Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Commodity weekly: Gold's record-breaking run continues
Ole Hansen
Head of Commodity Strategy
Key points in this update:
- Commodities face a second weekly loss, giving back half the strong gains seen during the previous four weeks
- Mixed performances: energy, industrial metals, and grains down; precious metals and softs up
- Gold’s record-breaking rally continues amid demand from investors seeking protection against multiple uncertainties
- Crude oil, diesel, and natural gas all suffering steep declines due to sluggish demand despite geopolitical supply risks
The commodities sector is heading for a second weekly loss, in the process giving back half the 10% gains seen during the previous four weeks when the first US rate cut, China stimulus hopes, heightened Middle East tensions, and weather concerns in Brazil all helped drive the Bloomberg Commodity Total Return Index to a five-month high. Since then, the positive impact of the mentioned drivers has faded, with US economic data strength reducing the timing, speed, and depth of incoming US rate cuts, while the market has grown increasingly immune to news from Israel’s ongoing war against Iran-supported groups in Gaza and Lebanon.
A number of economic policy easing measures in China, primarily supporting the housing market and the banking sector, were initially well received and helped drive strong gains in the Chinese stock market, as well as China-dependent commodities such as copper and iron ore. However, in the past couple of weeks, more than half of those gains have now been reversed, with traders increasingly questioning the scale and the pace of the announced initiatives. While there has been a clear shift in policy to support a 5% growth target, these rallies—for now—look like dead cat bounces unless fiscal policy shifts more directly to support consumption, which, together with underwater property prices, remain two key factors preventing the Chinese economy from growing at the targeted pace.
Following last month’s strong rally, which saw gains across all sectors, performances have turned much more mixed, especially this past week, where weakness across energy, industrial metals, and grains has only been partly offset by gains across precious metals, where gold’s record-breaking run of gains continues. Overall, the Bloomberg Commodity Total Return Index, which tracks the performance of 24 major futures markets, and which is replicated by several exchange-traded funds, trades down 1.8% on the week, thereby reducing the year-to-date gain to 4.5%.
Gold’s record-breaking rally continues, and following another shallow mid-month correction that saw buyers return ahead of USD 2,600, spot bullion broke above USD 2,700 to record its sixth record high this year. The precious metals market has witnessed an unprecedented strong uptrend this past year, with gold and silver both trading up more than 30% year-to-date, with only minor corrections seen during this extended rally, which at this point, shows little sign of ending.
The bullish drivers throughout this period are numerous, from the risk of fiscal instability and uncertainties surrounding the US presidential election to its safe-haven appeal, geopolitical tensions, and de-dollarisation. And now also rate cuts—not just by the Fed, but by other central banks as well—reducing the cost of holding non-interest-paying investments in gold and silver. The latter potentially supports increased demand for gold-backed ETFs from underinvested asset managers, especially in the West, who, up until May, had been net sellers since the FOMC began its aggressive rate hikes in 2022.
The sustained demand for investment metals during this time has, for now, triggered a breakdown in the normal inverse correlation between gold and the dollar. The latest example is the lack of a negative reaction in gold to the 2.5% gain in the Bloomberg Dollar Index since the beginning of September—a period that has seen the timing, speed, and depth of future US rate cuts pared back amid continued strength in US economic data.
Having already jumped by almost 40% in the past 12 months, there is little doubt that many would-be investors balk at the prospect of paying record prices, but the fear of missing out on the continued rally ultimately forces many to get involved. Having reached record prices, the ability to forecast the next level is increasingly down to guesswork and the round numbers game, with the next major target for gold pointing to USD 3,000 and silver to USD 35.
This week, a poll among delegates from around the world attending the London Bullion Market Association’s annual gathering predicted higher prices in a year’s time for gold, silver, platinum, and palladium. While gold is expected to climb around 10% to USD 2,917.40 an ounce by late October next year, delegates, just like us at Saxo, held a very strong view on silver, seeing it gain more than 40% to reach USD 45 an ounce, with experts noting that industrial demand continues to drive market deficits as mine supply struggles to keep pace.
The gold-to-copper ratio is a financial metric that reflects the relative strength of gold and copper. In this example, we use LME copper, currently trading around USD 9,600 per ton. It provides insights into various economic conditions, including inflation, growth expectations, and general market risk sentiment. The year-long rally in gold and recent correction in copper have seen the ratio slump to 3.52, a level last seen in 2020 during the pandemic, when copper prices temporarily slumped, and gold received a boost amid stimulus-led inflation concerns.
