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Commodities Week in a Minute: Black Friday commodity comments. Diamonds, gold and copper

Commodities Week in a Minute: Black Friday commodity comments. Diamonds, gold and copper

Commodities

Diamonds and precious stones
The diamond market right now is abuzz with optimism which is typical for this time of the year but the trend of offering big discounts to entice buyers in the US is probably margin dilutive given the commentary from Signet this week (Sales off 3% and slipping to a loss of $12m). However on the other side of the world, Chow Tai Fook’s H1 results confirmed (admittedly supported by what is solid demand for gold products) improving demand, sales and profit margins, which given the relatively slower growth in the US could very much support current or even improving demand levels, but let’s get through the rest of the festive season first before popping champagne corks although Q3 imports into Hong Kong are +1% to $4.7bn. Luk Fook report next week.

Talking of popping champagne corks, Gem Diamonds announced the recovery of a 202ct, D colour, type IIa this week (see what I did there?). This is the seventh >100ct recovery this year and things look to be turning around for the team. (We have a note out this morning; please shout if you would like a copy).

Precious metals

One thing that struck me talking to investors over the last few weeks is the lack of volatility in gold at the moment, which mirrors the sentiment towards volatility in equity markets - think VIX/VVIX at or around all-time lows. Many will see gold as an opportunity cost, but my view is more that gold is now acting more akin to an insurance policy (capital preservation) as opposed to an investment based on capital appreciation. The chart below highlights the decline in 1 year at-the-money options vs. the gold price with prices now at the lowest level since July 2005 – When gold was trading at less than $430/oz, which then spiked as the price rose and subsequently fell post the 2011 highs.

Short term, this is likely to remain the trend for now with gold at or around these levels, despite the FOTH (Fear Of The Hike) phenomenon. That said, I would expect a significant uptick when we get a significant reversal in equity markets, itself interesting in seeing how the robo ETF’s have to deal with irrational human behaviour and current market concentration levels. The Dec rate hike, now priced at a 97%, we feel is nailed on, but any slippage in the dots will be supportive.

Net, net, cash generation at a lot of producers is likely to remain strong as 2018 progresses.

Base metals

Bulls of copper are again cheering as a few events this week have sought to kick-start the red metal once again.

LME stockpiles fell to their lowest levels in twelve years, falling 14% as demand for Asian based materials soared and the recent trend of large deliveries into Chinese warehouses tailed off and SHFE-LME arbs again look attractive.

Not one to miss an opportunity, physical premiums jumped this week, implying higher demand and Codelco, the world’s largest producer confirmed marginal increases to the annual premium for Chinese customers from $72/t to $75/t. European producers saw a 7% increase to $88/t.

All this just before the chaps at Escondida (c5% of global production) decided to go on strike again this year, remember the six week strike earlier this year? After the smart chaps at BHP announced that they were going to cut 3% of the workforce (120 people)… right in the middle of what is a “too-tight to call” election in the country and tensions are running hot…
 

Worth noting that Southern Copper, the world’s fifth largest producer is also suffer two separate industrial disputes at its operations in Peru.



Bulk commodities

Plenty of investors looking beyond the winter shutdowns and thinking iron ore is a solid buy at these levels.

What do I think?

Higher grades will remain will bid as the environmental targets set by the Government will not change.

Mid to higher grades will likely become the swing factor in demand for those wishing to remain in the local authorities good books

The lower down the grade ladder you go, the more we get in to a traders paradise!

Takes your bets, takes your chances.

That's enough from me today

Stay strong

Kieron

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