Report by Ole Hansen, Head of Commodities Strategy, Saxo Bank
Key Points:
- The commodities sector is heading for its first weekly gain in three weeks, supported by strong gains in the energy and grains sectors.
- Precious metals gains deflated after gold’s rally to a fresh record high, which attracted some profit-taking amid USD strength and rising bond yields.
- Financial markets, including commodities, are trading nervously ahead of the 5 November U.S. elections, as the outcome remains too close to call.
- Focus in this update includes gold, crude oil, EU natural gas, palladium, copper, and zinc, as well as cocoa and grains
The commodities sector was heading for its first weekly gain in three, supported by strong gains across the energy sector and grains, while precious metals gains deflated after gold’s rally to a fresh record high helped attract some profit-taking amid USD strength and rising bond yields, and not least, some profit-taking ahead of a U.S. election which, depending on the outcome, carries major two-way price risks. The industrial metal sector traded lower as the market sought greater clarity and more details from Beijing regarding recent stimulus announcements, while U.S. Treasury Secretary Janet Yellen criticised the stimulus blitz so far for failing to tackle the most pressing problems of overcapacity and weak domestic demand.
Financial markets are increasingly focusing on the upcoming 5 November U.S. elections, as the outcome remains too close to call. Gold and silver reached fresh highs earlier in the week before encountering another correction attempt, largely influenced by the rising Treasury yields and a strengthening USD. This unusual breakdown in typical market correlations indicates that traders are hedging against a potential ‘Red Sweep,’ a scenario where Republicans gain control of both the White House and Congress. Such a political shift could lead to an unfunded spending agenda, further increasing the debt-to-GDP ratio and raising long-term fiscal sustainability concerns. Higher government borrowing might result in an oversupply of government bonds, pushing up borrowing costs across the economy. Conversely, the likelihood of a ‘Blue Sweep’ is lower, suggesting limited spending manoeuvrability under a Harris presidency, which reduces these worries.
Overall, the Bloomberg Commodity Total Return Index, which tracks a basket of 24 major commodities split almost evenly between energy, metals, and agriculture, traded up 1.5% on the week. On a year-to-date basis, the index has returned 5.5%, with the main contributing sectors being precious metals at 34% and softs at 21%, while losses have been concentrated in grains at -16.5% and energy at -4.7%, the latter primarily due to a 35% loss on natural gas.
Gold rally pauses with profit-taking emerging ahead of November 5
Gold’s record-breaking rally finally paused after the weight of profit-taking in response to rising bond yields and a stronger dollar saw prices reverse lower. Silver, which surged through key resistance-now-support at USD 32.50 in the previous week, also ran into profit-taking after hitting a fresh 12-year high. The precious metals market has witnessed an unprecedented strong uptrend this past year, with gold and silver trading up by 31% and 38% on a total return basis, respectively, with only minor corrections seen so far during this extended rally. Whether that will continue at the same pace increasingly rests on the outcome of the 5 November elections, given what the result, as highlighted above, may do to the outlook for global trade relations, the dollar, government spending, and U.S. debt levels.
Despite the risk of post-election correction based on a “buy the rumor, sell the fact” behaviour, our long-held bullish view on investment metals has not changed, given they are being supported by several drivers, most of which are unlikely to fade away anytime soon. Among others, these include concerns over fiscal instability—not least in the U.S.—safe-haven demand, geopolitical tensions, and de-dollarisation driving strong demand from central banks, as well as China, where investors seek alternatives to rock-bottom savings rates and falling property prices.
While silver needs to hold support at USD 32.50 to avoid another rush of long liquidation, gold will, following the latest USD 153 rally, look for support at USD 2,685, USD 2,666, and ultimately, the big one at USD 2,600.
Crude prices have stalled, but two-way risks remain
Crude oil futures have settled into a nervous wait-and-see mode, with major two-sided risks keeping prices rangebound for now. Having witnessed a slump below USD 70 last month, followed by an attempt to break above USD 80, Brent crude has settled into a relatively narrow range around USD 75. While the activity points to calm markets, plenty of risks continue to build, which could see the price again test either of the two mentioned boundaries.
Besides a potential small positive impact of Chinese stimulus on demand, the main short-term upside risk to prices remains related to developments in the Middle East, and not least the effect of an expected Israeli attack on Iran in retaliation for the 1 October missile strike. Meanwhile, the downside risks are multiple, with the upcoming U.S. elections increasingly becoming a binary event that may impact risk appetite across markets. In addition to demand concerns, the market has to deal with the prospect of OPEC+ adding currently unwanted barrels back into the market from December.
Cocoa price decline comes too late to affect Christmas
Cocoa prices have fallen to a March low of USD 6,750 as the main season harvest gets underway in Ivory Coast. This improves a tight supply situation that earlier this year saw prices temporarily spike above USD 12,000 per tonne. So far, bean arrivals to ports have exceeded last year’s, highlighting an improved supply outlook following a period of beneficial rain.
In addition, a one-year delay in implementing the European Union’s Deforestation Regulation (EUDR) may ease supply concerns for EU importers, who were facing increased expenses from verifying deforestation-free supply. The delay also reduces the short-term risk of cutting off supply from non-compliant regions.
However, the price drop has probably arrived too late to lower prices for the high-demand season ahead of Christmas and New Year. While Easter chocolates may be less expensive next year, the chocolate we consume this Christmas will likely be pricier than last year. Despite the prospect of an improved harvest, the shortfall from the previous two harvests will take time to rectify, if at all possible. This is evident in the futures market, which is pricing cocoa next December at around USD 5,200 per tonne—some 23% below the current price but still more than double the long-term average.
