Editorial: Gold, iron ore 
rallies fade

Oh well, it was fun while it lasted. The big rallies seen in gold and iron ore prices in recent months have given back much of their gains as May progresses, with gold falling down to US$1,227 per oz. at press time and iron ore at US$51.22 a tonne.

Gold prices are now US$5 an oz. lower than 30 days ago, and only US$20 an oz. higher than a year ago. After rising a heady US$70 in a week, prices peaked on May 3 at an intraday high of US$1,303.20 and an AM Fix in London of US$1,296.50 per oz., and it’s been a steady grind down ever since.

But the biggest single-day drop in gold happened on May 18, upon the release of the minutes of the April 26–27, 2016, meeting of the U.S. Federal Reserve’s Federal Open Market Committee (FOMC), which showed a renewed willingness on the part of the Fed to raise U.S. interest rates as early as June or July. Many banks and investment houses are placing the odds of an imminent rate hike at 35–50%.

The adjective most used by Fed watchers to describe the tone of the FOMC’s latest comments was “hawkish,” as committee members noted improved U.S. labour-market conditions, coupled with inflation rates below their traditional 2% target range.

More recently, the St. Louis Federal Reserve President James Bullard said that keeping the U.S. rates too low for too long could cause financial instability down the road and that stronger market expectations for a rate rise are “probably good,” even if there are shorter-term fluctuations in the U.S. dollar relating to the “Brexit” vote in the United Kingdom.

It’s quite a turnaround from the Fed’s general approval of negative interest rates as a legitimate policy tool — a view first expressed in mid-February by Fed chair Janet Yellen during testimony before the U.S. Congress.

Those words helped rein in the U.S. dollar and kick off a two-month rally in gold prices, with some of the most bullish sentiment for gold seen in five years.

But the renewed prospect in mid-May of a rate hike by the Fed naturally sent the U.S. dollar up, and commodity prices in U.S. dollars down.

Looking at this year’s charts of the gold price versus the U.S. dollar, it’s quite evident the two have had a very strong inverse correlation throughout 2016.

And so the last few weeks of dollar strength have firmly capped the rally in gold that began in early January, when gold broke above US$1,100 an ounce.

On the brighter side, gold prices are still up 16% this year.

Again showing the dominant influence of the U.S. dollar, the charts for the other precious metals show a similar pattern to gold over the past year, with silver now trading at US$16.18 an oz., platinum at US$996 an oz. and palladium at a mere US$551 an ounce. All have had rallies snuffed out in recent weeks, but still trade significantly above values seen at the start of 2016.

Meanwhile, iron ore — after having been one of the top-performing commodities in 2016 — saw spot prices fall back to 10-week lows in the US$50-per-tonne range on U.S. dollar strength and more mundane issues of oversupply in the market, particularly with respect to Chinese stockpiles.

Iron ore prices have pulled back 24% from the short-term peak of US$69 per tonne in mid-April, after having risen 79% from mid-January in a move that surprised analysts who had predicted another subdued year for iron ore prices in 2016.

These days, many base metal analysts think that the Chinese government’s vast credit injection into the Chinese economy will continue to translate into domestic, steel-consuming construction that will keep buoying prices for iron ore, especially when combined with slowing iron ore production growth from the worlds biggest iron ore miners Rio Tinto, BHP Billiton and Vale.