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Commodities Week in a Minute: Colour of the year, Diamond price declines and a new opportunity for Gold

Published: 07:31 09 Dec 2016 EST

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Commodities

Diamonds and precious stones

A couple of weeks on and the fall-out from the Indian demonetisation efforts continue to reverberate around the diamond and gemstone industry. Many column inches have already been dedicated to the macro impact and the decision to not hold rates this week has only increased the concerns over a liquidity crunch in-country but the scale of the impact on Indian diamond and gemstone buyers has been significant.

Whilst I do foresee this to be a relatively short term concern compared to other more structural concerns, the fact that certain lower quality smaller goods are now registering discounts of more than 25% vs. those achieved prior to the actions is indicative of how volatile these categories are.

Right now, it is clear that if goods are on tender, prices and confidence will be influenced, but the scale of this impact will vary relative to the mix of goods on sale and/or the production profile of a particular producer, and of course, if the goods are even offered for sale.

I think this sentiment has been perfectly summed up by Alrosa this week when announcing their November diamond sales figures (+63% year on year) “The market activity at year-end was affected by India's currency reform in November. One of its effects was a temporary decline in the activity of India's small and middle-size diamond cutting companies, which also affected the low-end small-size rough diamond segment. Activity in other market segments remains high”.

Finally, congratulations to Mr Lamb and the team at Lucara, Karowe has now generated >$1bn in accumulated sales since production commenced in June 2012.

 

Precious metals

It certainly feels as though the yellow metal is suffering from a death by a thousand cuts at the moment, registering the worst weekly run for over a year, but given the 2016 performance to date is UP 10%, all is not lost, just maybe a little more considered when compared to early July.

Near term, If I am honest, it feels as though the trend will continue lower, with so many factors obliging what is now a consensual short, such as the stronger $, the reflation trade, a yield pick-up in “risk free” assets, an imminent rate hike, the temporary reduction in European QE, not to mention the mass ETF liquidation programme.

So time to dust off those sub-$1,000/oz. predictions again?

No.

Two factors that will be important in drivers in 2017: Firstly, the collapse in short term physical demand, not just in India but also in China following the efforts to stem the decline of the Yuan, these are likely to be relatively short term.

Secondly and more intriguingly is that trading gold as a commodity within Islamic finance is now a reality. A pro-gold law was adopted recently by the Accounting and Auditing Organization for Islamic Financial Institutions, which sets Sharia Law standards for finance groups.

Historically, Islamic investments have been guided by Sharia Law, which prohibits financial practices like earning and paying interest on loans. It also outlines requirements for the exchange of commodities like gold and silver. Islamic law sees gold as a substance sold by its weight and measures; a commodity that must be immediately exchanged in equal amounts. These types of substances are called Ribawi, and traditionally include silver, dates, wheat, salt, and barley. Therefore, the idea of using precious metals as an investment vehicle or as wealth retention is new.

The new revisions to Islamic financial guidelines have significant potential to influence global gold demand and subsequently, pricing, given that 1.6 billion Muslims will now be allowed to trade in precious metals. Gold bullion investments will be opened up to 25% of the world’s population, with the Islamic finance market expanded to “grow to US$5 trillion by 2020,” according to some commentators.

Another factor is that exchange traded funds that are backed by gold are expected to qualify for the new guidelines, but gold futures probably won’t. Physical gold bars and coins may also qualify, according to the World Gold Council. However, the rules require that a bank selling gold has to “offer same-day settlement or has to demonstrate it can provide the exact gold being sold within one day,”

I am going to stick with my rather less than heroic $1,250/oz average for 2017, implying a moderate 7% increase from today’s price. As a reiteration, our top economist Simon French fails to see more than 1 rate rise in the US next year, should that turn out to be the case, the yellow metal could well prove to be a steady performer in 2017, but maybe not beginning on the 1st January…

 

Bulk commodities

Iron ore.

Coking Coal.

Thermal Coal.


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