Where should metals investors be looking following Black Monday?
Monday morning was tough for global markets, with a selloff in the Chinese stock market leading a global drop in equities. Some are calling the event “Black Monday.”
The Shanghai Composite index was down 8.5 percent at close of day on Monday, while the S&P 500 (INDEXSP:.INX) was down 77 points, or 3.94 percent. The Dow Jones Industrial Average (INDEXDJX:.DJI) lost over 1,000 points in early trading, but gained back some of its losses to finish down 588 points, or 3.94 percent.
The S&P/TSX Composite index (INDEXTSI:OSPTX) dropped 3.12 percent, or 420 points, climbing back from a 700-point drop at market open.
Meanwhile, commodities prices fared much the same. Despite seeing some gains on safe-haven buying recently, spot gold finished the day down 0.53 percent, at $1,154.90 per ounce. Spot silver saw even bigger losses, falling 3.4 percent to finish at $14.79 per ounce.
The spot copper price has been testing the $2.30 per pound level recently, and finally dipped below that number on Monday to close at $2.25.
As Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal explained, Monday’s fall was driven by a number of inputs. “The fall this morning was driven by a number of issues, including a slowing global economy and the realization that the rally in recent years was fueled by central bank liquidity, which is losing its potency,” he said. “Also, the omnipotence of Chinese officials to seamlessly orchestrate 7-percent growth indefinitely has been shattered.”
“Without evidence of organic growth, bond yields will stay at historically low levels for the foreseeable future and deflation will remain the dominant economic force,” he added.
Unfortunately, that isn’t good news for metals and commodities investors. “There really aren’t any safe places to be in commodities right now,” Berry said, though he reminded investors that “ultimately lower prices are a solution rather than a problem.”
“I still maintain that the issues facing the commodity complex are structural in nature as opposed to just cyclical, and this should present some very appealing M&A opportunities,” he concluded.
In the meantime, Frank Holmes, CEO of US Global Investors (NASDAQ:GROW), said there are a number of factors investors should be keeping an eye on, not least of which is the global manufacturing purchasing managers’ index (PMI).
“When this number shows the one-month reading cross below the three-month trend line we see commodities unravel,” he explained. “This took place in July and the global instability seems to be continuing. Investors should watch PMI data not only on a global scale, but on an individual country basis as well.” He added that it is also important for investors to keep an eye on the US Federal Reserve’s decision regarding interest rates.
In terms of what Black Monday means for commodities, Holmes expressed positivity about gold. “Historically, the normal seasonal pattern for gold shows the precious metal rising from here until Chinese New Year,” he said. “If you pair that with its safe-haven appeal during a stock market selloff, gold has the potential to rise even more.”
In a Monday post titled Gold Glimmers as Global Market Fear Grips Investors, Holmes notes a number of other factors that are supportive of gold. Furthermore, he points out that famed hedge fund manager Stanley Druckenmiller invested $323 million of his own money into a gold ETF last week.
Of course, the gold price is still down overall for the year, the recent price rise notwithstanding. Still, Holmes sees opportunity in the yellow metal.
“Although the commodity space is a volatile place for investors to be right now, there is still opportunity there,” he said. “I’ve always advocated a 10-percent weighting in gold — 5 percent in gold bullion and 5 percent in gold stocks, while rebalancing each year. It’s important for investors to realize that gold’s ‘normal DNA of volatility’ is plus or minus around $150, so the precious metal could easily jump higher as we move forward or it could retreat. I think odds favor gold moving higher, however.”
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Black Monday: China Leads Selloff in Global Markets
Precious Metals Stocks in the Black on Black Monday