Widespread commodities decline in July, with gold as the notable exception

Overall, the Bloomberg Commodity Total Return Index ended down 4% last month, its worst monthly performance since May last year, with all sectors apart from precious metals trading lower on the month. During the week, however, the overall monthly loss was somewhat reduced as key markets started to recover after weeks of heavy selling from hedge funds cutting their exposure began to dry out. Year-to-date, the index which does not include highflying cocoa, Paris wheat and EU gas as well as platinum trades up 1% with the main sector moves being an 18.1% rally in precious metals and a 19% drop in the grains index.

In addition, a geopolitical risk premium returned to crude oil and also gold in response to renewed worries about stability in the Middle East, after Hamas said Israel had killed its political leader, who was on a visit to Iran. Together with rumblings between Israel and Hezbollah in Lebanon, the market is once again forced to focus on the unlikely risk of the month-long conflict spilling over to other parts of the Middle East, which ultimately could see the supply of energy being disrupted for a period of time.

Finally, global markets including growth and interest rate-sensitive commodities received a boost following after the FOMC made several changes to its statement that suggested a dovish shift, with Chairman Powell laying the groundwork, depending on incoming economic data, for a September rate cut.

Gold's 4% rally lifts the year-to-date gain to 17.3%

Gold reached a fresh record this month just below USD 2500—Saxo’s end-of-year target—after traders, following a succession of weaker US economic data prints, lifted expectations that a US rate cutting cycle could begin in September with additional 25 basis points cuts now seen at the following three meetings. The latest strength was supported by another round of soft US economic data prints on Thursday which helped drive the policy-sensitive 2-year yield down to a 14-month low. Combined with the ugly swings in equities, a soft US jobs report on August 2 may increase the risk that the Fed and other central banks are repeating the errors of history by waiting too long to cut interest rates and then being too slow when they finally start.

Lower funding costs for holding a position in a non-interest paying metal, such as gold, will increase its attractiveness, and during July, we have seen some early signs that interest rate-sensitive investors have started to warm up to gold, with the total holdings across the major exchange-traded funds showing the biggest monthly increase since March 2022 when total holdings peaked above 3200 tons, only to suffer months of net selling amid rapid rising US interest rates.

Also, this week, the World Gold Council published their Gold Demand Trends Q2 2024, and despite record prices, the organisation saw record demand with OTC investment driven by wealthy families and individuals worried about US government debt levels and uncertainty about the outcome of the US presidential election. Since April, gold has made three successive record highs, the latest to USD 2484 taking it close to our end-of-year target. With three US rate cuts priced in this year, as opposed to the FOMC’s projection of just one, some short-term disappointment cannot be ruled out, but overall, the direction towards higher prices in the months and quarters ahead remains. Key support can be found in the USD 2280 area while resistance for now looks firm above USD 2450.

Crop friendly weather sends grains lower

The grains sector suffered a 6.5% setback last month with corn, soybeans, and wheat all trading near four-year lows amid the prospect of another strong US crop production year, combined with slow economic growth and bumper domestic harvests in China potentially slowing imports of the three major crops from the world’s top importer of food commodities.

While the US weather forecasts point to crop-friendly weather during the run into the harvest period, some concerns have emerged in Europe where the Paris Milling wheat contract shows signs of consolidation as a period of heavy rains in France, a major exporter, look set to yield the smallest harvest in at least a decade. In addition, traders will also be monitoring the wheat harvest in the previously drought-stricken Black Sea region.