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Commodity weekly: Green transformation trouble

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Financial markets felt relieved this past week after Fed Chair Powell strongly hinted that the Federal reserve is done hiking rates. The dollar suffered a broad retreat while US Treasury yields slumped, thereby boosting sentiment across markets that have recently been plagued by geopolitical concerns, sharply rising Treasury yields driving the risk of economic weakness. The commodity sector traded mixed with gains in softs and metals being offset by continued losses in energy.

Financial markets felt relieved this past week after Fed Chair Powell strongly hinted that the Federal reserve is done hiking rates. Despite being careful not to rule out another increase, Powell, focusing on how much inflation has fallen, rather than emphasizing the economy’s recent strength, let the market conclude that the Fed really doesn’t want to hike again unless hotter-than-expected economic data force their hand. The dollar suffered a broad retreat while US Treasury yields slumped, thereby boosting sentiment across markets that have recently been plagued by geopolitical concerns, sharply rising Treasury yields driving the risk of economic weakness and a mixed earnings season.

The commodity sector has seen mixed trading with gains in softs being led by coffee after stockpiles at exchange monitored warehouses plunged to a 24-year low, and industrial metals where copper also enjoyed support from falling inventories and a softer dollar. The precious metal sector traded higher, led by platinum and silver playing catchup following golds recent surge. These gains were being offset by losses in the energy sector with crude oil heading for a second weekly drop as the Israel/Gaza war remains contained while demand is weakening. With the grains sector also suffering a small decline led by corn and wheat, the Bloomberg commodity index, which tracks a basket of 24 major commodity futures spread evenly across energy, metals and agriculture, ended effectively unchanged on the week.


Green transformation hit by rising costs and narrow focus on wind and solar

It was also a week where the green transformation theme received mixed signals with the wind and solar industries facing increased challenges from soaring costs, while the nuclear sector continues to attract increased attention. Furthermore the mining of green metals, especially copper, received a setback after Panamanian lawmakers voted to repeal a new contract with Canada’s First Quantum Minerals raising uncertainties over the future of a giant Cobra copper mine, Panama’s second largest source of revenue which directly and indirectly employs 49,000 people.

In his latest equity update, my colleague Peter Garny wrote: “October was another bad month for our three green transformation theme baskets (renewable energy, energy storage, and green transformation) extending this year’s losses to between -27% and -32%. As we have written in many equities notes this year, the green transformation is a capital and commodity intensive transformation and thus this part of the market has been hit hard by rising bond yields and higher commodity prices. In addition, the excessive equity valuations in everything related to the green transformation in 2021 have also added to the current hangover experienced in this segment of the equity market”.

The widening performance gap between companies predominantly exposed to the wind and solar industry and nuclear companies, is nothing short of stunning. Year-to-date the Global X Uranium ETF ($2.3bn market cap) trades up 36.5% while the iShares Global Clean Energy ETF ($2.7bn market cap) has lost almost 33%. Recent developments across all three areas highlight the need for nuclear power to become a bigger part of the solution to decarbonize the economy. Earlier in the week Cameco, one of the world’s biggest producers of uranium, delivered blowout Q3 results which sent its share price soaring sharply higher, and it shows the demand outlook for nuclear power is increasing quarter by quarter.     

Source: Bloomberg

Short-term cyclical weakness versus long-term structural upside

Returning to a broader commodity market focus, Saxo holds the view that key commodities are at the beginning of a multi-year bull market driven by CapEx drought due to rising funding costs, lower investment appetite and lending restrictions. The green transformation is creating “greenflation” through rising demand for industrial metals towards “new” energy at a time where miners are faced with rising costs, lower ore grades, growing social and environmental scrutiny, and in some cases resource nationalism.

In addition, we are seeing increased fragmentation pushing up demand for, and prices of, key commodities. The agriculture sector will likely face a higher degree of weather volatility and price spikes. Overall, these supply and demand imbalances may take years to correct, ending up supporting structural inflation above 3% which will likely increase investment demand for tangible assets such as commodities.

Gold rally slows as Fed pause boosts risk sentiment

The reason gold did not shoot back above $2k after Powell hinted the FOMC is done hiking rates, was the fact bullion had already moved considerably within the past few weeks. And while the rally initially was triggered by the unrest in the Middle East and wrong-footed short sellers in the futures market, we believe the bulk of the near 200-dollar rally was fueled by the continued surge in US bond yields with traders and investors growing increasingly concerned about US fiscal policy, and especially whether the recent jump in both real and nominal yields would end up ‘breaking something’. That focus triggered an unusual situation where rising bond yields and indeed, dollar strength, ended up supporting gold.

With US treasury yields showing signs of stabilization and potentially beginning to soften a touch, we may see normal relations between bullion and yields reestablishing, and while peak rates will add support to gold in the months ahead, the continued move towards higher prices will be challenged by usual periods of consolidation and corrections. For now, however, with multiple geopolitical uncertainties still supplying some support, we believe any short-term correction will be short lived and shallow, not least the continued and rising support from central banks as they continue to buy bullion at a record pace.

For a second year running, strong central bank demand helps explain why gold has not behaved ‘normally’, rallying to a near record high during a period of surging US real yields, higher cost of carry, a strong dollar, and heavy ETF selling. A recent update from the World Gold Council showed how central banks, led by China, are likely to test last year’s all-time high for gold buys this year, with the buying being led by emerging markets looking to reduce their reliance on the US dollar for reserves holding. According to the WGC, central have bought 800 tonnes in the first nine months of the year, up 14 per cent year-on-year, and provided we see another strong fourth quarter, last year's record above 1000 tonnes could be breached.

Against these 800 tonnes of central bank buying, the year to Q3 reduction in total ETF holdings stood at 183 tonnes, and it highlights why this selling has had such a limited negative impact on prices. We believe renewed interest for ETFs, as seen this past week when holdings rose for the first time since May, will be the trigger that eventually sends gold higher. Such a change will occur either when we see a clear trend towards lower rates and/or an upside break forcing a response from real money allocators for ‘fear of missing out’.


Gold has paused after rallying almost 200 dollars last month after profit taking emerged once again above $2000 per ounce. Having rallied so hard in a short space of time, the market needs consolidation, but so far, the correction has been relatively shallow with support appearing at $1953, ahead of $1933, the 200-day moving average and 38.2% retracement of the rally. Given the length of the recent rally, gold can correct back below $1900 without damaging the bullish setup, while a fresh break above $2000 may give traders the confidence to push it higher towards the $2050 level.

Commodities podcast special with WisdomTree

Earlier this week we invited into our studio in Copenhagen, Nitesh Shah, Head of Commodities & Macroeconomic Research, Europe at WisdomTree, Europe’s largest commodity provider of Exchange Traded Products (ETPs) for a broad discussion about the current market situation and the outlook for key commodities, including gold, silver, platinum and crude oil, as well as the current north/south weather divide impacting grains and soft commodities differently. The green arms race and its impact on major and minor metals also received attention.

Regarding the use of ETPs, we asked Nitesh about the pros and cons of investing in commodity ETPs versus an exposure in commodity focused companies, and what investors should be most aware of when investing in commodity ETPs.

The podcast can be accessed here.

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