Prior to that, the ratio was only this weak in the aftermath of the financial crisis in 2008, when recession and inflation concerns for a short while drove the two metals in opposite directions. Although copper has increasingly become a China demand story, given the fact that some 50% of global supply is consumed in China, the falling ratio is nevertheless signalling potential economic distress and a general high level of uncertainty.
Having returned to, and once again finding support around USD 4.30, a level reflecting the middle of the range seen since June, the short-term outlook for copper will continue to depend on stimulus news from China, as well as market speculation about the timing, pace, and depth of future US rate cuts. Our bullish long-term view remains unchanged, with solid demand, especially towards the energy transition, potentially creating a shortfall amid miners struggling to increase supply amid higher input prices, lower ore grades, climate change, and rising regulatory costs and government intervention. Overall, the uptrend from the 2020 pandemic low looks well-established, and it would require a weekly close below USD 4 to change that.
Commodity sector losses this week have predominantly been concentrated across the energy sector, with crude oil, diesel, and natural gas all suffering steep declines amid disappointment about China’s efforts so far to stimulate demand, together with the IEA’s warning about a growing risk of supply exceeding demand next year. This, as OPEC+ attempts to add barrels into an oversupplied market amid sluggish demand as the electrification of the world continues to impact demand for diesel and gasoline, together with a generally weak growth outlook among some of the top consuming nations, and rising production from non-OPEC+ members.
The risk premium associated with a potential supply disruption, in the event of an Israeli attack on Iran's energy infrastructure, fluctuates. This is because weak underlying fundamentals dampen traders' willingness to make significant bets, knowing that they could face losses if such an outcome doesn't occur. Some, but so far limited, support emerged ahead of the weekend following the killing of Hamas’ leader in Gaza and after Chinese economic data showed tentative signs of improvement. In addition, US crude stock’s counter-seasonal decline extended to a fourth week, while gasoline stocks plunged to the lowest in nearly two years.
Having failed earlier this month to break above the 200-day moving average, currently at USD 81.60, Brent crude, the global benchmark, has returned to trade near the mid-70s, a level that is currently regarded as neutral. As per the chart, Brent has been trading mostly sideways for the past two years, with major developments during this time basically offsetting each other, leaving traders wondering what it will take to break the stalemate. In the coming year, the direction of travel will be determined by several major developments, such as the pace of electrification, not least in China, which is approaching peak demand for gasoline and diesel; the impact of rate cuts on economic activity; OPEC’s ability to manage production increases without lowering prices; and geopolitical developments.
Recent commodity articles:
17 Oct 2024: Copper prices decline amid doubts about China stimulus impact
16 Oct 2024: How high can gold and silver rally?
8 Oct 2024: Podcast: Navigating market shifts: Fed rate cuts, commodities and rising food prices
8 Oct 2024: Video: These commodities might be impacted by the US election
7 Oct 2024: Crude oil surge caps strong four-week rally for commodities
7 Oct 2024: COT: Broad buying momentum persists, led by Brent, copper and grains
2 Oct 2024: Q3 2024 Commodity Outlook: Gold and silver continue to shine bright
30 Sept 2024: COT: Fed and PBOC trigger largest weeklyl surge in commodities demand in a decade
27 Sept 2024: Commodity weekly: Industrial metals gain strength during a week of crude weakness
26 Sept 2024: Crude prices drop again as Saudi and Libya supply concerns grow
24 Sept 2024: Fed and PBOC add momentum to commodities market rebound
23 Sept 2024: COT: Dollar short reduced; Investment metals see strong demand ahead of FOMC
20 Sept 2024: Commodity weekly: Commodities boosted by bumper rate cut
20 Sept 2024 Video: Gold or silver, which metal will perform the best
17 Sept 2024: With gold reaching new heights, silver shows potential
16 Sept 2024: COT: Record short Brent and gas oil positions add upside risks to energy
11 Sept 2024: Crude slumps amid technical selling and recession fears
10 Sept 2024: US Election: will gold win in all scenarios
9 Sept 2024: COT: Crude long cut to 12-year low; Dollar short more than doubling
5 Sept 2024: Can gold overcome the 'September curse'?
4 Sept 2024: Wheat rises on European crop worries
3 Sept 2024: Chinese economic woes drag down crude oil and copper
2 Sept 2024: COT: Commodities see broad demand as the USD slumps to a net short
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