money."

Production halts in mines might lead to supply deficit of copper

According to the estimations, about 84,000 tonnes of copper supply would disappear by the initiation of the strikes in the copper mines, by the end of the year 2014. According to David Charles, a mining analyst at Dundee Capital Markets, stated that even though the price of copper is staying low at 9 percent decline at the LME, the surplus will be long eliminated by the end of the year 2014, as the supply deficit, yet has to be materialized.

A rise in  the price of copper is to be extended to the year, 2015, as the demand for copper in the construction industry, household sector as well as in the power sector of China remains to be strong.

At the beginning of the  year 2014, according to the analysts’ forecast, there ought to have a supply surplus of about 600,000 tonnes of copper, but if the strikes held by the workers in the mine work out well, the surplus will turn out to be a small one of about 70,000 tonnes, or hopefully there would be a deficit in the global market.

Silver to avg $15.8 an ounce in 2015: Natixis

Silver prices are expected to average $15.8 an ounce next year and $16.1 an ounce in 2016, said Natixis in a Metals Review.

Based on Natixis positive outlook for the US economy (modestly rising US yields, appreciating USD), and additional downside risks attaching to silver prices (low cash cost of production, potential for sales from ETPs).

So far this year silver prices have fallen by 10%. The strong correlation with gold meant that the price of silver dropped as a result of a stronger dollar and US economy. 

Although silver mine supply is increasing, the drop in silver prices has led to a contraction in supply of silver scrap. 

As for demand, Natixis main concern remains the ever increasing amount of silver being held in physically-backed ETPs.

Stocks Now Most Overbought In A Year

Just two words - "Volumeless" and "Overbought" - but when has that mattered...

Spot The Rally (using the lower pane only)

 McClellan Oscillator at a notable extreme...

 and the Relative Strength Indicator is once again signaling a trend change...

Copper hits two-week high on supply disruption worries

* Strike action looms in Indonesia, Peru
* Nickel surges over 5 percent to hit one week high of $15,550/T

(Reuters) - Copper prices hit a two-week high on Tuesday as the outlook for rising supply was tarnished by looming strikes at two key mines while expectations of higher demand from top consumer China helped reinforce optimism.

Three-month copper on the London Metal Exchange

(LME) ended at $6,795 a tonne, up 0.97 percent, having earlier touched a two-week high of $6,797.75 a tonne.

Workers at Freeport-McMoRan's Indonesian copper mine will hold a one-month strike from next week and those at Peru's biggest copper mine, Antamina, plan to start an indefinite strike from Nov. 10. 

In a quarterly profit release, Freeport said a large percentage of Grasberg open pit operators had not reported for scheduled shifts, resulting in lower production from its open pit copper mine in October. It also reported a 32 percent drop in quarterly profit, hurt by lower metals prices. 

Analysts polled by Reuters expect the copper market to show a surplus this year and to post an even bigger surplus in 2015, but that view is threatened by events such as strikes and delays. 

"There's a bit of stability led by the copper supply disruptions and we're getting a bit of a bounce in prices," said Robin Bhar, an analyst at Societe Generale.

"But we are still expecting more downside to come for copper rather than upside. The wall of supply is still coming. That has not been delayed or cancelled," he said.

The metal used in power and construction is down more than 8 percent this year, and has gained just 1.3 percent this month, partly on expectations of a big surplus forming in the market.

"We hear what the producers are saying in terms of what they're planning to put out, but it's the unforeseen factors such as industrial action that create (uncertainty), as we have seen in the past few days, and that's providing a little bit of support," said analyst James Glenn of NAB in Melbourne.

"Plus the physical market at the moment is still quite tight so any signs of better demand is going to see the price go up."

On the demand side, Chinese firms showed slight improvement with industrial profits in September up 0.4 percent from a year earlier, reversing a 0.6 percent annual decline in August, data showed on Tuesday.

Markets are now eyeing the U.S. Federal Reserve's policy meeting this week, where it will likely reinforce its stated willingness to wait a long time before raising rates after a volatile month in financial markets that saw some measures of inflation expectations drop worryingly low

In other metals, nickel surged 5.25 percent to end at $15,550 - its highest in about a week, as investors reassessed the buy-side case given key supplier Indonesia's ore export ban.

