Commodity Weekly: Gold gearing up for a break

Commodity Weekly: Gold gearing up for a break

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Commodity markets, with a few exceptions, remain in reasonably good health as we approach the end of what so far has been a very volatile and at times troubling first-half, driven by the worst pandemic-related slump in global growth since WW2. Crude oil found its footing to move higher, gold increasingly looks ready to test resistance while some soft commodities are still waiting for post-pandemic demand to return.


Commodity markets, with a few exceptions, remain in reasonably good health as we approach the end of what so far has been a very volatile and at times troubling first-half, driven by the worst pandemic-related slump in global growth since WW2. While still down 20% on the year, the Bloomberg Commodity Index is trading up 2% this month with pro-cyclicals such as industrial metals, oil and fuel products being the main driver.

Most markets, including commodities, are currently watching the U.S. Federal Reserve and the S&P 500 index as the key sources of inspiration. Some weakness related to rising COVID-19 cases in the U.S. and briefly in Beijing temporarily sent stocks lower before the FOMC announced plans to buy corporate bonds. These developments continue to raise the question of whether current stock market valuations have dislocated from the real economy where growth has slumped and unemployment has jumped. The market currently behaves as if the Federal Reserve will step in at any sign of weakness.

19OLH_WCU1

Energy: The energy sector continues to experience a divergence between crude oil and products on one hand and natural gas on the other. Robust OPEC+ cuts together with a high degree of compliance and reports that demand continues to recover at a rapid pace have supported a strong recovery in crude oil and products since the late April nadir. In their latest Oil Market Report, the International Energy Agency (IEA) sees 2020 oil demand improving but still down by 8.1 million barrels/day, before recovering by 5.7 million in 2021. Overall, they don’t see demand fully recovering until at least 2022, with a slow recovery in jet fuel demand and a change in consumer behavior cited.

While crude oil has been sent on the road to recovery, natural gas prices in the U.S. and Europe may stay under pressure during the coming months. This is in response to stockpiles continuing their seasonal build, potentially towards capacity. U.S. natural gas for delivery in July trades just above support at $1.60/MMBtu ahead of the March low at $1.52/MMBtu. Without a strong pickup in demand due to warmer weather or increased industrial demand, the short-term risks point to lower prices still. 

Adding to the sense of unease is the prospect that the recent oil-related cut in U.S. production may soon start to reverse. With WTI crude oil back above $40/b shale oil producers stand ready to increase production, an event that will yield additional associated gas production. Another challenge is the recent drop in exports of LNG with lower gas prices across the world reducing the profitability of exporting LNG when taking the cost of transportation and liquefaction into account.

19OLH_WCU2
Source: Saxo Group

Precious metals: Gold’s period of rangebound trading around $1700/oz extended into a ninth week as the metal struggled to find a theme strong enough to take it higher, or lower. The lack of positive response to additional central bank stimulus, the recent dollar weakness and lower real yields have all helped drive a reduction in speculative longs held by hedge funds in the futures market. Since the February peak they have cut bullish bets by 55% to the lowest in a year.

Bullion-backed exchange-traded funds, meanwhile, have continued to go from strength to strength with total holdings according to Bloomberg data having risen by 565 tons to 3138 tons so far this year. Thereby, more than off-setting the pandemic and lockdown-related drop in physical demand from the world’s biggest gold consumers in Asia.

Rising demand for ETF’s have come from all types of investors from retail to pension funds and some of the world’s ultra-rich. Nine private banks interviewed by Reuters, which collectively oversee around $6 trillion in assets for the world’s ultra-rich, said they had all advised clients to increase their allocation to gold. 

Two of several reasons we have mentioned these past few months for maintaining a bullish outlook, debasement concerns and lower real yields, were highlighted in the latest note from Goldman Sachs. In it they raised their six-month price forecasts for gold to $1900/oz and not least silver to $21/oz. The latter representing a gold-silver ratio at 90.5, a 9% outperformance relative to the current market.

Recent price action in precious metals highlights their ability to frustrate and the need to be patient. The trigger that’s needed to propel the market higher is currently missing given the risk-on and optimism seen across financial markets. These developments, however, do not change our view that gold will act as an important diversifier in the short-term, while in the long-term it is likely to prosper as the dollar weakens and real yields move lower as inflation rise.

Adding to this are increased geo-political risks, potentially fueled by  COVID-19 blame game, especially with polls pointing to a significant defeat for President Trump this November. Furthermore, the pandemic risks speeding up the deglobalization and reshoring process that started with the U.S.-China trade war.

19OLH_WCU3
Source: Saxo Group

Spot gold has yet to close above $1750/oz and if and when that happens we suspect renewed momentum and fresh buying from underinvested hedge funds will propel the price higher towards $1800/oz and silver towards $19/oz.

Softs: Arabica coffee, cocoa and to a lesser extent sugar, are showing little or no signs of the V-shaped recovery shown via the strong performance in stocks and general appetite for risk. Coffee has dropped below $1/lb in its longest slump in 10 months as a record Brazilian production and a weak Brazilian real meet muted demand from out of home demand through restaurants and coffee shops. Sugar consumption is expected to drop as consumption suffers and ethanol-based demand has dropped with crude oil. A similar story emerging in cocoa, the demand for which is closely linked with GDP growth. It has dropped to a two-month low amid mounting worries that the slowdown will hurt demand. On 9 June, hedge funds held short positions in coffee and cocoa and a small long in sugar.

19OLH_WCU4
Source: Saxo Group

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.