Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Commodity weekly: Gold and silver steal the limelight
Ole Hansen
Head of Commodity Strategy
- Commodities sector starts March with strong gains, marking best weekly performance since October.
- Supported by a softer dollar and lower Treasury yields after Powell's remarks on potential rate cuts
- Precious metals see significant gains with gold reaching record high while silver tops the performance table
- Wheat futures tumble to 3-1/2-year low amid increased competition and ample global supply.
- Stuck in range crude can't get a break
The commodities sector has started March on a firm footing with broad gains supporting the best weekly performance since October, and while obesity drugs and AI continue to receive a lot of bandwidth in the stock market, this week in commodities belonged to precious metals, not least gold which was heading for its strongest two-week gain since July, in the process racing higher to reach a record high. Supported by a softer dollar and lower Treasury yields after Federal Reserve Chair Powell said the central bank is “not far” from having the confidence needed to ease policy and that rate cuts can and will begin this year.
As mentioned, these remarks helped send the dollar broadly lower - and risk appetite broadly higher - not least the Japanese yen which got multiple boosts, which apart from a dovish Powell included a strong wage growth print which raised chances the Bank of Japan will finally exit the world’s last remaining negative-rates regime and hike rates, perhaps as soon as this month. The USDJPY retreated and may have further to go as speculators reduce exposure to one the most favourite short trades in the past three years.
As per the table below, all sectors except energy, traded higher on the week with broad gains seeing the Bloomberg Commodity Total Return Index trade back in black on the year. Despite all the focus on gold, silver was the top performer after enjoying a trifecta of support from rising gold and copper prices as well as the softer dollar.
The Bloomberg Softs index remains the best performing sector this year, despite emerging signs of profit taking, not least cocoa which has witnessed a parabolic surge amid a substantial drop in supply from West Africa. However, with buying pressure from producers closing short positions, put in place to hedge exposure, starting to ease it was coffee and cotton’s turn to shine. Arabica coffee futures enjoyed the tailwind from surging Robusta coffee futures which surged to a new high on mounting concerns over weak supplies from Vietnam and Indonesia, two of the world’s top three producers.
Gold focus shifts to consolidation after record run
In our latest weekly update, we mentioned how the gold market last month showed signs of strength, trading flat on the month despite seeing US Treasury yields shot higher after US data strength earlier in the month had further delayed the expected timing of the first and depth of subsequent US rate cuts. Towards the end of February, the yellow metal was increasingly behaving like a coiled spring, wanting to trade higher despite yield headwinds, but held back by worries about continued data strength. However, after an in-line US PCE core deflator print was followed by a weaker ISM manufacturing print, buyers threw caution to the wind and rushed into the yellow with momentum buying giving it additional strength once a key band of resistance, which is now support, between USD 2075 and USD 2088 were broken.
At the end of last year, we forecast gold could reach USD 2300 in 2024, so while the latest rally is in line with our general view on the direction of gold, we have been left surprised by the timing of the run up to a fresh record. Given the need for rate cuts to attract ETF investors back into gold we have been calling for patience regarding the timing of the next move higher. Without any participation from ETF investors who sold 9 tons this past week, the rally has primarily been driven by under-invested hedge funds forced back into the market as several key resistance levels got broken.
Underlying support has for months been provided by central banks, some of which are buying gold in order to reduce their exposure to the dollar, and continued strong demand from retail investors in Asia, most notably in China where stock market weakness and falling property prices are forcing the middle class to look elsewhere. In addition, we believe that heightened geopolitical tensions around the world have reduced the short-selling appetite, basically all strengthening gold’s current buy-on-dips credentials.
Without a notable pickup in demand from investors in ETFs to pick up the baton from hedge funds that will soon reach their desired level of exposure, gold may hit a plateau followed by a period of nervous trading as recent established longs may reduce exposure. Overall, we maintain our USD 2300 target with the technical picture potentially pointing to an even higher level around USD 2500.
Top performing silver supported by gold and copper strength.
Silver is the best performing commodity this past week after the semi-industrious metal on top of the tailwind from gold received an additional boost from industrial metal strength, not least copper which recorded its highest close for the year amid continued supply worries and demand optimism in China in the coming months, especially if the government announces measures to support metals intensive sectors like property and infrastructure. While gold has reached a fresh record, silver has yet to send a strong technical signal with another +5% move needed before challenging key resistance in the USD 26 area.
Copper, rangebound since mid-2022, and the past nine months within a relatively narrow USD 3.50 to USD 4.00 range, is showing signs of fresh strength, supported by dollar softness, supply tightness, and China demand optimism. The weekly chart points to a breakout that needs a move through USD 4 to be confirmed.
Wheat futures tumble to a 3-1/2-year low
Two years ago, this past week, the Chicago wheat futures reached an all-time high at USD 1363 per bushel after top exporter Russia invaded fellow supplier Ukraine, for a short period of timing throwing around 30% of global wheat exports into question. This week, the CBOT wheat futures contract tumbled to USD 528 per bushel, the lowest level since August 2020, thereby joining soybeans and corn, both of which in recent weeks had already slumped to 2020 lows. While soft commodities like cocoa, coffee, and cotton remain bid amid weather-related supply worries, the grains sector have suffered continued losses after a strong 2023/24 crop production season lifted global supply and with that competition for export orders.
Competition is the key to wheat's current weakness as wheat prices the US and Europe are being forced lower by weaker prices in top exporter Russia. In addition to the current abundance of supply, Australia’s output is expected to expand, while wetter weather is seen supporting US crops in the ground. However, in their monthly report on Friday, the US Department of Agriculture is expected to make small cuts to its forecast for US and world wheat stockpiles.
Speculators have responded to months of weakness by continuing to increase short positions across the grains sector, recently resulting in a record short being held, primarily driven by corn and soybeans, with the current net short in wheat having seen a gradual reduction in recent weeks. However, as we approach the northern hemisphere planting and growing season, the attention will turn away from old stocks to new production prospects, and with that comes increased weather-related volatility.
Crude can’t get a break
Crude oil’s current lack of momentum continues to support our view that Brent and WTI will likely remain rangebound for a while longer, an outlook that was given additional credence this past week with WTI trading softer following several failed attempts to break above 80 while Brent has yet to challenge key resistance near USD 85. Overall, we see the risk of a breakout skewed slightly to the upside with focus on disruption risks in the Middle East and prolonged OPEC+ production restraint.
Biggest short-term challenge potentially being the risk of selling from hedge funds scaling back exposure amid profit-taking in response to crude oil’s current struggle to break higher. Especially after their net long in Brent and WTI futures reached a four-month high at 430,000 contracts or 430 million barrels.
Commodity articles:
8 Mch 2024: Investing with options - Gold optionality
6 Mch 2024: How to add gold exposure to your portfolio
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
29 Feb 2024: Podcast: Why speculative interest is important to understand
28 Feb 2024: Oil price stuck in neutral despite underlying strength
27 Feb 2024: Resilient gold market defies lower rate cut predictions
22 Feb 2024: Copper short squeeze fades ahead of key resistance
21 Feb 2024: Gold's resilience despite recent futures and ETF selling
20 Feb 2024: WTI crude eyes resistance amid improved signals
16 Feb 2024: Commodity weekly: Grains tumble; Industrial metals eye China boost
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
Previous "Commitment of Traders" articles
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
26 Feb 2024: COT: Record corn short, cocoa surge no longer supported by speculators
19 Feb 2024: COT: US inflation surprise drives broad selling of metals
5 Feb 2024:COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024:COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024:COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024:COT: Weakest commodities conviction since 2015
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