Q1 Outlook: Gold regains safe haven status

The direction of commodities in the early part of 2019 will continue to be influenced by decisions taken in Washington and by central banks last year. The economic fallout from US president Donald Trump’s trade war with China is beginning to be felt. Quantitative tightening by the US Federal Reserve and an end to quantitative easing by the European Central Bank have begun to remove some of the liquidity that a heavily indebted world needs to support demand for riskier assets.

Gold, which recorded its best month in two years in December, has re-emerged as a safe haven amid the turmoil elsewhere. A drop in US 10-year bond yields to a near one-year low, reduced expectations for further rate hikes, a dollar that has stopped rising and, not least, the turmoil in global stocks have all supported renewed demand for gold as well as silver, given its historical cheapness to gold.

While a trade deal between the US and China could help counteract the current risk aversion, the endof-cycle market dynamics and the risk of recession combined with the continued unwinding of a decadelong sugar rush of central banks’ liquidity injections will create formidable headwinds throughout the year. In this environment, we see upside to precious metals, pockets of opportunity in industrial metals and limited upside to oil as supply outstrips demand through most of the year.

Depressed prices across several key commodities and tightening fundamentals in others may still attract some buyers. In addition, support could emerge in response to a weaker US dollar, China stepping up its efforts to support its economy and, not least, the potential policy panic from central banks mentioned by Steen Jakobsen in his introduction.

GOLD AND SILVER

As the aforementioned themes roll over into 2019, we expect to see continued demand for gold as investors once again seek tail-end protection against increased volatility and uncertainty across other asset classes. Hedge funds only turned long gold in early December after having traded it from the short side for six months. This pickup in demand together with a continued accumulation from long-term investors through exchange-traded funds should provide enough support for gold to break higher towards the key area of resistance between $1,360 and $1,375/oz where consecutive highs were set between 2016 and 2018.

A friendly investment environment for precious metals should see silver, despite its link to industrial metals, regain some of its lost ground against gold. From an historically cheap level above 80, the gold-silver ratio, which measures the value of gold in ounces of silver, could turn lower towards the five-year average at 74, a 10% outperformance. Based on this assumption, we forecast an end-of-year price for gold at $1,350/oz and silver at $18/oz. We would categorise the gold forecast as being relatively conservative. Please note that a break above $1,375/oz, the 2016 high, could signal additional strength towards $1,480/oz, the halfway mark of the 2011 to 2015 sell-off.

CRUDE OIL

Forecasting a price level, let alone the direction, of crude oil has not been getting any easier after a brutal end to 2018. The risk of a spike to $100/barrel at the beginning of October was followed by a collapse in Brent crude oil to $50/b just before year-end. The moving parts in crude oil are many, both on the supply and the demand sides. Adding to this an increased degree of political interference, courtesy of President Trump and others, and it is no wonder that uncertainty is elevated as 2019 begins.

Oil producers can support the price by cutting supply, but with global growth being called into question, they have been left struggling to respond to the recent collapse. It is, however, our view that crude oil will recover further than what has already been achieved in early January. On the demand side, the market is already pricing in a sharp deterioration in global growth, and this has created the ”risk” of a positive surprise.

The Opec+ accord to cut production by 1.2 million barrels/day from January and six months forward will help stabilise the market. Additional support could be provided by the US signalling its unwillingness to extend further the waivers that back in November allowed eight countries to keep buying oil from Iran. US production, meanwhile, remains a key point of interest as it was last year’s production surge together with the aforementioned waivers that helped reverse the bullish sentiment in the market. US shale oil production growth is likely to slow following the price slump but if the 2014 - 2016 selloff is anything to go by, it could take somewhere between three and six months before the impact becomes visible in the data, which for now, despite having stabilised into year-end, continue to show year-on-year growth close to 2 million b/d.

During the first quarter, we see WTI crude oil averaging just above $50/b as it settles into a $45/b to $55/b range while awaiting further developments on the trade front, as well as weekly US rig count data serving as a future guide to production and the Opec+ group potentially delivering the agreed production cut. Brent crude is likely to have already found a bottom at the key $50/b psychological and technical level, and we see it averaging $60/b as it settles into a $55/b to $65/b range.

COPPER

After the initial sell-off when the trade war erupted last June, copper spent the rest of the year within a range while taking a whole host of market-unfriendly news on the chin. Although fundamentals have started to improve, as seen in available stocks and the outlook for tightening supply, the headline risks associated with trade wars and weaker economic data have kept it locked. An eventual de-escalation of the US-China trade war and further Chinese policy easing combined with a relatively tight supply outlook should, in our view, provide the support copper needs to yield a positive return in 2019.

From its current level around $2.65/lb, we see high-grade copper during the first half of 2019 making a return to $3/lb, the equivalent of $6,600/tonne for LME Copper. Needless to say, the biggest risk to this assumption remains the recessionary risks that could affect both housing activity and car sales. The Chinese car market suffered its steepest monthly decline in six years last month, resulting in the first annual decline in three decades.