Investors in Europe seeking shelter amid rising inflation and a sharp deterioration in the economic outlook have achieved 24% and +21% better returns in gold compared with the Euro Stoxx 50 benchmark and euro government bonds. We maintain a positive outlook for gold driven by the need to diversify from volatile stocks and bonds, inflation becoming increasingly imbedded and ongoing geopolitical concerns. Having found support at $1875 this week, a weekly close above $1920 may see renewed upside driven by fresh momentum and technical buying.
Copper broke the uptrend from the 2020 low resulting in a drop to near a three-month low around $4.40 per pound, before sentiment received a boost from China’s pledge to maintain the 5.5% growth target, a level the Chinese economy is currently operating well below. While the short-term outlook has worsened and inventories at exchange-monitored warehouses have risen during the past four weeks, the outlook in our opinion remains price supportive. The demand for action to isolate Russia through a reduction in dependency of its oil and gas is likely to accelerate the electrification of the world, something that requires an abundant amount of copper.
In addition, Chile, a supplier of 25% of the world’s copper, has seen production slow in recent months, and with an “anti-mining” sentiment emerging in the newly elected government, the prospect of maintaining or even increasing production seems challenged. In addition, Chile’s 13 years of drought and water shortages are having a major impact on the water-intensive process of producing copper. Moreover, government legislation has been put forward to prioritize human consumption of water and if voted through it may delay investment decision but also force mining companies to invest in desalination facilities, thereby raising the cost of production further.
Agriculture: Soybean oil futures in Chicago reached a record high as Indonesia’s sweeping ban on palm oil exports and rationing of sunflower oil at supermarkets in Europe further stretches global supplies of edible oils. Export restrictions for palm oil used in everything from cooking to cosmetics and fuel will stay in place until domestic prices ease and given that Indonesia consumes only one-third of its production, we should expect exports to resume once inventories are rebuilt and prices stabilize. The edible oils sector, which according to the UN’s food index has risen by 56% during the past year, is the hardest hit by weather woes and the war in Ukraine, the world’s biggest exporter of sunflower oil, and it is leading to food protectionism by producers which inadvertently may boost prices further.
Speculators have recently increased their exposure to U.S. crop futures to a record with slow planting progress and deteriorating crop conditions highlighting a challenged and price supportive situation. In their latest weekly update, released on Mondays, the US Department of Agriculture said corn planting had advanced by 3% to being 7% complete, the slowest pace in almost ten years and trailing last year’s pace of 17%. Winter wheat rated good/excellent dropped 3% to 27% and was near the worst on record. The planting delays and conditions have been caused by the weather being too cold, too wet, or a combination of both. Big grain harvests in North America are needed this year after Russia’s invasion of Ukraine has reduced shipments out of the Black Sea, from where 25% of the global wheat export originates, while raising doubts about this year’s crop production in Ukraine.