Head of Commodity Strategy
Summary: The commodity sector remains at the center of the "everything up" rally currently unfolding across markets. Ample liquidity provided by governments and central banks together with expectations for a post-pandemic growth sprint have turbo charged the sector at a time where pockets of supply tightness have started to emerge. Not least industrial metals such as platinum and copper, both receiving increased attention as metals in tight supply that are needed to support the green transformation.
The commodity sector remains at the center of the “everything up” rally currently unfolding across many different asset classes. Ample liquidity provided by governments and central banks together with expectations for a post-pandemic growth sprint have turbo charged the sector at a time where pockets of supply tightness have started to emerge. Thereby supporting investment demand from investors both hungry for (roll) yields and in search for investments that can provide some cover against an expected rise in inflation.
In our recently published Quarterly Outlook we highlighted the fundamental reasons why we see the emergence of a new commodity bull market in 2021. Part of the heightened focus being directed towards metals, not only gold at a time of very low negative real rates and the most relaxed monetary policy in history, but also and especially towards those needed in the green transformation agenda.
Topping the list in terms of performance following the March 2020 collapse, we find metals such as silver (XAGUSD) given its dual usage as an investment and industrial metal, where especially the photovoltaic (PV) market is expected to be strong as many countries embark on renewable energy projects.
The platinum (XPTUSD) market has received a major boost during the past year and from trading at a +1000 dollar discount to gold in early November, the spread has since contracted by more than 400 dollars with platinum rising to a six-year high above $1200/oz. The latest rally followed news that China's auto sales surged in January, up 30% from last year and the 10th month of straight gains. This at a time where years of platinum oversupply as the automobile industry turned their attention to palladium has started to change. According to the World Platinum Investment Council, the substitution back to platinum (from palladium) has already started but the extent to which is currently being kept a secret by the major catalyst manufacturers Johnson Matthey, BASF and Umicore.
What is known, however, is the pick-up in investment demand via ETF’s and a lesser extent futures has risen strongly during the past few years with total ETF holdings currently at a near record 3.9 million ounces. Combining the ounces held by futures exchanges, investment demand currently accounts for close to 45% of the known above ground stocks (AGS). The move towards an expected supply deficit is occurring at a time of increased focus on tightening emission regulation in regular combustion engines while accelerating green hydrogen production has increased demand for platinum-based electrolyser capacity.
Having been in a downtrend for nearly a decade, platinum’s breakout last November helped attract renewed investment demand, not least after gold hit $2000/oz and its premium to platinum rose above $1000/oz. These developments helped attract increased switching activity between the two metals.
Dr. Copper (COPPERMAR21 & HGH1) - used in everything from wiring and electronics to electrical vehicles, and as such a good indicator of global growth and activity, has rallied to an eight year high on a wave demand optimism as governments around world unleash green economy initiatives. Last week it briefly challenged support at $2.50 after China tightened liquidity before an overnight rally took it to $3.7850, the highest level since October 2012. This after data showed Chinese January factory-gate prices rose for the first time in a year, thereby raising the risk of China exporting inflation to the rest of the world.
February is typically the weakest point in any year for copper demand as the Chinese Lunar New Year holiday reduce demand from the world’s biggest consumer. Yet almost all signals indicate a tightening market with the lack of mine supply growth pointing towards a looming deficit. The Spring months are likely to bring a fresh demand boost as the Covid-19 cloud continues to lift and as governments embark on green-focused spending plans. A demand boost that the supply side appears to be ill-positioned to meet.
Copper inventories monitored by the three major exchanges in New York, London and Shanghai has fallen to a multi-year low at 215k tons, less than half of the 522k average seen during the past five years. Something that is also being reflected in the forward curves where the front of the LME copper curve is showing rising backwardation, a sign of tightening spot market availability.
However, while the price has rallied to a near decade high, speculators in COMEX HG futures have been more hesitant. Currently they hold a net-long of 78k lots, close to a three year high but 38% below the record from September 2017. Furthermore the position has stayed relatively constant since September. Another measure indicating a not yet stretched market is the long/short ratio. At 3.5 longs per one short, the ratio is well below the record 6.4 from 2017.
As per the chart the retracement seen during the +60% run up since the March 2020 low has been very shallow with buyers emerging on each attempt. Most recently the price found support at $3.50/lb before embarking on the latest upside extension which has the market pointing at $4/lb, the 2012 high and a key psychological level.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
