Commodities weekly: Inflation surprise weighs on metals as energy markets diverge

Gold's technical breakdown overwhelms longer-term support

Gold fell to USD 3,852 on Thursday, its lowest level in 13 months, before recovering back towards USD 3,900, but overall heading for a weekly loss exceeding 4%, pressured by higher yields, dollar strength and renewed short selling.

Gold's earlier resilience, when investors appeared willing to challenge the Fed's hawkish outlook, has given way to deteriorating technical signals, with momentum-driven traders and commodity trading advisers (CTAs) returning to the sell side. COMEX gold futures open interest has risen for three consecutive sessions to a six-week high as prices declined, suggesting fresh short selling rather than long liquidation alone.

Positioning data underline the shift. In the week to 3 November, managed money traders reduced their gold net long to a five-month low of 104,000 contracts, while silver's net long fell to just 2,700 contracts. Platinum joined palladium in net short territory, highlighting the broader deterioration across precious metals.

Having broken below USD 4,000, gold now faces that level as important resistance. A sustained recovery above it is needed to ease downside pressure, with sellers being in control for now.

Nevertheless, short-term technical weakness contrasts with continued central bank accumulation and resilient ETF investment demand. These underlying sources of support may help limit the correction but are unlikely to prevent further selling if yields and the dollar continue rising.

The longer-term outlook partly hinges on whether lower energy prices challenge expectations for further Fed tightening or renewed concerns about US fiscal sustainability support investment demand. With the Treasury relying heavily on short-term bills, rising front-end yields are increasing refinancing costs and adding to an already substantial interest burden.

While existing fixed-rate debt is unaffected until refinancing, persistently high borrowing costs, large deficits and substantial funding requirements could revive debt sustainability concerns and strengthen gold's appeal as a store of value. For now, however, energy prices given the link to inflation, rising yields and a stronger dollar remain the dominant influences.

Crude oil recovers modestly, but the Middle East remains in limbo

Brent has recovered towards USD 96.50 per barrel, rising for a third consecutive session despite limited prospects for a US–Iran diplomatic breakthrough. Nevertheless, crude is heading for a third weekly decline, having fallen around 18% over that period as recovering Middle East production and exports weigh on prices.

The region remains caught in a fragile "no war, no peace" situation. Talks remain deadlocked, with Tehran demanding sanctions relief and an end to the naval blockade while refusing to surrender enriched nuclear material. Despite continued attacks on shipping, crude production and exports have recovered towards pre-war levels as the market adapts to disruptions.

Saudi Arabia and Iraq reported a sharp rebound in October production, while UAE output continues to rise. The recovery coincides with OPEC's assessment of sustainable production capacity ahead of 2027 quota negotiations, potentially intensifying competition for market share. Recent cuts to official selling prices have reinforced concerns about a future supply surplus.

However, recovering crude production masks a very different situation in refined fuels and natural gas.

Damaged infrastructure, shipping restrictions and security concerns continue to constrain diesel, jet fuel and LNG exports from the Gulf. The wider Middle East accounts for around 11% of global refining capacity, while almost 20% of global LNG trade normally passes through the Strait of Hormuz.

Diesel remains near USD 180 per barrel in major markets, almost twice Brent's price, while US distillate inventories hover near a two-decade low. European natural gas prices are around 210% higher than a year ago, reflecting constrained LNG flows and unusually low inventories ahead of peak winter demand.

This divergence has broader implications. Cheaper crude and gasoline could ease headline inflation, but elevated diesel, aviation fuel and gas prices continue to affect transportation and industrial costs, potentially delaying disinflation and complicating the Fed's policy outlook.

For oil, recovering production and the prospect of a future surplus present downside risks, while unresolved geopolitical tensions preserve the threat of renewed supply disruptions.

Natural gas rallies as short sellers face a weather-driven squeeze

US natural gas and Europe's TTF benchmark have emerged among the week's strongest performers, both rising around 7%, with US gas heading for its biggest weekly gain since May as colder weather forecasts lift heating demand expectations.

The rally has been amplified by extreme speculative positioning. During the six weeks to 3 November, speculators increased their combined net short across the two major US natural gas futures contracts to a six-year high, leaving the market vulnerable to accelerated short covering as weather forecasts turned colder.

