Commodities 10 minutes to read

Metals responding well to trade war escalation

Ole Hansen

Head of Commodity Strategy

Summary:  Today's Washington-led escalation of the Sino-US trade war surprisingly attracted a limited reaction from global markets with Chinese stocks trading higher on the day with the yuan being close to unchanged.


Today’s main news event has been the announcement from the US that it will impose a 10% tariff on about $200 billion in Chinese goods from next week. In addition, President Trump said that any retaliation from China would lead to additional tariffs on about $267 billion in goods. This escalation of the trade war surprisingly attracted a limited reaction from global markets with Chinese shares trading higher on the day and CNY nearly unchanged.

Gold took the tariff news on the chin while maintaining its relative tight trading range around $1,200/oz. It has been doing this for the past month, during which time it has managed to absorb continued selling from leveraged funds and exchange-traded funds. 

The combination of this latest move by the US having been flagged well in advance and news from China that it plans to increase infrastructure spending to offset the negative growth implications helped settle a few nerves. While gold remains stuck due to the limited reaction in bonds, stocks and not least the dollar, we have seen industrial metals, including platinum move higher. 

HG copper (+2%) is close to challenging the recent high at $2.72/lb with the potential for increased spending from the world’s largest consumer helping reduce some of the trade war angst that has kept it under pressure since July. 

Source: Saxo Bank

Platinum (1.6%) has seen its record discount to gold contract to a five-week low. Since April it tested a $420/oz record discount to gold on a couple of occasions; the move higher today has reduced the discount to $390/oz and the spread is currently challenging the downtrend from early 2017.

Silver, meanwhile, has struggled to catch a bid despite its semi-industrial credentials. It continues to hover just above the important $14/oz level while trading close to a multi-decade low against gold, as seen through the gold-silver ratio, currently at 84.70. 

All of the four major metals covered by the Commitments of Traders report have been under pressure since the trade war broke out back in June. In order for silver to move higher, it needs gold to catch a bid thereby potentially starting to challenge the bearish conviction currently held by hedge funds. 

Gold as mentioned remains stuck in a relatively tight range around $1,200/oz. and would need a weaker dollar and potentially also weaker stocks before challenging those holding a negative price view. The FOMC meeting on September 26 is widely expected to yield another rate hike and should have a limited impact on gold. More importantly, and more challenging, is a renewed rally in 10-year US real yields which have climbed to 0.9%, a near four-month high. 

A break above $1,214/oz and probably also $1,220/oz is needed before potentially seeing short-covering carrying it higher. Until such time we maintain a neutral view on gold with silver and platinum potentially providing a better opportunity given the aforementioned relative and absolute cheapness. 

Source: Saxo Bank
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