Resource World Magazine

Resource World - Feb-Mar 2017 - Vol 15 Iss 2

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86 www.resourceworld.com F E B R U A R Y / M A R C H 2 0 1 7 Epilogue by David Duval T here is arguably no other time in mod- ern history when commodity prices have been so difficult to predict – at least in the near term. Metallurgical coal prices (for steel making) reached US $300/ tonne in 2016, a level not even the most bullish of analysts predicted. Iron ore prices were on a similar trend along with metals that are typically alloyed with it including copper, zinc and to a lesser extent, nickel, which probably remains at historical lows versus unit cost of production. It would seem that any type of modelling these days – climate change and economic modelling being among the worst offend - ers – is generally far removed from the inherently complicated, multi-variable, fast- changing nature of the subject in question. Historically, commodity prices have been based on their supply/demand char - acteristics: too much demand boosts prices and too little demand pushes prices lower. Stock market conditions also effect prices, some of which is driven by technical analysis including price charting where program-based software signals (i.e. buy/ sell) are as diverse as the traders employing them. With everyone looking at the same charts, commodity markets can turn on a dime – both up and down. Commodities are also sensitive to changes in the global macroeconomic landscape including economic, political or weather- related events (especially in the case of "soft" commodities such as wheat and soy beans) that are simply too unpredictable to forecast over a meaningful time frame. On the political side – and this is argu - ably more a driver of gold prices – you only have to look at the recent US elec- tion and the January 20th inauguration of Donald Trump whose inflammatory rheto- ric suggests the possibility of trade wars with three of his country's largest trading partners: China, Canada and Mexico. His accusation that China is a currency manipulator (as if the US doesn't manipu- late its own currency) might well be a factor in the Renminbi's recent devaluation and the fact Chinese nationals are purchas- ing foreign assets at a breakneck pace as a hedge against future devaluations. Bitcoin, a cryptocurrency where encryp- tion algorithms are exploited to secure transactions, has traded at over US $1,000 which many attribute to efforts by Chinese to get money out of their country. Evidence of this is more than visible in Toronto and Vancouver housing markets. Further deval - uations against the US dollar would see Chinese goods become more competitive in export markets which could augment gains in many industrial commodities including iron ore, copper, zinc, nickel and others. China's island building and militarization of the South China Sea has prompted threats by the US to block Chinese access to its artificially made islands which, if followed through, would throw commodity markets into a tizzy. Gold in particular would likely be a major beneficiary of such an action. Not only has the political pendulum swung far to the right in the US, Great Britain recently voted to exit the European Union which, based on its own internal dis - sentions, appears to be falling apart at the seams. Just recently, an Italian referendum designed to amend the powers of Italy's dysfunctional parliament was voted down. As he promised before the referendum, if the proposal failed to pass, Prime Minister Matteo Renzi resigned after leading one of Italy's 65 governments since 1945. Among the leading contenders to replace his government in the next election is the Five Star Movement led by Beppe "The Clown" Grillo, a popular Italian comedian. (Sorry folks, they don't make this stuff up). If you think some of Donald Trump's policies are over top, he pales in comparison to Beppe whose biggest joke might well be on the Italian people. France is also swinging radically to the right; propelled by the momentum of a Trump win in the US, a hard-right politi - cian, François Fillon – previously written off by pollsters and establishment pundits – rocketed to the top of the polls in his party's presidential primary. He vows to "conquer Islamic totalitarianism," prom - ises to clamp down on mass immigration, and calls for a closer relationship with Vladimir Putin's Russia, parroting Trump's successful formula to his presidential win. Fillon's main competitor, National Front leader Marine Le Pen, an anti-globalization proponent, was recently reported to have visited the Trump Tower in Manhattan. What's hard to assess is the impact these important geopolitical events will have on the global economy and, more specifically, on industrial commodities. Trump's hon - eymoon, as reflected in the strength of the US dollar, began to wane in early January, causing gold to move significantly higher. Copper and zinc have all performed admi- rably as have oil and natural gas, the former due to OPEC's recent agreement to cut production, the latter because of histori- cally cold temperatures in North America. Nonetheless, as an investor whose port- folio is totally in the commodities sector, I'm placing my bets on gold and silver, the former being both a currency and a com- modity. Buy lots! n Visual Capitalist has prepared an inter- esting commodities poster that can be found at http://www.visualcapitalist.com/ chart-every-commodity-2016/ Political issues spell uncertainty for industrial commodities – perhaps a strong upside for gold

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