Lawrence Williams

Or the end of the beginning? … Looking at mixed fortunes ahead for gold, iron ore and base metals – positive, flat to negative and slightly upbeat respectively.

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The title of this article could be taken two ways, but our meaning in using it – courtesy of London metals and mining commentator David Hargreaves’ Week in Mining newsletter, which used aspects of the famous Winston Churchill wartime quote in its title and conclusions this week – is that are we perhaps actually nearing the bottom of the prices downturn virtually across the board in resources?

As the newsletter points out -  the Brent crude oil price has fallen through $50/bbl, iron ore is staring down the abyss, copper has a look of testing $6,000 per tonne on the downside, while gold has picked up to $1,200 plus etc.

In currencies, the US dollar continues its rise against all, or at least most, others, with the Euro testing nine-year lows. The Eurozone has moved into deflation as the forthcoming Greek elections could put in power a political party which could well implement a default on the country’s debts and lead to Grexit – the possible Greek exit from the European Union.

Further on the geopolitical front, Islamic fundamentalist-inspired terrorism has hit the headlines again with the Paris shootings at the Charlie Hebdo offices, the totally unprovoked murder of a policewoman attending a traffic accident and subsequent hostage taking leading to more deaths.  Rhetoric from leaders of ISIL, which now dominates large swathes of Syria and Iraq, preaches extending Paris-type events to other Western nations and calls for new attacks on airlines.  All very disturbing for a mostly rather less volatile and less religiously committed Western World.

These French terror attacks are probably partly aimed at stirring up anti-Islamic feeling within the majority populations in Europe in particular as a way of polarising potential civil strife to the ultimate advantage of the extremist elements involved.   It is estimated that around 5% of the European population follows Islam, and in France, with its strong former colonial connections in mostly Muslim North and West Africa, the Islamic faith may account for as much as 10% of the population - a very sizeable minority indeed.  Political parties with an anti-foreigner agenda are springing up across Europe and this could escalate as the ‘faith’ polarisation becomes stronger and stronger.  Virtually all the Islamic faith followers in Europe abhor the French killings, but if these result in anti-Muslim retaliation (which they are beginning to) the prospect of alienating this very big minority of the European population, leading to ever more blood on the streets, is very real indeed.

While the Russia/Ukraine situation has stayed out of the headlines since the beginning of the year, recently completely overshadowed by the Paris events, it has not gone away.  There remains the prospect of new European sanctions against Russia, ostensibly over its annexation of Crimea, but as we pointed out in a recent article these sanctions are damaging to Europe too, and could become more so should Russia raise the retaliation stakes.  Also the Russia/Ukraine situation may be much more complex than most observers have been prepared to recognise.

See: 2015 Black Swans – or another BRIC in the wall

This plethora of problematical geopolitical events has the potential to further destabilise the European economy, which is already in recession and entering a prospective period of deflation.  The events represent an almost unprecedentedly disturbing start to the year and we have to hope against hope that they do not continue throughout 2015 or the consequences for global economic recovery could be dire.

To all this we have to add China.  While the forthcoming year of the sheep suggests a period of calm and prosperity in the Chinese Zodiac, the slowdown in the country’s economy suggests otherwise, although GDP is still said to be growing at a rate of around 7% per annum.  Because of its huge impact on global metals demand, the Chinese slowdown from double digit GDP growth, with the major mining companies gearing up to meet the kind of demand growth those figures suggested, has had a dramatic impact on demand for raw materials – particularly for iron ore and copper.  There is the suggestion that inventories have been run down and demand could pick up as the year progresses.  However there is no doubt that the Chinese building and construction sector is slowing which doesn’t hold out great hope for an iron and steel pickup, although for copper the expansion of the country’s high speed rail network could provide some much-needed stimulus.

But Chinese individual wealth has still been growing over the last several years.  This is showing up in terms of automobile imports which are continuing to rise.  China, for example, is nowadays Jaguar/Land Rover’s biggest market on the luxury car front.  While an economic slowdown – but probably not a recession – is on the cards, the economy is still growing at a rate which Western nations would love to see.  While the government is no longer looking for growth at almost any cost, it does seem to be prepared to help counter any prospective serious economic decline through lowering interest rates and other measures and perhaps the hard landing which some have predicted will thus be held off.

So where does all this leave us in terms of metals prices going forwards?  Stagnation in Europe and lower growth in China, perhaps slightly alleviated by a weak recovery in the U.S., may not be auspicious for iron ore, although we suspect it won’t fall much lower.  Copper, as the main element in the base metals picture is a slightly more complex situation to forecast.  Assuming China does need to rebuild stocks and continues to invest in electrically intense infrastructure development, and, with many analysts predicting a supply deficit in the current year, then the red metal could well be at or near its bottom and due for at least a weak recovery in price.

Gold is another matter altogether.  The price is still seemingly being controlled by activity on the futures markets, but the European travails could lead to rising safe haven demand as a wealth protector should the EU start to unravel, while Chinese demand looks as though it should remain strong throughout the year ahead.  Continuing strength in the US dollar against other currencies would normally mean a decline in the dollar gold price, but recently gold has been holding up remarkably well in dollar terms, which means it has been a very good buy in other currencies – notably the euro.

So what is the overall view in our opinion?  Oil – flat to weaker as long as Saudi Arabia continues to pump it at current rates; iron ore flat to weak also with the three biggest producers all having expanded capacity heavily over the past year, but with demand, particularly from China, at best stagnant for the time being; base metals perhaps slightly positive, but not significantly so; gold’s fundamentals continue to look good, but then they have for the past couple of years and the price has still tanked.  Overall though gold, and the other precious metals, on balance, should probably continue to see positive gains ahead with the possibility of a major kick upwards should additional geopolitical problems materialise, or current ones escalate.