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China is defying the skeptics and the Fed continues to dither on QE. Meanwhile, gold, silver, copper and iron ore are all up, taking the TSX and the TSXV on a ride with them. What’s going on?
Last week, commodities rose across the board on signs that the Chinese economy is recovering, with copper and iron ore being two of the biggest beneficiaries. The red metal rose to $7,331 a tonne on Friday, up $11 from Thursday, after the Chinese government announced that the country is on track to meet its 7.5-percent growth target. Iron ore was at $138.60 a tonne on Friday and is expected to breach $140 this week due to brisk steel demand from China, reported Business Recorder.
As the world’s largest consumer of metals, growth in the Chinese economy is watched carefully by economists, mining companies and commodities traders. The 7.5-percent growth target announced last week is actually the ninth deceleration of the past 10 quarters, down from 7.7 percent for the three months ended March 31. But supportive measures, such as scrapping taxes for small firms and accelerating investment in urban infrastructure and railways, along with higher factory output in July, have given the Chinese government enough confidence to say that economic growth is “stabilizing,” reported The Globe and Mail, quoting a spokesman for the National Bureau of Statistics:
“We are confident that the economy is sustaining the positive momentum in the second half and confident of meeting the economic growth target,” said Sheng Laiyun, adding: “The economy is showing some positive changes. Signs of growth stabilization are becoming more obvious.”
Also stabilizing are Canadian stock markets, which, since reaching a trough at the end of June, have begun to recover and even climb. The S&P/TSX Composite Index (TSX:OSPTX) fell from 12,746 points in May to 11,836 on June 24, close to a 52-week low, but has since risen to 12,800 as of yesterday, just 104 points shy of a 52-week high. Even the Toronto Venture Exchange (TSXV:OSPVX), whose woes have been well-covered on these pages, is inching back. From a dismal 860 points on June 27, the Venture is up 65 points, or 7.5 percent, over the last month, although it is still down 24.2 percent year to date.
The S&P/TSX Capped Materials Index (^TTMT) — which features 55 (mostly) mining companies trading on the TSX — is up 12.86 percent month to date and 14.21 percent so far this quarter, while the fund seeking to mirror the performance of the materials index, the iShares S&P/TSX Capped Materials Index Fund (XMA) is also doing well. The fund has grown 7.52 percent in the past month and 5.75 percent over the past three months.
The Financial Times (FT) reported that a better Chinese economy is giving commodity bears who headed for the exits in June pause to reconsider their decision. Pointing to trade data showing record imports of iron ore, copper, oil and ferrochrome in July, caused by booming industrial production seeking industrial commodities, the FT quotes three metals analysts as saying that previously negative sentiment is changing.
“The data at the headline level does demonstrate that China’s demand has been pretty good,” Duncan Hobbs, commodities analyst at Macquarie, told the FT, while Grant Sporre, metals analyst at Deutsche Bank, said “[t]he sentiment has obviously turned.”
The picture for precious metals is also brighter, although a cloud still hangs over the sector in the form of statements from the US Federal Reserve indicating that quantitative easing (QE) is likely to taper before the end of the year. However, as The Financial Post pointed out on Friday, data showing a drop in US homes sales, along with a fall in durable good orders, is raising new questions about QE. Signs that the American economy is failing to grow at a pace acceptable to the US central bank could persuade it to delay scaling back its $85-billion-a-month bond-purchase program, which would be bullish for precious metals, particularly silver and gold.
Indeed, gold and silver have performed well in recent weeks despite ongoing vacillations by the Fed over the future of QE. At the end of July, silver was floundering at $20 an ounce, but has since risen $4.35, to $24.33, an increase of 21.71 percent. Gold, which suffered the worst drop in 30 years in mid-April, has also staged a strong recovery, rising in the past three weeks from $1,282.60 on August 6 to close at $1,404.50 yesterday — a gain of $121.90, or 9.5 percent.
There is also some indication that the Fed’s likely decision to taper QE is already baked into the gold price. In a commentary yesterday, Louis James, senior metals investment strategist at Casey Research, remarked that gold is climbing despite the Fed’s signalling that will taper its money-printing program.
“To me, this shows real strength behind the resurgence in gold prices,” Louis wrote. “This does not prove that the bottom of this gold correction is behind us, but it is an extremely bullish indicator, in my view.”
Such bullish signs for gold include: hedge funds betting more on the precious metal than they have in the past six months; a rising gold price in India despite that country imposing import restrictions on gold; a surge in physical demand, especially jewelry, in China and India, major gold-consuming nations; and an end to the gold ETF liquidations that occurred in the second quarter.
The bottom line for investors? Don’t count commodities and mining stocks out as an investment. As we enter the more active fall season in mining investments, now may be the time to take a good look at your portfolio. Companies that have recently started trending up, particularly the strong juniors with good metal in the ground, will be the ones to watch as the market (hopefully) continues to climb over the next few months. If you haven’t already, consider selling the laggards now while they’re up floating up with the rest of the boats. As the old adage goes, you can’t get hurt taking a profit.
Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article.
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Weekly Round-Up: Commodities Hold Steady on Fed Murkiness