- The commodity market has reported its second consecutive weekly loss, negating half of the strong gains from the previous four weeks.
- The results were mixed: decreases in the energy, industrial metals and grain sectors; increases in the precious metals and soft commodities sectors.
- The record gold rally continues, supported by investors seeking protection against numerous uncertainties.
- Crude oil, diesel fuel and natural gas recorded sharp declines due to weak demand, despite geopolitical risks on the supply side.
The commodity sector recorded its second consecutive weekly loss, losing half of the previous gains, which amounted to 10% over the previous four weeks. At that time, the first interest rate cuts in the US, hopes of stimulus in China, escalating tensions in the Middle East, and fears about the weather in Brazil contributed to the rise of the Bloomberg Commodity Total Return Index to a five-month high. Since then, the positive impact of these factors on prices has weakened, and strong economic data from the US has reduced expectations about the timing, pace, and depth of upcoming interest rate cuts. Markets have also become increasingly resilient to news related to the ongoing war between Israel and Iran-backed groups in Gaza and Lebanon.
A number of measures have been introduced in China to soften economic policy, mainly supporting the real estate market and the banking sector. These measures initially received a positive reception and contributed to significant rises in the Chinese stock market and in commodities dependent on China, such as copper and iron ore. However, over the last few weeks, more than half of these gains have already been reduced, and traders are increasingly questioning the scale and pace of the announced initiatives. Despite a clear shift in policy towards the target of 5% growth, these increases – for the time being – appear to be short-term rebounds. This could change if fiscal policy is more directly targeted at supporting consumption, which, alongside falling property prices, remains one of the key factors hindering economic growth in China.
After the strong rally last month, which brought gains in all sectors, the results have become much more diverse, especially in the past week, when weakness in the energy, industrial metals and grains sectors was only partially offset by increases in the precious metals sector, with record gold prices. Overall, the Bloomberg Commodity Total Return Index, which tracks the performance of 24 major futures markets and is replicated by several exchange-traded funds, fell 1.8% last week, reducing the profit since the beginning of the year to 4.5%.
The record gold rally continues, and after another shallow correction in mid-month, which attracted buyers before the $2,600 level, the price exceeded $2,700, reaching a record for the sixth time this year. The precious metals market experienced an unprecedented strong upward trend over the past year, with both gold and silver rising over 30% since the beginning of the year, with only minor corrections during this long rally, which at this stage shows no signs of ending.
The upward factors in this period are numerous – from the risk of fiscal instability and uncertainty linked to the US presidential election to the attractiveness of gold as a safe haven, geopolitical tensions and dedollarization. And now also interest rate cuts – not only by the Fed, but also by other central banks – lower the cost of owning non-interest generating investments, such as gold and silver. This can lead to increased demand for gold-based ETFs from underinvested asset managers, especially in the West, who have been net sellers from the start of aggressive rate hikes by the FOMC in 2022 until May.
The persistent demand for investment metals at this time has led, at least for the moment, to the breakup of the standard inverse correlation between gold and the dollar. The latest example is gold’s lack of negative reaction to the rise in the Bloomberg dollar index by 2.5% since the beginning of September – in the period when expectations were reduced regarding the timing, pace and depth of future interest rate cuts in the US in the face of continued strong economic data from the US.
After rising nearly 40% over the last 12 months, there is no doubt that many potential investors are hesitant at the prospect of paying record prices, but the fear of missing out on the continuation of the rally is ultimately forcing many to get involved. After reaching record prices, the ability to predict the next level increasingly relies on guessing and throwing out round numbers, with the next major target for gold being $3,000 and for silver $35.
Last week, a survey of delegates from around the world participating in the annual London Bullion Market Association conference predicted higher prices a year from now for gold, silver, platinum and palladium. The price of gold is expected to rise by about 10% to $2,917.40 per ounce by the end of October next year, while delegates, like us at Saxo, had a very strong opinion about silver, predicting a rise of over 40% to reach the level of $45 per ounce. Experts note that industrial demand continues to drive deficits in the market, while supply from mines struggles to keep up.
After returning to the $4.30 level and again finding support in this range, reflecting the mid-range seen since June, the short-term outlook for copper will continue to depend on news about stimulus in China, as well as market speculation about the timing, pace and depth of future interest rate cuts in the US. Our bullish long-term outlook remains unchanged, based on solid demand, especially in the context of the energy transformation. This demand can potentially lead to shortages in the face of difficulties for miners in increasing supply amid higher raw material costs, lower ore quality, climate change and rising regulatory costs and government intervention. Overall, the uptrend from the pandemic low in 2020 seems well established and would require a weekly close below $4 to change the situation.
Losses in the commodity sector last week primarily affected the energy sector, where crude oil, diesel and natural gas experienced significant declines following disappointment over China’s efforts to stimulate demand and an IEA warning of a growing risk of oversupply over demand in the next year. This is happening as OPEC+ is trying to increase oil supply to an already saturated market, in the face of weak demand. The world’s electrification continues to impact demand for diesel and gasoline, and overall weak growth prospects among some of the largest consuming countries as well as increased production from non-OPEC+ countries exacerbates the problem.
The risk premium associated with potential supply disruption in the event of an Israeli attack on Iranian energy infrastructure is fluctuating. This is due to the fact that weak fundamentals dampen traders’ willingness to take significant bets. They know they could lose if such a scenario doesn’t materialize. Some, though so far limited support, emerged ahead of the weekend following the killing of a Hamas leader in Gaza and after Chinese economic data showed uncertain signs of improvement. Additionally, the drop in US oil stocks outside of the season extended to the fourth week, while gasoline stocks fell to the lowest level in almost two years.
Following a failed attempt to break above the 200-day moving average, currently at $81.60, Brent crude, the global benchmark, returned to trading around the mid-$70s, which is currently seen as a neutral level. Over the past two years, Brent has essentially traded sideways, and the major price-relevant events during this time have essentially balanced each other out. This leaves traders with the question of what it will take to break this stalemate. The direction of market development in the coming year will be determined by several key factors, such as the pace of electrification – particularly in China, which is approaching peak demand for gasoline and diesel; the impact of interest rate cuts on economic activity; OPEC’s ability to manage production growth without lowering prices; and the geopolitical development.
Ole Hansen, Director of Commodity Market Strategy, Saxo
Source: https://ceo.com.pl/rekordowa-passa-zlota-trwa-29502
