The price of silver plummeted 4.5% on Tuesday. It closed at $15.01/oz… its lowest close since February 2010.
Gold had a bad day too. It dipped below its 2015 low of $1,148.10 before recovering to close at $1,153.70. It lost 1.4% on the day.
Historically, people buy gold and silver for protection during uncertain times. Gold and silver have held their value for thousands of years through wars, depressions, and financial crises. When stock markets crash or paper money fails, gold and silver are a reliable store of wealth.
Louis James, editor of International Speculator, blames China.
The Chinese stock market has crashed an incredible 28% in 16 days. And China’s 1.4 billion people are the biggest buyers of gold in the world.
The world’s biggest gold buyers are suffering a major liquidity crunch. Many won’t have the cash to buy anything, not even gold. Worse, hundreds of Chinese stocks are halted and huge numbers of investors are facing margin calls. That means that many who own gold will be selling because it’s the one thing they can get a bid on.
When a large number of buyers are forced to become sellers… well, counterintuitive days like today can make sense.
If I’m right about this, precious metals will slide until the liquidity crunch in China passes. We saw the same thing in 2008. But when this reversal happens, the rebound should be even sharper. Unlike most Americans or Europeans, Chinese people do see gold as an important form of wealth protection.
We’ll discuss the details of the Chinese stock market crash later this week.
• Meanwhile, another important commodity is within pennies of its 10-year low…
The price of iron ore has declined for nine days in a row. On Tuesday, the Metal Bulletin’s iron ore index plummeted 5% to $49.60 per metric ton.
Iron ore is in a bear market. It’s now 73% below its record high from September 2011.
Iron ore is the key ingredient in steel. China has consumed iron ore like crazy in recent years to build out its infrastructure. Its colossal Three Gorges Dam used 463,000 metric tons of steel.
China is the world’s largest consumer of iron ore by a long shot. It consumed 1.25 billion metric tons of iron ore in 2013. The rest of the world consumed that much combined. China is both the world’s largest producer and importer of iron ore.
Iron ore prices depend on China… and China is slowing down.
China reports that its economy grew 7% in the first quarter. That’s impressive for most countries, but it was China’s weakest quarter in six years. According to Bloomberg, Chinese steel production is on pace to contract for the first time since at least 1990.
• Iron ore also is Australia’s biggest export…
The Australian dollar just sunk to its lowest level since the financial crisis. One Australian dollar is now worth just US$0.74… down from US$1.10 in 2011.
Crashing iron ore prices are a big reason why. Australia’s economy depends on commodities. Its other top exports are coal, natural gas, gold, and crude oil. But iron ore is its biggest export by far.
Iron ore accounted for 25% of the value of Australia’s total exports last year. And 77% percent of Australia’s iron ore exports went to China, Australia’s largest trading partner. One-third of Australia’s total exports go to China.
China consumes what Australia pulls out of the ground. China’s boom was great for Australia. But with China slowing down, Australia is struggling.