Nickel has posted losses for the last seven weeks running as Philippines supply to China rose, partly filling the gap caused by an Indonesia ore export ban that sent price up by some 40 percent in the first half.

Tin ended up 1.66 percent at $19,875 a tonne and zinc closed up 0.04 percent at $2,256 a tonne.

Aluminium ended up 0.71 percent at $1,998 a tonne, and lead closed up 0.94 percent at $2,033 a tonne.

Freeport Indonesia union plans one-month strike at copper mine

Workers at Freeport-McMoRan Inc's giant Indonesian copper mine plan to go on strike for a month from next week, a union official said on Monday, after the company failed to make changes to local management following a fatal accident.

Earlier this month, hundreds of angry protesters blocked access for two days to the open-pit area of the Grasberg complex, where production was temporarily suspended following the death of four workers on Sept. 27.

The remote copper mine is one of the largest in the world and any prolonged disruption could support prices of the metal , which have fallen almost 10 percent this year.

Three Freeport unions have agreed to take strike action from Nov. 6 until Dec. 6 to pursue demands including the appointment of new managers, Albar Sabang, a senior official at a Freeport union, told Reuters. Sabang's union has about 9,100 members.

"The purpose of the strike is of course to stop production so there will be pressure for the Freeport Indonesia management to answer to our demands," Sabang told Reuters by text message.

Freeport, which employs around 24,000 workers, declined to comment on Monday. About three-quarters of the workforce belong to a union.

Relations between Freeport and the unions have been strained in recent years following a three-month strike in late 2011 as well as a series of minor disputes.

In addition to the four workers killed in the collision involving a truck last month, 28 people were killed after a tunnel collapsed in May last year.

Indonesia's mine ministry investigated the Sept. 27 accident and asked the company to introduce changes to safety procedures and policies before allowing open-pit mining to resume.

Three weeks ago, the Freeport Indonesia union warned of fresh protests, blockades or strike action if workers' safety concerns and other demands were ignored.

A union letter detailing the planned strike was sent on Oct. 23 to Freeport's local CEO, Rozik Soetjipto, the chief executive and chairman of the Arizona-based firm and various government officials.

Under normal conditions, the Grasberg open pit produces around 140,000 tonnes of copper ore per day and the underground mine about 80,000 tonnes.

Although the copper market is broadly expected to be in surplus next year, one trader said, an extended strike could tighten regional concentrate supply, with the market not far from balanced at the moment. Freeport's concentrate is low in impurities.

Freeport, one of the biggest tax payers in Southeast Asia's largest economy, only recently resolved a tax dispute with the government that halted exports for months and frayed relations.

Should the Freeport strike go ahead as planned, it may be the first big test for Indonesia's newly appointed energy and mineral resources minister, Sudirman Said.

Nickel continues its impressive fall

By the end of the week on Friday, the nickel price hits seven month low to 14,980 dollars per tonne, and at the same time the stocks on the London Metal exchange topped the roof with 378,132 tonnes.

At the beginning of the year, the metal, was expected to be the rising metal among other base metals in the year 2014, but the hopes have all been shattered and the supply has risen about 9 percent ahead of the coming year.

The commodity analysts at, Common wealth Bank, Vivek Dhar and Lanchlan Shaw, stated that, there is a high chance of nickel surplus in the year 2015-2016.

In the beginning of this year, Indonesia, the main producer as well as the exporter of high grade nickel ore, and one of the  vital exporter of nickel to the steel industry of China, banned the exports of unprocessed nickel to the world.at that time, China advanced its procedure by importing nickel from Philippines, the under developed mines Indonesia, and also imported ferro-nickel from other parts of the world to cover up the deficiency caused by the decline in the nickel imports from Indonesia. Many stainless steel producers in China, had to change the amount of nickel in their final product.

