Gold slide leads commodities fall
Key commodity markets have been spooked by US central bank plans to wind back its money-printing program, weak Chinese manufacturing data and fears of a credit crunch in the world's second-biggest economy.
Gold, silver and copper slid, as did iron ore stocks such as Fortescue Metals and Rio Tinto, although iron ore prices bucked the trend.
According to investment bank UBS, copper fell to its lowest level in 20 months due to "further evidence that the economy of top metals consumer China is slowing, as well as the US Fed's intention to begin scaling back stimulus measures later this year".
Gold dropped as low as $US1269 an ounce this week and, despite recovering to about $US1300, was still well down on a weekly measure. Australian goldminers will be partly protected due to the corresponding fall in the local currency.
"The worst of the current round of decline is probably behind us as gold prices may stabilise and rebound," Jeffrey Christian, managing partner at CPM, said. "It's going to be very important to see in the next few days how enthusiastic investors are. If they signal they are waiting for still lower prices, that will be a very negative signal."
Charlie Aitken at Bell Potter said, "commodities and commodities currencies faced the perfect storm of a resurgent US dollar and increasing concerns about the health of the Chinese economy".
He declared the commodity super cycle as "dead, buried, gone".
"I continue to tell you to broadly avoid resource stocks because commodity prices are going to fall more than the Australian dollar," he wrote in a note. "Right here right now we have signs of stress in the Chinese banking system, consistently weak Chinese economic data and a resurgent US dollar.
"That is a terrible combination for commodity equities, when you then add in commodity prices in meltdown."
ANZ economist Mark Pervan said that commodities leveraged to China - with the exception of iron ore - were pressured by softer preliminary manufacturing data and concerns over domestic credit conditions.
"China's HSBC Flash manufacturing print for June was much weaker-than-expected. The series fell to 48.3 against expectations of little change in the month to 49.1," Mr Pervan said.
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Gold and other commodity prices fell because markets were spooked by signs the US central bank will wind back its money-printing program, weaker-than-expected Chinese manufacturing data and fears of a credit crunch in China. Those factors pushed precious and industrial metals lower and pressured commodity markets.
Newcrest Mining slumped to a 10-year low as the broader gold sell-off hit miners. The article notes Australian goldminers are partly protected because the fall in the US dollar gold price is offset to some extent by a corresponding fall in the Australian dollar.
Investment bank UBS said copper fell to its lowest level in 20 months due to further evidence that China’s economy—the world’s top metals consumer—is slowing and because the US Fed intends to begin scaling back stimulus measures later in the year.
Iron ore stocks such as Fortescue Metals and Rio Tinto slid along with other resource shares, although the article notes iron ore prices themselves bucked the broader commodity downtrend. Still, miners exposed to China faced pressure from weak demand data.
Jeffrey Christian of CPM said the worst of the current round of gold declines is probably behind us and that gold prices may stabilise and rebound. He added investor sentiment in the coming days will be important—if investors wait for lower prices, that could be a negative signal.
Some analysts in the article advise caution. Charlie Aitken at Bell Potter called the commodity super cycle 'dead' and recommended broadly avoiding resource stocks because he expects commodity prices to fall more than the Australian dollar. That reflects short-term concerns about a resurgent US dollar and weak Chinese demand.
ANZ economist Mark Pervan pointed to softer preliminary Chinese manufacturing data as a key pressure on commodities leveraged to China. China's HSBC Flash manufacturing print for June fell to 48.3 (below expectations of 49.1), signalling weaker activity and weighing on metals and resource demand.
Plans by the US central bank to scale back stimulus and wind back money printing tend to strengthen the US dollar and reduce liquidity, which can push commodity prices down. For Australian miners, a weaker Australian dollar can offer some protection, but analysts warn that falling commodity prices and a stronger US dollar create a difficult environment for commodity equities.
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