ETFdb Logo
ETFdb Logo
ETFdb Logo
ETFdb Logo
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • Entrepreneur ETF
    • Equity ETF
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Future ETFs
    • Gold & Silver Investing
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Modern Alpha
    • Multi-Asset
    • Multi-Factor
    • Nasdaq Investment Intelligence
    • Portfolio Strategies
    • Retirement Income
    • Smart Beta
    • Thematic Investing
    • Volatility Resource
  • Database
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
    • ETFs Future-Forward 2021: An iShares Investing Symposium
    • Three Themes for 2021: An iShares & MSCI Investing Symposium
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Videos & Podcasts
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Gold Rally May Give Way to Industrial Metals
News
Share

Gold Rally May Give Way to Industrial Metals

Justin KuepperMar 10, 2016
2016-03-10

Gold prices have soared nearly 20% so far this year, according to Finviz, while silver and palladium rallied 12% and 10%, respectively. These precious metals have outperformed nearly every other commodity with the exception of lumber prices, which jumped 13% year to date.

Precious Metals Charts
Figure 1 – Metal Prices Rally Higher – Source: Finviz

Precious metal prices are being driven by a combination of central bank easing across most of the developed world and an economic slowdown across emerging markets. While gold doesn’t have any yield, negative interest rates in Europe and Japan have actually made zero yields attractive. Gold’s status as a safe-haven asset has also made it attractive to investors given the uncertainty surrounding emerging markets, such as China, and those reliant on crude oil revenue.

Below, ETF Database takes a look at these dynamics and a contrarian thesis that industrial metals may actually be poised to outperform gold in the latter half of 2016.


Content continues below advertisement

Deflation & Uncertainty Drive Precious Metals

The rally in precious metals has been driven by a combination of monetary easing and economic uncertainty that has plagued the market since mid-2015.

The European Central Bank and Bank of Japan cut interest rates into negative territory earlier this year in order to combat deflation and spur economic growth. In Europe, high unemployment and excessive debt has dampened growth. In Japan, Prime Minister Shinzo Abe’s economic policies have proven ineffective at stemming a decade-long fight against deflation. These dynamics have led to increasingly desperate easing measures by banks.

The slow demand for goods and services in developed countries contributed to China’s exports falling 25.4% in February from a year ago – its worst single-month decline since early 2009. This has put pressure on crude oil, iron ore, and copper prices, which has in turn hurt many emerging markets that rely on the commodities sector. In a lesser way, the fall in crude oil has hurt the U.S. domestic energy sector (but bolstered consumer balance sheets) as well.

China Exports Graph
Figure 2 – Chinese Exports Fall – Source: TradingEconomics

The prolonged period of low interest rates also had a negative impact on emerging markets that borrowed heavily before the commodity collapse. With prices headed lower and the U.S. dollar moving higher, these debts are becoming more difficult to pay off. This has limited emerging-market governments’ abilities to introduce stimulus measures to help bolster growth rates and avoid a protracted economic decline.

Finally, the OEDC recently noted that leading indicators pointed to easing growth in the U.S., Canada, Germany, Japan, and the U.K. The IMF is also widely expected to lower its 3.4% growth forecast for 2016 when it makes its updated predictions in April.

Market May Be Overly Pessimistic

These problems may seem severe in nature, but pessimism in the financial markets may be overdone in many ways.

There’s a growing perception that central banks have run out of options or resolve when it comes to spurring growth and inflation through monetary policy. While this may be true for central banks acting alone, there are many policy options available if these banks work in conjunction with governments. Fiscal policy, structural reforms, and deregulation are all low-risk measures that could help, while so-called “helicopter drop” is a more extreme option whereby the government and/or central bank would directly transfer cash to citizens. The most popular “helicopter drop” proposal is former Federal Reserve Chairman Ben Bernanke’s tax rebate program that would be financed by the purchase of government bonds.

China’s National People’s Congress (NPC) also recently introduced a number of measures to bolster its economic growth, which could reduce some of the worries about emerging-market economies. These measures include expansionary fiscal and monetary policies that are supported by a budget deficit of 3% in 2016 – up from 2.3% in 2015. With extensive foreign reserves, China is far from exhausting its economic countermeasures to slow growth.

Industrial Metals Rally

Industrial metals rallied after China’s NPC announcement earlier this week. Iron ore prices increased 20% on Monday, March 7, in its biggest single-day gain on record. While China’s prediction of 7% growth in 2016 has been largely dismissed as unrealistic, it may have been a driving factor in the metal’s sharp rally this week. Future specific policy announcements out of the NPC could drive prices even higher, but they are likely to settle lower in the mid to long term.

Iron Ore Price Spike Chart
Figure 3 – Iron Ore Price Spike - Bloomberg

The supply side of the pricing equation could also be bullish. According to Glencore CEO Ivan Glasenberg, the commodities market may have hit the bottom and cuts in spending by the world’s biggest mining companies could have a positive impact on future prices. He said in a conference call that reduced spending could tighten up supply and more supply could take time to come back – all at a time when sales to China are “pretty good” at the moment.

Industrial metals, such as iron ore, copper, and steel, tend to outperform precious metals during an economic rebound. Copper prices have already rebounded about 17% since January on hopes that mining cutbacks could erode the global production surplus.

The Bottom Line

Gold and other precious metals experienced a significant rally in late 2015 and early 2016, driven by monetary easing across the developed world and economic uncertainty in many emerging markets. While these trends are certainly problematic, the market may be overly pessimistic about global economic growth. Central banks still have many policy options available to them and emerging markets like China continue to pursue growth initiatives.

Industrial metals like iron ore rallied higher after China announced new expansionary policies at the NPC this year, and supply dynamics are bullish. If these efforts succeed, industrial metals could become a more attractive asset class than precious metals in late 2016 and early 2017.

» Popular Pages

  • Tickers
  • Articles

May 16

Steering Retirees Through the Great Resignation

May 16

ETF Leaders Powered by the NYSE: Darek Wojnar

May 16

Here are Morningstar’s Kapoor's Thoughts on Millennials

May 16

Palladium ETF Strengthens on Chances of Global Deficit

May 16

A Look at CLNR’s Investment Thesis

May 16

An Options Strategy for Current Turbulent Markets

May 16

Blockchain ETFs Head the Market Bounce

May 16

Midstream's Important Role in the Energy Transition

May 16

Does Your ESG Portfolio Identify Risks to Financials?

May 16

Electric Vehicles Gaining Market Shares, KARS Invests

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

ARKK

ARK Innovation ETF

XLE

Energy Select Sector SPDR...

WEAT

Teucrium Wheat Fund

VIG

Vanguard Dividend...

VGT

Vanguard Information...

VNQ

Vanguard Real Estate ETF

VYM

Vanguard High Dividend Yield...


Content continues below advertisement

Loading Articles...
Help & Info
  • Contact Us
  • About Us
  • Mission Statement
  • Press
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © ETF Flows LLC
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

Equity ETF Channel

Retirement Portfolio Redux: Is the 60%-40% Portfolio Dead?

Debbie CarlsonOct 22, 2020
2020-10-22

With the 10-year U.S. Treasury yield hovering below 1% and Federal Reserve Chairman Jerome Powell...

Equity ETF Channel

Portfolio Diversification Isn't Dead, It Was Just Sleeping

Debbie CarlsonOct 15, 2020
2020-10-15

Investors could be forgiven to think there was no reason to invest outside of the U.S. for the...

}
X