Iron ore, the best performing commodity this year, reached a five-year high before dropping back. The near 70% year-to-date rally to $117/MT was been driven by tightening supply at ports in China due to Brazil dam disaster and bad weather in Australia, the world’s two major shippers. It was only halted when China’s top steel group stepped in and urged the government to maintain order and to investigate the rally which they believed had increasingly disconnected the price from current fundamentals.
During the past week we, the Strategy Team at Saxo Bank, released our Q3 Outlook called “The global fiscal panic”. I began the commodity section by writing the following: The global fiscal panic that we expect to unfold over the coming quarters will drive additional gains across several key commodities. Gold seems best positioned to benefit from a renewed race to the bottom in central bank rates and bond yields, while the risk of a renewed currency war could weaken the US dollar, another positive factor for commodities.
Steen Jakobsen, our CIO, highlighted the risks that renewed monetary policy easing might be unable to move the needle and deliver the sought-after boost to global growth. As a result, we are likely to see a shift towards global fiscal expansion with a focus on infrastructure, environment and inequality. One of the sectors standing to benefit the most from the increased spending of money that governments don’t have is commodities, not least gold as inflation is likely to come roaring back just a couple of quarters after it had been pronounced dead. Link to the outlook, click here
Two key events this past week related to the US Federal Reserve and the European Central Bank supported our view that a potential race to the bottom in rates is coming. In Europe, the political appointment of Lagarde to replace Draghi saw bond yields in southern European countries tumble in the belief that further support will be provided. In the US meanwhile, President Trump tapped a long-time dove and a onetime gold bug to fill the vacant slots at the Federal Reserve. Both if appointed could speed up the pace of incoming rate cuts, potentially weakening the dollar while giving gold a boost. Two long tails and a double top on the weekly candle chart point towards additional short-term consolidation. The key area of support can be found at $1380/oz (38.2% retracement of the 2011 to 2015 sell-off) followed by the 2016 high at $1375/oz and 2018 high at $1366/oz.