Commodities boosted by bumper US rate cut

The Federal Reserve’s long-awaited rate cut cycle began with a bang after the FOMC surprised the markets with a 50 basis point cut while signalling another 50 basis point cut this year, followed by an additional 100 basis points of cuts next year. Fed Chair Jerome Powell used the press conference to signal optimism about the economy, despite signs of a loosening labour market, making it clear that the larger rate cut comes from a position of strength, not weakness. The Fed’s jumbo rate cut clearly signals its intention to support the US economy and guide it towards a soft landing, where inflation is brought under control without triggering a recession.

The different asset classes, including growth and demand-dependent commodities, responded positively to this Goldilocks scenario, with the energy and industrial metal sectors both rallying, while the prospect of lower funding costs—and with that the prospect of increased demand for gold from asset managers via ETFs—helped drive the yellow metal to a fresh record high above USD 2,600, a year-to-date gain of more than 25%. Silver, enjoying multiple support from rising gold, industrial metals, and a softer dollar, recorded an even stronger gain, taking the year-to-date gain close to 30%.

Apart from lower funding costs, the commodities sector has also been supported by continued dollar weakness, with the broad-focused Bloomberg Dollar Index trading lower in seven out of the last eight weeks. Out of 13 major currencies, only the Mexican peso has recorded a loss, with gains being led by the Japanese yen, the Scandies, and the antipodeans (AUD and NZD), while major currencies like the euro and yuan both trade up around 3%, with the latter hitting a 16-month high, thereby making imports cheaper and potentially adding to the current commodities strength.

Gold and especially silver have more upside

Gold’s record-breaking rally continues, now supported by the US rate-cutting cycle, which in the past has led to strong gains in the months that followed. Spot bullion reached another milestone after breaking above USD 2,600, reflecting a year-to-date gain of more than 25%. This surge means a standard 400-troy-ounce gold bar (around 12.4 kilograms or 27.4 pounds), commonly traded internationally and used by central banks, now costs over USD 1 million, up from USD 725,000 last October.

Since then, gold has surged more than USD 800, with only minor corrections during this extended rally—showing strong underlying momentum, driven by FOMO (fear of missing out). Gold’s rise—despite being a ‘dead’ asset that offers no returns beyond price appreciation minus its funding or opportunity costs—reflects a world in imbalance, where investors continue to pay record prices for gold amid multiple drivers from fiscal profligacy, geopolitics, and “de-dollarisation” demand from central banks, to a general safe-haven appeal, topped up with a supportive rate-cutting cycle from the US Federal Reserve, which has reduced the opportunity cost of holding not only gold but commodities in general.

While gold’s new record high has captured most attention, silver has outperformed, delivering an even greater return in 2024. Silver’s dual role as both a precious and industrial metal means its price is influenced by gold, industrial metals, and the dollar. After hitting a decade-high of USD 32.50 in May, silver experienced a deep correction alongside industrial metals due to concerns about Chinese demand. Between May and August, the gold-to-silver ratio widened from 73 ounces of silver per ounce of gold to 90 ounces.

However, a continued gold rally and a recovering industrial metals sector, supported by a weaker dollar, have brought the ratio back below 84, with silver once again outperforming gold. Investors cautious about paying record-high prices for gold may see better value in silver, which remains well below its 2011 record of USD 50. For silver to attract more buyers, a break above the May high at USD 32.50 is needed. Momentum funds currently hold a relatively small speculative long position in silver near the five-year average, compared to gold’s much larger 227k net long position, which is double its five-year