The outlook remains highly weather-dependent. Sustained cold conditions and strong LNG export demand could support further gains, while milder forecasts may quickly undermine the rally. Extreme positioning adds another layer of volatility as the market enters its most weather-sensitive period.

Grains rebound as USDA delivers a bullish surprise

Grains have bucked the broader commodity selloff, with corn and soybeans rebounding from multi-month lows following the USDA's November World Agricultural Supply and Demand Estimates (WASDE) report.

The report pointed to tighter-than-expected US supplies, driven by lower corn production and stronger domestic and export demand for soybeans. The surprise followed a prolonged selloff that had pushed speculative positioning sharply lower. In corn, managed money traders had reversed from a record net long of 431,000 contracts to a net short of 23,000 contracts.

Tighter supply estimates and reduced speculative exposure triggered short covering, potentially signalling a near-term bottom. Attention is now shifting towards Australia's wheat harvest and the corn and soybean growing season in Brazil and Argentina, where weather will become increasingly important.

Wheat also recovered amid renewed uncertainty surrounding Russia–Ukraine peace negotiations, although expectations for abundant global supplies, particularly from Southern Hemisphere producers, continue to limit gains.

While the USDA report may have established a near-term floor, relatively comfortable global inventories suggest a sustained recovery will require stronger demand or fresh supply concerns.

Commodity producers: Energy continues to outperform

Listed miners and energy producers have delivered sharply contrasting returns over the past year. Despite recent weakness, the MSCI World Energy Index has gained approximately 40%, substantially outperforming the S&P 500's 12.7% rise, supported by elevated prices and tight physical markets during much of the Middle East conflict.

Copper miners (COPX) have gained 15%, reflecting underlying price strength and expectations of rising demand that producers may struggle to meet. Gold miners (GDX) and silver miners (SILV) have risen 6.2% and 5.3%, respectively. Their performance highlights how equity market conditions, operating costs, capital expenditure and valuations influence returns alongside underlying commodity prices.

At the other extreme, uranium-related equities (URA) and rare-earth producers (REMX) have lost 28.6% and 26.7%, respectively, illustrating how favourable long-term themes do not necessarily translate into positive investment returns.

Uranium's equity weakness is particularly striking given that physical prices have risen around 17% over the past year to approximately USD 90 per pound. Legacy supply contracts, sluggish utility contracting, operational setbacks and rising costs have weighed on earnings expectations. Higher interest rates and a valuation reset across AI-linked nuclear and small modular reactor stocks have added pressure.

Cameco (CCJ), representing roughly 22% of URA, has lost 16.5% over 12 months. Its recent Q3 earnings miss followed an extended maintenance shutdown at Key Lake, which halved quarterly output from McArthur River/Key Lake and lifted average cash production costs 62% to USD 29.16 per pound.

Another headwind is the persistent discount to net asset value (NAV) at the Sprott Physical Uranium Trust (U.UN), in recent years an important marginal buyer. The discount has persisted almost non-stop since February and recently exceeded 18%. Unable to issue new units at a premium to NAV, the trust has effectively been sidelined from spot purchases since mid-summer, removing an important source of demand. Please note, that regional trading restrictions apply to some of the ETFs mentioned.

The energy sector's exceptional performance also extends to futures investments, where elevated backwardation has generated substantial positive roll yields. Brent and London gasoil total returns have exceeded 113% and 200%, respectively, year to date, despite the recent correction. US natural gas illustrates the opposite effect, with contango amplifying losses and producing a year-to-date total return of around minus 22%.

These differences underline the importance of distinguishing between commodity prices, futures total returns and listed producer performance.

Outlook: Energy prices hold the key to the next inflation shift

The coming weeks will remain dominated by the interaction between inflation, interest-rate expectations and energy prices.

Gold faces continued pressure from higher yields, dollar strength and bearish technical momentum, with a recovery above USD 4,000 needed to improve the outlook. Oil remains vulnerable to recovering Middle East supply, although unresolved US–Iran tensions and fuel tightness preserve upside risks.

Natural gas faces a volatile start to winter, driven by weather and speculative positioning, while grains have found support from tighter US balances despite comfortable global inventories.

The central question is whether falling crude and gasoline prices can ease inflation quickly enough to challenge the Fed's hawkish outlook, or whether persistent pressure from refined fuels, natural gas and underlying inflation will keep interest rates higher for longer.

That distinction could determine the direction of commodities into year-end.