Weeks of speculation that China was considering easing some of its heavy-handed Covid rules finally came to fruition on Friday when China’s health authorities released 20 new guidelines. The key measures included reducing the number of quarantine days, relaxing some centralised quarantine rules to quarantining at home, limiting PCR testing, prohibiting excessively extending lockdowns, promoting vaccination and treatments and prohibiting local authorities from shutting down production, schools and transportation without proper approval.
The easing being implemented at a time where new cases are spiking sends a strong signal that China is finally moving towards a growth friendly stance and commodities responded accordingly. The industrial metal sector headed for its best two-week performance since March, leading to a +12% rally being led by copper – which surged higher to threaten the sell-into-rallies mentality that has prevailed for many months now.
As per the performance table above, it has generally been a strong start to November for the commodity sector. Industrial and precious metals leading from the front while the grains sector, despite the softer dollar, trades lower. The main driver of the weakness being wheat, which saw prices slump in Chicago and Paris as expectations of higher world supplies weighing on the market. The U.S. Department of Agriculture, in its monthly supply-demand report (the World Agricultural Supply and Demand Estimates), saw world wheat stocks at 268 million tons, up slightly from its October outlook of 268 million tons and higher than analysts forecast for a small decline to 266.5 million tons. In addition, wheat prices were also pressured by the news Russia had ordered its troops out Kherson, potentially improving the prospect for an extension to the current Ukrainian safe corridor agreement once the existing one expires on November 19.
Gold breaks higher to signal a long-awaited reversal
Gold is heading for its biggest weekly gain since March after the weaker-than-expected CPI print gave metals, including silver, a major boost from the subsequent drop in yields and the dollar. The yellow metal traded up 7% during the past two weeks after once again finding support in the $1615 area, now a triple bottom. Whether the break above resistance-turned-support at $1735 now signals a change in the trading behaviour among speculators from sell-into-strength to buy-on-weakness remains to be seen.
Supporting the underlying improvement in sentiment was the recent published Gold Demand Trends Q3 2022 update from the World Gold Council. The update outlined how central bank demand, despite seeing gold slump by 8%, reached a quarterly record of nearly 400 tons, thereby offsetting a 227 tons outflow from bullion-backed ETFs. Overall, the year-to-date demand increased 18% versus the same period in 2021, signalling a return to pre-pandemic levels.
Overall, we maintain our long-held bullish view. This is primarily driven by expectations of a major repricing when the market realises long-term inflation will settle at a higher level than the sub 3% currently being priced in. ETF investors – net sellers for months - and speculators in the futures market (having traded the market with a negative bias) now hold the key that could unlock further gains. Without support from these important segments of the market, gold and silver will continue to find most of the directional inspiration from movements in Treasury yields and the dollar. Expect some consolidation and potentially a recheck of support at $1735 with resistance at $1765 and $1789.