Copper Surges After Report Mysterious London Buyer Has Cornered Up To 90% Of Market

Copper prices are surging this morning (in the face of Goldman's recent warnings of a plunge), jumping 4 handles apparently on the heels of a WSJ story in which LME admits that a single buyer has snapped up more than half the copper held in London Metal Exchange warehouses, giving it control over a crucial source of supply and raising concerns among traders about the potential for higher prices. What is more remarkable is, as WSJ reports, on several occasions in the last month, this buyer held as much as 90% of the world’s copper stored in LME-licensed warehouses. Though no confirmation has been given traders suggest the firm cornering the copper market is Red Kite Group, a London hedge-fund manager that focuses on metals trading.

As The WSJ reports,

A single firm has owned at least 50% of the copper in LME-licensed warehouses for much of the last four months. Accumulating such a dominant position became easier in June because the amount of metal under the exchange’s watch had plummeted, as had prices. The warehouses have held less than 160,000 tons of copper since mid-June, compared with more than 360,000 tons at the start of the year. Some analysts say copper production is running behind demand, forcing some users to draw on stockpiles in LME-licensed warehouses.

On several occasions in the last month, this buyer held as much as 90% of the world’s copper stored in LME-licensed warehouses, equal to about 140,000 tons, or enough to make the copper parts of the Statue of Liberty more than 1,700 times. As of Wednesday, the buyer owned between 50% and 80% of copper held in warehouses, according to the most recent exchange data.

Rumors are that it is Red Kite...

Established in 2004, Red Kite is now run by two of its founding partners, Michael Farmer and David Lilley, both alumni of the German industrial conglomerate Metallgesellschaft AG, which collapsed in 1993. The fund is known for its bold and extremely profitable trades involving copper, as well as other metals. Red Kite Group manages $2.3 billion, according to its website.

Red Kite declined to comment.

The London Metal Exchange, owned by Hong Kong Exchanges & Clearing Ltd. , doesn’t limit how much metal a single trader may hold in its warehouses, and says that it has mechanisms in place to prevent market squeezes—a situation in which holders of a large share of the supplies use their position to jack up prices.

Some traders say the concentration of so much copper under one firm’s control is already driving up prices. It costs about $72 more per ton to buy copper for delivery today than for delivery in three months.

“There’s no reason for anyone to be holding 70% of the stocks of the commodity,”said Jessica Fung, head of Commodities Metals at BMO Capital Markets.

*  *  *

As Metal Bulletin notes,

The Red Kite metals fund posted returns of just over 50% in 2013 after a well-timed switch from a short to a long position in the copper market around the time that prices posted their lows for the year, well-placed sources told Metal Bulletin.

Simply put, they were the market (buying it up in hopes to corner the market)...

The long position delivered returns as copper prices rebounded to finish the year up nearly $700 from its 2013 low, but Red Kite also made strong returns on physical inventory and spreads as copper premiums jumped in Asia and the LME forward curve moved into backwardation, market sources told Metal Bulletin.

"The Red Kite switch was definitely up there as one of the big trades of the year; the volumes were huge," a source active in the copper market told Metal Bulletin.

At the time, sell-side analysts in particular were turning strongly bearish on the copper market, reacting in part to lagged evidence of the slowdown in demand that prompted Red Kite to run short positions around the start of the year, sources said.

"Good data is very hard to come by in the copper market, and at the time I think a lot of people were trading looking in the rear-view mirror," one observer of the company told Metal Bulletin.

*  *  *
Summing it all up - Is Red Kite the next Amaranth?

*  *  *

The irony of someone cornering another metals market a week after the death of Nelson Bunker Hunt is not lost on us.

China’s September gold imports hit five-month high

China's net gold imports from Hong Kong hit the highest in five months in September as the world's biggest consumer stocked up ahead of its National Day holiday.

Net imports from Hong Kong to the mainland 61.7 metric tons last month, the most since April,according to Bloomberg.

Total gold imports from Hong Kong totalled 91.745 tonnes, as the nation observed its annual holiday the first week of October, a time when millions of people travel and spend more than usual. It also marks a pick-up in weddings, boosting demand for gold jewellery.

