Head of Commodity Strategy
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’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 in the previous week surged through key resistance-now-support at USD 32.50, 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 on a total return basis trading up by 31% and 38%, 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 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 once 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 impact 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 also has to deal with the prospect of OPEC+ adding currently unwanted barrels back into the market from December.Instead of copper, it was zinc that stole most of the attention after data showed a large accumulation of stocks on the London Metal Exchange. The metal, primarily used for galvanisation, which involves coating steel or iron to prevent rusting, briefly surged to a 20-month high following a string of recent disruptions. Further fuelling the rally was data from the LME showing one party holding more than 50% of the available stock, raising concerns about a squeeze, something the London Metal Market has witnessed on several occasions in recent years.
European natural gas reached a fresh high for the year near EUR 43 per MWh or USD 13.65 per MMBtu—in other words, European consumers pay 5.5 times more for their gas compared with those in the U.S.—with outages in Norway, Europe’s top supplier, and several geopolitical risks more than offsetting weak industrial demand. The prospect of a mild start to November also keeps demand for heating capped. Storage sites across the region are 95.3% full, versus 98.6% for this time last year.
Heading into winter, traders will worry about competition for LNG from Asia, not least the 1 January expiry of a contract governing flows via the Russia-to-Ukraine pipeline, which is crucial for eastern and central Europe, particularly Slovakia and Austria. Given the current circumstances, the deal is unlikely to be renewed in its current form, potentially reducing Russia’s share of natural gas to Europe further from the current 20%, which is down from around 45% before Russia’s attack on Ukraine strained trading relations between Europe and Russia.
In response to Russia’s war against Ukraine and the sanctions from the West, palladium, a metal under pressure for months, rose strongly after the U.S. asked G7 allies to consider sanctions on Russian palladium and titanium. Russia, along with South Africa, accounts for 70-80% of the world’s palladium output, making any disruption to Russian supply a potential concern. However, this is somewhat mitigated by the current weakness across the global internal combustion engine (ICE) vehicle industry amid an economic slowdown and the industry’s transition to electric vehicles. While a sustained positive price impact is questionable, given that significant action may further pressure the auto sector, short-term support has come from speculators reducing a long-held short position following the technical breakout through resistance-now-support at USD 1,125 per tonne.
A surge in U.S. export sales helped support a weekly bounce in corn and soybeans, two major crops recently pressured by the prospect of a bumper U.S. harvest, and uncertainty over the outcome of the 5 November U.S. election. Corn led the way after the USDA reported 4.2 million tonnes of American corn sold last week, the most in a single week since May 2021. This was driven by demand from buyers taking advantage of low prices to re-stock ahead of the election, which may lead to trade disruptions or policy changes. Overall, the Bloomberg Grains Subindex trades down 16.5% on the year and is by far the worst-performing sector amid an overhang of supply of key crops, which, despite pockets of weather-related trouble, has seen back-to-back strong production years.
Cocoa prices have fallen to a March low at USD 6,750, as the main season harvest gets underway in Ivory Coast, thereby improving a tight supply situation which earlier this year saw prices temporarily spike above USD 12,000 per tonne. So far, arrivals of beans 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, while the delay 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.
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Head of Commodity Strategy
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Head of Commodity Strategy
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