WCU: Trade optimism boosts oil and copper; Gold bulls rethink

The soft commodity sector was the worst performing, with profit taking hitting both sugar and cocoa following a recent run of strong gains. Coffee hit a four-month low on the combination of a weaker Brazilian real and the prospects for ample supplies from Brazil, the world’s biggest grower and exporter.

Gold softened to trade below $1500/oz with the market struggling to rekindle the support that propelled it higher during the third quarter. However, the negative impact on gold of a trade-deal related rally in stocks and bond yields are now being off-set by a weaker dollar and geo-political risks.

The appetite for gold as seen through demand for bullion backed exchange-traded funds remains strong. During the past two months, when gold traded sideways, total ETF holdings jumped by 167 tons to reach 2,545 tons, less than 30 tons below the December 2012 record.

While we maintain a bullish outlook for gold into 2020 the need to change focus may create a challenging short-term outlook. The bond engine has stopped providing support as the U.S. Federal Reserve concentrates on the front end of the yield curve while in Europe protests about negative yields continue to grow. Instead, we remain unconvinced that the current strength in stocks can be maintained and that the dollar will continue to remain strong, not least should Brexit and trade talks succeed.

In our recently published Q4 Outlook called “The Killer Dollar” we highlighted the reasons why the world can ill afford a strong dollar.  And with the Fed offering the bigger easing potential compared with other central banks operating close to their limits, the dollar may trade lower sooner rather than later.

From the helicopter perspective the outlook for gold remains strong as long the price stays above $1380/oz, the old ceiling that provided resistance from 2014 to June this year. We maintain our end of year target at $1550/oz and higher in 2020. 

Brent crude oil rallied back to $60/b with demand worries being off-set by the intense focus on U.S. – China trade talks. In addition, a small risk premium re-emerged after quickly disappearing following the Saudi Aramco attack last month. Turkish troops entering Northern Syria and the Iran tanker attack on Friday both helped remind the market that while demand is a concern it is the worry of a disruption that carries the biggest risk in terms of sudden and sharp price movements.

Monthly oil market reports from the U.S. Energy Information Administration (EIA), OPEC and the International Energy Administration (IEA) all highlighted the risk to demand from trade wars and slowing global growth. While seeing shale oil growth slow in 2020 and 2021, the EIA also said that U.S. production could exceed 13 million barrels/day by December. On geopolitical risks the IEA said it should not be ignored but that “For now, though, there is little sign of this with security fears having been overtaken by weaker demand growth and the prospect of a wave of new oil production”.

In our monthly commodity deep dive held earlier this week I highlighted the reasons why we believe that the downside risk, despite economic angst, looks limited from here. The geo-political risk premium following the September attack in Saudi Arabia has been removed but events this past week shows why it could suddenly re-emerge. So, while the pendulum continues to swing between demand and supply worries, we suspect that WTI and Brent over the coming weeks will stay range bound around $55/b and $60/b respectively.