When gold entered a bear market, Chinese citizens began buying physical gold in droves, pushing the nation past India as the world's largest gold consumer in 2013. But then, an anti-corruption drive by President Xi Jinping prompted fewer buyers to purchase gold bars, coins and jewellery, and imports fell.

Officially, all gold exported to China moves through Hong Kong

Many gold market observers do not believe the Hong Kong import numbers, and hold to the view that a lot of gold gets into China unreported. Officially, all gold exported to China moves through Hong Kong, although the country recently started allowing direct imports via Beijing. Sources say the move is a way to keep China's imports under the radar as it seeks to hoard gold to diversify away from U.S. Treasuries.

The country's gold reserves are officially put at 1,054 tonnes — a number officials haven't updated since 2009.

Gold makes up little more than 1% of the country's $3.6 trillion in reserves compared to more than 70% for the United States, which holds 8,166 tonnes of gold in vaults.

Gold price: ETF investors cash out

On Monday gold futures drifted lower for the fifth straight session in anticipation of an end to the US Federal Reserve's economic stimulus program, slipping back from a six-week high reached a week ago.

In afternoon trade on the Comex division of the New York Mercantile Exchange gold for December delivery was changing hands for $1,225.30 an ounce, down $6.50 from Friday's close.

The gold market has been unpredictable this month, hitting a high of $1,255 an ounce last Tuesday after a sharp recovery from the 2014 sub-$1,200 low early in October.

Most large investors and retail buyers have been selling into the rally and the latest weekly data show holdings of exchange traded funds backed by physical gold falling to the lowest in over five years.

Net sales of 13 tonnes took total holdings to 1,654.2 tonnes, the emptiest vaults have been since September 2009 when gold was trading below $1,000. Gold bullion holdings hit a record 2,632 tonnes or 93 million ounces in December 2012.

Expectations for a continued rally in the dollar, the ending of QE in the US this week and a general benign outlook for inflation have left many investors in doubt about current upside potential

Ole Hansen, chief commodity strategist at Denmark's Saxo Bank says "the expectations for a continued rally in the dollar, the ending of QE in the US this week and a benign outlook for inflation have left many investors in doubt about the current upside potential for gold."

In the run up to gold's attempt to break resistance at $1,255 on Tuesday last week speculators in gold futures and options turned more bullish.

Bullish bets on gold – net long positions held by large investors like hedge funds – jumped some 30% in the week to October 21 according to Commodity Futures Trading Commission data.

It was the second time in ten weeks hedge funds added to their bullish positioning after falling to the lowest level this year early October.

On a net basis hedge funds held 75,273 gold lots or 7.5 million ounces, still almost half the year high of 14.4 million ounces.

Difference Between The 2% Mindset & 98% of the Population. 900th Post of Metal Forex Trader

Sacrificing happiness for comfort

Whoischick.com points out the fact that we can choose to be in two areas in our everyday life: the comfort zone or discomfort zone.

1. Comfort zone: 98% of us are being like everyone else. We live with insecurity, fear and regret. We procrastinate, play it safe, settle for less and lead a dull life. Most of the time we are just surviving or getting by.

2. Discomfort zone: Only 2% of the population are living their dreams. They have chosen happiness and living without limits. They have confidence, dare to explore new things, embrace the unknown and act in spite of fear. They are looking for changes, excitement, abundance and fulfillment. They believe in getting the most out of life.

What about you? Are you living the life you really like? Do you have the guts to live the life you always want?


A comfort zone does not equal to a safe zone

But this is easier said than done.

Everybody wants the freedom to do the things they like. But the moment you stop tolling all day in the office, how do you pay the bills at the end of the month? Who is going to support your family? How can you save for your retirement?

You can choose to stay in your comfort zone. But a comfort zone is not necessarily a safe zone. Company downsizing and retrenchment sometimes have nothing to do with whether you have met your KPIs or sales quota, how much past contributions you have made, or how serious your OGIM symptoms are.

Facing regular restructuring announcements in my corporate life, it was imminent for me to have a contingency plan. My Plan B was buying some good properties that could continuously generate passive income for me. If one day my name was in that batch of employees to let go, my tenants would help to pay my bills.

