Head of Commodity Strategy
Summary: Gold's continued climb towards $1800/oz has shifted some focus to silver given the the additional tailwind it is currently receiving from rising copper prices. Crude oil remains range-bound but for now supported by a potential big drop in stocks. Grains, led by corn, has rallied strongly after farmers cut the planted acreage amid concerns about the outlook.
What is our trading focus?
XAUUSD - Spot gold
XAGUSD - Spot silver
XAUXAG - Gold-Silver ratio
COPPERUSSEP20 - HG Copper
OILUSAUG20 - WTI Crude oil
CORNSEP20 - CBOT Corn
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Gold has reached another new high for the cycle with $1800/oz now within striking distance, a level that the futures contract (GCQ0) has already reached. The market capped its best quarter in four years as the WHO warned that the worst of the pandemic is still to come. The break higher looks intact as long as the daily closes remain north of 1,745-1,750 area. Gold will continue to look for direction either from new policy measures aimed to force inflation higher or negative real rates more negative or some more participation from the US dollar and other commodities, especially silver.
Silver has outperformed gold this week with the XAUXAG ratio falling below 98 (ounces of silver to one ounce of gold). With copper racing higher to reach $2.75/lb. on virus related supply worries and firming Chinese demand, silver’s short-term upside potentials could be better than golds. Especially on a break above the March high and trend line resistance around $18.40/oz.
Crude oil trades higher, but within the established range, after the American Petroleum Institute reported a bigger-than-expected stockpile drop last week of 8.2 million barrels. If repeated by the EIA in their weekly report today at 14:30 GMT it may offer some additional support to a market currently worried by the demand impact from renewed lockdowns and the surging number of virus cases in the U.S.
Also supporting the price was the monthly production report from the Energy Information Administration which found that U.S. production dropped by 5.3% in April to 12 million barrels/day. Thereby confirming the slowdown seen in the weekly estimates reported every Thursday in the mentioned inventory report.
A monthly OPEC oil production survey carried out by Reuters found the group collectively cut production to the lowest in two decades last month. The additional deep cuts promised and delivered by Saudi Arabia and other Gulf Arab members helped push the groups compliance above 100%.
We maintain the view that crude oil is likely to remain range-bound while the market tries to figure out the demand impact from renewed virus cases. Weak demand from motorists during the key holiday demand season may pose a threat to the current stability. Not least considering the pressure on OPEC+ to deliver a prolonged and economic painful production cut extension beyond July. According to Reuters, the group is seen easing production cuts from August by 2 million barrels/day to 7.7 million.
Looking ahead to the inventory report the market, apart from looking for a drop in crude stocks, will be looking for signs of renewed weakness in gasoline and diesel consumption, just as the July 4th holiday signals the beginning of the U.S. summer driving season. As per usual I will post results and charts on my Twitter @Ole_S_Hansen
U.S. grain markets led by corn and soybeans rallied strongly on Wednesday after a government report showed a bigger-than-expected reduction in the planted acreage. Corn jumped 4% after surveys over-estimated the U.S. acreage by the largest amount since at least 2005. U.S. farmers entered the fields this spring at a time of peak uncertainty with low prices, poor outlook and the pandemic raging. As a result they reduced the corn acreage to 92 million acres (95.1 expected) and soybeans to 83.8 from 84.8 expected.
A separate USDA report however showed that domestic quarterly grain stocks were bigger than expected. Primarily due to lower ethanol linked demand for corn and reduced soybean exports to China during the lockdown.
Corn’s dramatic turnaround from a $3.15/bu low on Monday to a $3.45/bu high today could force continued buying from funds holding an elevated short position. Support now at $3.39/bu.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
