Commodity weekly: agriculture surges, metals fall on fading rate cut hopes

Having reached a fresh record high at USD 2450, gold suffered a USD 125 correction, in the process heading for its worst week in three months. Silver which earlier in the week surged to an 11-year high at USD 32.50 also suffered a sharp reversal, but for now the semi-industrial metal holds above key support in the USD 30 area. Copper’s premature rally to fresh record high also suffered a correction towards key support in the USD 4.70 to USD 4.75 area. Overall, we maintain a positive outlook and suspect traders and investors will maintain a buy-on-dip strategy across all three metals.

US and especially EU gas prices jumped with the Dutch TTF benchmark hitting a year high in response to an unplanned outage in Norway and renewed concerns about the remaining supplies from Russia. Staying with energy, Brent trades down around 6% on the month, near key psychological support at USD 80, and it has now lost more than half the strong gains seen between December and early April. A recent weakness in refinery margins and weaker time spreads in both WTI and Brent suggesting oil demand has hit a soft patch following a strong first quarter.

However, despite the current softness we still see demand picking up in the coming months amid seasonal strong demand in the Middle East towards cooling, as well as the US summer holiday driving season, and strong demand for jet fuel. All eyes now on the June 2 OPEC+ meeting and how the group will respond to prices trading close to USD 80 instead of USD 90, a price level preferred by most members.

Partly offsetting the mentioned losses across energy and metals were the agricultural sector with the softs and grain sectors both rising, as weather related worries supported continued strong gains in wheat, corn, cotton, and coffee. Wheat futures in Chicago and Paris were heading for another weekly gain, trading at ten-month highs, supported by adverse weather-related crop losses in the Black Sea region, as well as other major producers such as Australia, France, and Germany.

Following a recent and relative deep correction, coffee prices reverted sharply higher amid renewed focus on the damaging impact of dry weather conditions, not least in Vietnam, a key producer of the Robusta bean, leading to the biggest two-day rally since at least 2008. In Brazil dryness and heat remain a concern for most Arabica coffee producing regions, potentially negatively impacting the production outlook.

CBOT Wheat, first month contract:

Gold, copper, and silver, some of the recent highflying metals, all ran into profit taking this week after hitting record highs in gold and copper and silver, an 11-year high. Apart from an increasingly overbought market condition, the trigger was the minutes from the latest FOMC meeting in which officials said interest rates will need to stay higher for longer to combat stubborn inflation. Some softness had already started to emerge prior to the announcement amid signs of softening demand amid hesitancy from investors, central banks, and traders to pick up metals at record price levels.

Despite this week’s correction, the Bloomberg precious and industrial metals total return indices both trade up by around 17% this year, however, the combination of high prices deterring some buyers and an even longer wait before the first US rate cut, may now lead to another period of consolidation, the depth of which depends on whether prices drop further to levels that may force hedge funds and CTAs to reduce an elevated exposure. With that in mind gold’s recent correction low around USD 2285 will be key, while in silver the level to watch is whether the spot price will manage to hold above USD 30, a former resistance level turned support following last Friday’s explosive, but now deflating breakout.

We maintain our positive outlook for investment metals with silver potentially enjoying additional tailwind from expected industrial metal strength. We are currently focusing on the below drivers to support prices:

• Strong retail demand in China amid the desire to park money in a sector seen as relatively immune to a struggling economy and property woes.
• Continued central bank demand amid geopolitical uncertainty and de-dollarisation, and not least gold’s ability to offer a level of security and stability that other assets may not provide.
• Rising debt-to-GDP ratios among major economies, not least in the US, raising some concerns about the quality of debt. In other words, rising Treasury yields are not necessarily negative for gold as they raise the focus on overall debt levels and the sustainability of those.
• In addition, the focus is changing from the negative impact of lower rate cut expectations towards support from a reaccelerating inflation outlook.

Futures and ETF positions held by financial actors highlighting how recent rallies have been underpinned by strong demand from hedge funds and CTAs, especially in the leveraged futures market.

Copper meanwhile suffered a sharp setback after the recent surge to record highs in London and New York, which further deterred demand from physical buyers. Not least in China, the world’s top consumer of copper, where data for weeks has been telling a story about demand softness that financial traders thoroughly ignored amid the bullish price momentum, and the long-term focus on supply struggling to meet strong demand towards the electrification of the world. Recently the mentioning of AI and an anticipated demand for power to run a growing number of data centres supporting AI helped attract new investors into copper, some perhaps not fully understanding how commodities work.

Commodities are spot products where the price is determined by the prevailing balance between supply and demand, not what that balance may look like in six or twelve months’ time. The recent copper squeeze in the High Grade Copper future traded in New York occurred after traders sold into a rising premium between the High Grade copper price in New York and the LME price in London. However, as the spread due to speculative demand for HG futures continued to dislocate, short sellers were eventually forced to buy back their short positions, thereby triggering a dislocation which is only now getting worked back to normal levels.

Overall, we believe the direction of copper remains up, but following the latest surge to a record high - the timing of which occurred somewhat sooner than expected, given the current weakness in underlying demand fundamentals - a period of consolidation looks increasingly likely. Given how far copper has travelled in a relatively short time, the contract can retrace to USD 4.56 or even USD 4.40 per pound without disturbing the bullish setup.

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