I also started researching about possible ways to achieve financial freedom. It is not about not having to work at all, but more about the freedom of choosing to do the type of work I enjoy, the liberty to spend my time the way I prefer, etc.

Throughout the years, I have seen many people who try different ways to realize their dream of being financially free. Some work while some flop.


Financial freedom: what don’t work

Some people may claim that they ‘have been there’. However, if their financial freedom is not sustainable, and they eventually go back to where they were, I won’t call that a proven strategy at all. These methods include:

1. Following any get-rich-quick program that guarantees to make you a millionaire but sounds too good to be true.

2. Joining any high risk ponzi investment scheme that promises high return in a short period of time. No such scheme can stand the test of time in our past history.

3. Winning the lottery, striking the jackpot or reaping a windfall at the casino that you will quickly spend or lose them all and go back to square one in no time.

4. Receiving a sudden big inheritance or donation with no prior training in personal financial management or investment. Think the woman who spent her $1 million donation after the horrible accident of her husband, all in barely one year’s time.


Financial freedom: what work

Below are three proven methods to achieve financial freedom that I have found to be sustainable in the long term.

1. Investing in good stocks or good properties that becomes a stable stream of income in terms of dividends or rental return, and promises a sizable capital gain when cashing out one day.

2. Building a solid and sustainable business that offers a reliable source of income in the long term.

3. Having a wealthy spouse who has high earning power or the financial means to support your lifestyle, and is generous to you (note: to you only).

It is good to be able to achieve one of the above. But it is best to attain all of them if you know what I mean!

Will the Fed turn off the QE tap? We'll find out Wednesday

Precious metals markets could be in for a wild ride this week, with the US Federal Reserve expected to wind down its third installment of quantitative easing. (QE)

The two-day Fed meeting starts Tuesday and at its conclusion, investors will know whether or not the central bank, led by chair Janet Yellen, will end the bond-purchase program that has been responsible for fuelling US stock markets, keeping interest rates low, and most important for mining – keeping the prices of precious metals buoyant since the program began in 2008.

Last December, on signs the US economy was moving out of recession and no longer needed as much economic stimulus, the Fed began winding down its monthly bond purchases from $85 billion, to its current $15 billion.

While an announcement to end QE would almost certainly be negative for gold and silver, and US equities that have become dependent on the low-interest-rate environment, there are signs that now may not be the best time to "take away the punch bowl" of cheap money. Fears of deflation, slowdowns in Europe and China are three of the biggest reasons for a possible continuation of QE. A raft of negative news this month has also roiled stock markets, ranging from unrest in Hong Kong to Iraq to Ebola.

Two weeks ago James Bullard, head of the St. Louis Fed, said the Federal Reserve should continue with asset purchases until the US economy shows more strength, telling Bloomberg TV: "We can go on pause on the taper at this juncture and wait until we see how the data shakes out in December."

The UK Observer pointed out that "midterm elections next month could see the Democrats lose control of the Senate and break an uneasy truce over economic policy. So the Fed may be only be a few meetings away from declaring that the US needs more QE and find itself delaying a rise in rates. More cheap money would cheer stock market investors."

Others at the Fed, however, think the central bank will stay the course. Boston Fed president Eric Rosengren suggested that when the Fed meets Oct. 28-29, it will likely end the program, unless US employment data looks poor enough for the Fed to consider changing its mind.

Whether or not the Federal Reserve chooses to continue easing, it seems almost certain that Europe will open its QE taps. 

"Figures next month are expected to show the eurozone contracting in the third quarter following stagnation in the second. Eventual ECB action looks inevitable," says the Observer. 

Earlier this month, the European Central Bank started purchasing French bonds in an attempt to revive the flagging eurozone.

The Fed has a habit of delaying difficult and market-moving decisions when it comes to QE. It certainly will be interesting to see which direction it decides to go and how the markets react.

