Base metal prices like copper rise and precious metal prices like gold fall when the economy is doing well. What happens if both copper and gold prices fall?
JUANA SUMMER, HOST:
The global economy is kind of messed up right now. And that’s why we’re seeing what financiers like to call a flight to quality. It’s lingo for people who buy super safe assets like gold. But even gold has been in free fall since March, along with the rest of the metals market. Paddy Hirsch and Adrian Ma from The Indicator report.
ADRIAN MA, BYLINE: When the world economy is doing well, copper goes up because it’s used to build and make things, but gold goes down because it’s often used as a safe haven, and you don’t need a haven when things are going well . On the other hand, when the economy is doing badly, you often see the seesaw being turned in the other direction.
PADDY HIRSCH, BYLINE: Something very strange is happening right now though. Copper and gold both fall, and most metals fall with them. Tai Wong has spent the last 20 years buying and selling everything from gold and silver to nickel and tin. And he says the volatility we’re seeing in the metals market right now reminds him of 2011 when the Great Recession stimulus started to fade.
TAI WONG: Copper was pretty high – in the 8,000s – and it started falling dramatically.
MA: At that time there was a fear that the US economy would slip into recession and that the global economy would follow suit. And Tai says the same fear is affecting the metals market today.
HIRSCH: There are really three things driving these concerns, Tai says. This is the dollar; it’s inflation and it’s China. And these three factors are like the witches of Macbeth casting really evil spells on the metal market.
MA: The spell cast by the first witch is China.
WONG: China uses – probably uses 50% of the world’s copper in one way or another. So if China catches a cold, the copper market could catch pneumonia.
MA: And China doesn’t just buy copper. It buys all metals. So when China’s economy slows, demand for all metals falls. China’s slowdown is acting like one of Harry Potter’s magic spells – Flipendo (ph) – throwing the market back.
HIRSCH: But that’s nothing compared to the second witch’s spell. And that ban is the dollar, which is the strongest in a generation right now.
WONG: Since most commodities, almost all commodities, including gold, including oil, are valued in dollars, a stronger dollar has the effect of pushing those commodities down.
MA: What Tai is saying is if you’re outside the US and you need to buy dollars to buy the metals you need, those metals also get more expensive.
HIRSCH: So a strong dollar affects the metals market a bit like the Harry Potter spell Impedimenta (ph). It makes you trip and can make you fall flat on your face in case you didn’t know it. But it is nothing compared to the effects of the spell cast by the third of our witches, the Avada Kedavra (ph), the killing spell – inflation. There is, of course, an antidote to inflation – raising interest rates.
MA: Rising interest rates make borrowing more expensive. And a lot of people who deal in metals deal in borrowed money.
DEER: Yes. So, Tai says, as interest rates have risen, demand for metals has fallen even further.
MA: Tai says that this combination of a strong dollar plus rising interest rates plus a sluggish Chinese economy means we’re likely to see a lot more ups and downs in the metals market, and most likely more downs than ups.
HIRSCH: In the meantime, Tai says, all a retailer can really do is buckle up and keep up with what’s going on, hoping there aren’t any nasty surprises. And when it comes to fixing the economy, none of us have a magic wand.
MA: Adrian Ma.
DEER: Paddy Deer.
MA: NPR News.
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