In 2017, the focus among investors worldwide was in the United States and the Trump administration. The US president had just defied the convectional wisdom to win the closely-contested election. During the year, investors placed their bets that a former businessman would help turn around the economy by lowering taxes and deregulating the industry. They were right. At the end of the year, the stock market had one of the biggest gains.
Then, as this year started, investors believed that the president would continue working for the industry. Then things started to change. In March, after purging his former officials like Rex Tillerson and H.R. McMaster, the president went rogue. He announced new tariffs on all imported steel and aluminium. Then, he announced that his administration would place tariffs on Chinese goods worth billions of dollars.
The global stocks markets have been affected. As shown below, the performance of the Dow, S&P 500, Australia’s ASX, UK’s FTSE, and EU’s Stoxx has lost momentum this year.
While stocks have declined, metals have been significant losers this year. The declines on the metals has been attributed to the ongoing trade crisis. Since metals are usually raw materials of various products, disruption of the global trade often leads to lower demand and lower prices.
Another reason why metals have declined is the strong dollar. As shown below, the dollar has gained by almost 6%. The gains on the dollar have been because of the Federal Reserve, which has indicated that it would have more hikes. Already, the bank has made two hikes and is expected to make two more hikes this year. Since most commodities are usually priced in dollars, as its price moves up, their prices tend to move lower.
Gold has been a major loser this year. It has lost almost 9% of its value. The reason for this is the stronger dollar. As the dollar rises, gold tends to fall as traders move to the yield-earning currency over gold. Surprisingly, the convectional knowledge that gold tends to rise when there are global risks has not worked out as the stronger dollar has provided support. The chart below shows the movements of gold and the dollar index.
Palladium was the best performing metal a year ago. It rose by more than 40%. This year, it has lost more than 20% of its value because of the trade conflict. Palladium is used in the manufacture of cars and other industrial engines. As global trade slows down, the demand too slows pushing the price lower. The same is true with its alternative metal, platinum which has lost almost 20% of its value.
Copper was also a shining light a year ago. Its price rose by more than 25%. This year, the price has fallen by almost 15%, as supply from Chile resumes. The increase in supply, the stronger dollar, and the perceived decrease in demand has pushed the price to the lowest levels in more than a year as shown below.
The rout in the metals market will likely continue as the global financial conflict turns into a full-blown trade war. However, the ongoing weakness will form an exciting entry position for investors bullish on the metals.
In the coming week, the major metal miners will release their quarterly earnings. The major releases will be from Steel Dynamics, Glencore, Anglo American, Goldcorp, and Lundin mining among others.