On The Coming Collapse Of Copper

18 months ago we first brought the world's attention to the end of what has now been exposed as among the largest ponzi schemes in history - the Chinese Commodity Financing Deals (CCFDs) - pointing out how this meant commodities like copper were likely to come under pressure as firms liquidate what minimal holdings they had (and sell out futures hedges) to manage the risk of unwinds in these quasi-collateralized deals. Since then, copper prices have indeed plunged, as has global growth expectations and global bond yields as a realization that 'demand' implied by previous prices was entirely artificial. Now, as Goldman notes, the real world is catching up (or down) to the reality of mal-investment and how copper is set to drop notably further...

As Goldman Sach's Max Layton,

Metals and mining commodities – including the base and bulk commodities, steel and cement – are highly exposed to a slowdown in the Chinese property, with over 40% of Chinese demand for cement and copper in particular consumed in the construction sector. The recent slowdown in Chinese property sales, prices and early-cycle new starts has most impacted physical demand for (and sentiment towards) commodities exposed to the earlier stages of China’s construction cycle – steel and iron ore – which have underperformed commodities more exposed to latter stages of the construction cycle, such as copper.However, as the recent slowdown in new starts flows through to late-cycle, copper-intensive construction completions, we expect copper to come under further pressure.

Understanding the construction cycle and commodity demand

The property development timeline for a typical Chinese building (such as an apartment building) from new start to property completion takes around 18 to 24 months. An “early-cycle” construction phase can be characterized as a period with strong new starts, relatively weak completions, and falling inventories (associated with higher sales). Conversely, “late-cycle” construction phases are typically associated with weak new starts, relatively strong completions, and rising/and or high property inventories (associated with weak sales). The intensity of basic material consumption varies significantly across these phases: consumption of steel and steel-making raw material (such as iron ore and coking coal) tends to be strongest in the earlier stages, while copper tends to be consumed in the later stages.

Specifically, as much as c.61% of Chinese and c.25% of global copper consumption is related to Chinese housing and property activity. Of the c.61% of Chinese consumption that may be related to property, up to c.45-50% is directly associated with project completion (plumbing, wiring for lighting, local power infrastructure, telecom, etc.), and c.12% is associated with the actual property sale, when the property is fitted with copper-intensive consumer appliances and/or tiling intensive in mineral sands. The strong link between completions and copper demand owes to the fact that internal and external copper wiring (for connection to the grid) tends to be installed around project completion. There is strong empirical evidence for the relationship between completions strength and copper prices: using completions as the primary indicator of China’s copper demand, together with ex-China demand data, explains the vast bulk of variation in copper prices over the past decade.

Bad news for copper

In 2012/2013, the Chinese construction sector transitioned from an early-cycle construction phase to a late-cycle one, as completions surged following a wave of new stimulus-related construction post the Global Financial Crisis. Since then, the cycles have been relatively muted, with both new starts and completions growing sub-trend, for the most part. More specifically, the observed weak growth in new starts over the past two years has bearish medium-term implications for late-cycle copper-intensive construction completions. In our view, this weakness has not been priced in, as it has not flowed through to the physical market via higher inventories, and therefore supports our bearish copper view over the next year ($6,600/t and $6,200/t at 6- and 12-month horizons).

Double whammy (at the margin): commodity financing deals

In the past three years, China has increasingly employed complex commodity financing deals to import relatively low-cost US dollar funding, which in some cases has likely been used to fund property development. While the profitability of these financing deals has already fallen owing to lower Chinese interest rates, higher rates outside of China, and – in the case of copper – persistent LME backwardation, we expect a further gradual unwind in such deals over the course of 2015 as China opens up its capital account gradually over time. This broader reduction in financing deals, combined with an expected rise in US interest rates, could result in higher costs of funding for Chinese property developers, potentially further slowing property starts and property-related commodity consumption. At the same time, a further reduction in deals would reduce demand for copper imports into bonded warehouses in China (a key component of the financing transactions), potentially raising inventory visibility outside of China. This scenario would be a double whammy for copper, which is both highly exposed to the property sector and supported by low visible exchange stocks.

Demand concerns put pressure on base metals

The global base metals market is currently facing strong headwinds that impact price performance.

