WCU: Gold and silver resume climb ahead of FOMC rate cut WCU: Gold and silver resume climb ahead of FOMC rate cut WCU: Gold and silver resume climb ahead of FOMC rate cut

WCU: Gold and silver resume climb ahead of FOMC rate cut

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil and metals, both the industrial and precious kind helped drive a key commodity index to a one-month high. The rally in agriculture commodities paused with the market adopting a wait-and-see ahead of the expected light trade deal between the U.S. and China.


It has been a relatively quiet week in commodities with the different sectors trying to weigh the impact of several key developments such as the weaker dollar, rising equities, trade talks as well as Brexit developments. The IMF downgraded global growth to the lowest level since the global financial crisis while China, the world’s biggest consumer of raw materials, saw its Q3 GDP slow to 6%, the weakest since the early 1990’s.

A combination of a weak demand at home and lower exports due to the ongoing trade war with the U.S. has taken its toll on Chinese growth, although recent economic data point to signs of green shoots beginning to emerge.

The USD weakness was spearheaded by GBP and EUR strength. The potential for a Brexit deal helped drive Sterling to a five-month high while the euro, the favourite short among speculators, reached a seven-week high.

The potential for a mini-trade deal between the U.S. and China, which could be signed in November at the APEC summit in Chile, helped support those agriculture commodities that may receive a boost from increased Chinese demand.

In addition to the prospect for increased demand from China, key crop prices in the U.S. are now also being supported by the impact of the delayed planting season leading to a delayed harvest. The yet to be harvested crops of soybeans and corn may increasingly be left vulnerable to extreme cold and rain. Something that ultimately could lead to a price supportive reduction in output.

Source: Bloomberg, Saxo Bank

Gold’s rangebound trading behaviour around $1500/oz extended into an 11th week with the market in need of a spark to kick it back to life. Trading up by 17% year-to-date and with the GDX ETF tracking major miners up by 30% it is only natural to see some caution emerging ahead of year-end. Gone for now is the roaring bond engine, which back in June and August helped the yellow metal break above $1380/oz and outside of its multi-year range. But despite seeing bond yields stabilize following their rapid descent, U.S. stocks near a record high and the outline of a trade deal emerging, gold has managed to avoid a major correction as the underlying demand remains.

During a four-week period up until October 15 leveraged funds reduced bullish gold bets by one-quarter or 72 million ounces to 220 million. However, in doing so and given the limited price impact of these reductions the market has grown more optimistic about a renewed push to the upside. We maintain our $1550/oz year-end forecast with the potential for a weaker dollar, growth and political concerns providing the required support.

From a charting perspective gold remains in good health having so far avoided even a minor correction. Instead of challenging support at $1450/oz, the 38.2% retracement of the June to September rally, it is now attempting a break above the downtrend from the September high.

Source: Saxo Bank

Crude oil remains stuck with WTI trading around $55/b and Brent around $60/b. While the short-term outlook has improved, the 2020 outlook remains challenging with the International Energy Agency looking for non-Opec supply to exceed demand, thereby putting pressure on the Opec+ group to cut even deeper.

In the short-term however, the market has found support from a surprise drop in U.S. crude stocks and expectations for a robust refinery activity to meet increased shipping demand for low sulphur fuel before IMO20 regulations begins next year. Current demand for crude oil and subsequent softening into 2020 can be seen in Brent crude oil with the June-2020 futures contract trading at a discount of $2.4/b to December-2019, the current front month.

How to address this price suppressing gap between supply and demand in 2020 is likely to be a major market focus ahead of the Opec+ group meeting in Vienna on December 6. At a time of slowing global growth and with that demand for oil, the group will find itself in a position of having to cut deeper or let the price drop further in order to force an accelerated slowdown in U.S. production growth.

We maintain the view from our Q4 outlook that Brent crude oil is likely to remain rangebound around $60/b ahead of yearend.

Source: Saxo Bank
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.