Election uncertainty in the USA supports investment metals, whilst stabilization in China may strengthen the silver market

• Uncertainty involving a variety of factors, including the US presidential elections, will continue to support demand for investment metals. Silver can play a significant role, as long as signs of stabilisation in the demand for industrial metals in China persist.
• The energy sector will closely watch the upcoming elections as both candidates have differing views on traditional and renewable energy sources. After a long period when oil prices hovered around $80, the price of Brent oil currently stands in the range of $70.
• We expect further, albeit unspectacular, increases in copper prices supported by lower financing costs following interest rate cuts by the US Federal Reserve which further reduces the risk of recession. The stabilising growth prospects in China, bolstered by government actions, and the ongoing demand related to the green transformation also contribute to this trend.

At the start of 2024, our analyses focused on the metals sector for which we forecasted highly positive prospects in the short term and future. After a strong first half, the precious metals sector, especially gold, continued to rise in the third quarter as investors sought a safe haven amid global uncertainty. The peak in the upward trend occurred in September, coinciding with the start of the interest rate reduction cycle in the United States. Meanwhile, the energy and industrial metals sectors, heavily dependent on economic growth, encountered difficulties. These problems were the result of a deepening economic slowdown in China and increasing recession risk in other regions, particularly in Europe.

Impact of elections on commodity prices

The energy sector is keenly watching the upcoming US presidential elections due to diametrically opposing approaches to traditional and renewable energy sources among candidates. Trump’s policy supporting the energy sector may eventually exert pressure on energy prices due to higher production, while simultaneously urging OPEC+ to hold prices steady. On the other hand, a Kamala Harris presidency would continue a policy promoting transportation electrification and development of renewable energy sources. These changes require considerable amounts of metals essential for green transformation such as copper, lithium, silver, aluminium, and cobalt.

Generally, the risk of substantial, unfunded government expenses, regardless of they relate to infrastructure, renewable energy sources or social programmes, and trade tensions between the US and China, coupled with tax cuts, may instigate new concerns about inflation and increasing public debt levels. Such context prompts investors to speculate that investment metals like gold may find support regardless of the election outcome. If US election results lead to a deadlock in Congress, even limited fiscal expenditure can heighten the risk of recession. In such a context, the Federal Reserve may need to resort to more decisive actions in money supply control, which will also support gold prices.

Gold and silver have greater possibilities

On the threshold of the last quarter of the year and in the context of the upcoming presidential elections, we observe that numerous uncertainty factors continuously favour demand for investment metals, particularly for silver. Maintaining stable demand for industrial metals in China will be crucial. Investors are willing to pay record prices for gold, an outcome of global situation-related fears – from increasing government expenditure, geopolitical tensions, all the way to “dedollarisation” tendencies on the part of central banks. Gold is regarded as a safe haven in times of crisis. It should also be noted that the US Federal Reserve’s interest cut cycle supports this trend, possibly leading to further increases in precious metal prices.

Given that current basic demand trends will persist, we anticipate further increases in gold prices until the end of the year and onwards into 2025. There is significant potential to reach the record limit of $3000. Silver, bolstered by the stabilising industrial metals sector, may fair even better. Its comparatively lower price than gold generates growth opportunities which might lead it to reach the $40 level next year. This conservative forecast assumes a gold to silver price ratio of 75, compared to the current ratio of around 83.

The demand perspective for oil is weak, prompting a downward shift in price range

The September drop in Brent oil prices below $70 was relatively short-lived. The market concluded that with such low prices and record short positions by hedge funds, a further decline would only be justified in the face of recession. We estimate that the likelihood of a recession in the US in 2025 is only 25%, although the impact of higher interest rates remains uncertain. Despite some signs of economic weakening, key indicators such as economic growth, investments and job offers indicate that the economy is not yet in recession.

However, a combination of strong production growth outside OPEC+ and weak demand, particularly in China, where demand growth in 2024 slowed to several hundred thousand barrels a day compared to around 1.3 million barrels a day in 2023, will likely limit growth potential in the coming months. Some of the supply-related focus is on Libya, where long-term supply disruptions may help tighten the market, and on OPEC+, which may delay scheduled production increase planned for December. This year, Brent oil prices hovered around $80, but we believe that the above factors point to further oscillation around $70 in the foreseeable future, with potential increases caused by geopolitical events or demand recovery in China.

Copper demand returns to norm after a significant mid-year drop

After a mid-year drop, copper prices have stabilised following a short-term spike to record levels at the end of May. This increase was primarily driven by investor speculation, anticipating higher prices in line with growing demand resulting from the energy transformation and expected energy demand increase in data centres related to artificial intelligence. The price drop from May to August was further intensified by rising copper inventory in warehouses controlled by major exchanges, especially in China, which was seen as a sign of weak demand. This ultimately led to price reductions to a level which is now starting to stimulate renewed demand growth.

In my view, as demand prospects stabilise, attention is beginning to focus on supply-side problems, especially after production forecasts in Chile and Peru, the world’s two largest copper suppliers, were lowered. Especially as we anticipate in the coming months that a combination of lower financing costs due to interest rate cuts by the US Federal Reserve, avoiding a recession in the United States, stabilised economic growth in China thanks to government support, and steady demand associated with green transformation will support prices. This creates the potential for further growth, though not as spectacular as the gains we saw at the start of 2024.

Ole Hansen, Head of Commodity Market Strategy, Saxo