In 2012 and 2013, a combination of expanding liquidity, weakening dollar, China’s voracious appetite for consumption and slowly improving growth prospects helped a strong uptick in demand. 

Although selective, investor interest in base metals was healthy.

Things are different now. This year has not been a great one for metals market.

In recent months, some of the important drivers have reversed direction while new challenges have emerged. Shrinking liquidity following the US Fed’s tapering programme, a steadily firming dollar, slowing industrial production in some of the major economies and lower inflation expectations have combined to cap the upside and force market prices down.

Currently, macroeconomic risks are casting a shadow – concerns over growth being the most important.

There is apprehension of demand slowdown. As the mover and shaker of the world commodity market, China’s import and consumption of metals exert a profound impact.

With construction activity in the Asian major slowing, there are fresh concerns over metals’ demand growth.

Another reason is the high level of corporate debt in China.

Although inflation is under control and employment healthy, the Chinese government seems to be worried about corporate debt and has, therefore, asked State-owned enterprises to fund purchases through cash flow rather than on credit.

According to experts, the metals and mining sector in China is not in a good shape. Declining investment growth and falling property prices have generated fears that the 2015 GDP growth target may be lowered. 

There are demand concerns is other regions too. Although US recovery is back on track, global growth is still uneven. Demand in Europe and Japan is still fragile.

Of course, many emerging markets show signs of stabilising with activities being adjusted to global realities. The US Fed’s monetary policy normalisation is seen as another uncertainty as expectations differ about the timeframe. Geopolitical tensions may have somewhat receded, but the Russia-Ukraine stand-off and insurgency in Syria and Iraq can potentially create a turmoil.

Simply put, the global environment is full of strong pulls and pressures.

As a result, many commodities are trading close to their cost curve.

Some of the less-efficient producers have shut down. It has also prompted a cut in capacity expansion.

Collapsing metal prices deter fresh investment while investor risk appetite wanes.

Supply demand fundamentals have begun to assert themselves.

Exception

An exception to the general trend of falling base metals prices is nickel whose price surge has been triggered by Indonesian ban on export of unprocessed raw material. Zinc is another exception because of tightening supplies.

Despite all the uncertainties surrounding the base metals market, on current reckoning, nickel will turn out to be a winner next year followed at a distance by zinc.

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FMC initiates fresh measures to boost liquidity

Amid a sharp decline in turnover of the commodity exchanges, the Forward Markets Commission has come out with a revised policy to allow traders to take higher position in commodities traded on the exchanges to improve the depth and liquidity in the market.

To promote transparency and prevent price manipulation in the market, the Forward Markets Commission (FMC) has also directed bourses to disclose the open position limit of top 10 trading clients, including hedgers, on their Web site.

Open position limit

The revised norms put out on October 20 have come into effect immediately. ‘Open position limit’ refers to the highest number of futures contract that an investor is allowed to hold on one underlying commodity.

According to the latest circular, FMC has come out with a new formula, based on which the gross position limit in agricultural commodities is capped at 50 per cent of the estimated production and imports for all exchanges.

Position limit for brokers, clients

For brokers, the position limit has been doubled and will be 10 times of the client’s level position limit or 20 per cent of the market wide open interest, whichever is higher.

For clients, the position limit will be based on the numerical position limits as decided from time to time or five per cent of the market wide open interest, whichever is higher. For the present, the numerical position limits as existing shall be continued, FMC said.

For considering position limit, a client’s position will be taken in net (of the total) and that of a broker in gross.

In order to promote hedging and arbitrage activities on exchanges, FMC said that it has decided to exempt the quantity of commodity that a hedger/seller, who has deposited early and pays in early, from the consideration of open position limits.

Commexes turnover

Turnover of the commodity exchanges has declined by over 53 per cent to Rs. 31.82 lakh crore till October 15 this fiscal from Rs. 68.42 lakh crore in the year-ago.

The turnover has been affected due to imposition of the commodity transaction tax from July 2013 and the Rs. 5,600 crore payment scam at the spot exchange NSEL.