Commodity Focus: Crude Oil, gold and coffee

Gold continues its slow recovery after recently finding support at the technical important level just below $1450/oz. A rejection at this level – if confirmed - sends a signal that the correction seen since the September peak has been a relatively weak one. The lack of firm buying response to the mentioned developments which have sent bond yields and stocks lower highlights a current wait-and-see approach ahead of yearend. Investors and traders who have booked profit, either in futures or exchange-traded funds are, given the time of year, unlikely to re-build major longs unless the yellow metal breaks back above $1516/oz. A break that could be triggered by renewed weakness in stocks or a repricing of the prospects for future U.S. rate cuts.

As we highlighted in our daily podcast on November 19 the short-term outlook for coffee has deteriorated once again. Improved fundamentals, being the outlook for a supply shortfall during the 2019-20 season, helped boost prices in recent weeks. This despite Brazil, a major producer of the high-quality bean, having seen its currency slide towards the weakest level since 2015. The weakness began on November 6 after Brazil’s largest-ever auction of oil deposits flopped and for a while it broke down the otherwise strong positive correlation between coffee and the Real.

Arabica coffee remains one of the favorite hedge funds short due to slope of the forward curve. The steep contango provides a carry for holding and rolling a short position. During a two-week period up until November 12 hedge funds cut their net short position in coffee by 80% and the short-term risk is that these could now be reinstated following yesterday’s technical break of support. Fundamentals are improving but until the mentioned contango is further reduced the outlook remains challenged. The one-year roll yield from holding a short position is currently close to 10% but down from 16% earlier in the year.