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.
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.
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.
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
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