Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
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Year of the metals
Ole Hansen
Head of Commodity Strategy
Summary: The new year could become the year of metals with a focus on gold, silver, platinum, copper, and aluminium. In precious metals we believe the prospect for lower real yields and a reduction in the cost of holding a non-interest paying position will support demand, especially through exchange-traded products where investors have been net sellers for the past seven quarters. Industrial metals stand to benefit from supply disruptions, industry restocking as funding costs coming down, and continued demand growth in China offsetting the rest of the world’s weakness. This will, not least, be driven by the green transformation which will keep gathering momentum. In some cases replacing demand for copper and aluminium from traditional end users, who could suffer from a weakening economic outlook in 2024.
Gold and silver to benefit from lower real yields and funding costs
Following a surprisingly robust performance in 2023, we see further price gains in 2024. Gains driven by a trifecta from momentum-chasing hedge funds, central banks continuing to buy bullion at a record pace, and renewed demand from ETF investors, such as asset managers—they’ve been absent for almost two years amid the rise in real yields and increased carry costs.
With the US Federal Reserve pivoting towards rate cuts, we see the current number of expected rate cuts being justified by a soft landing, while a hard landing or recession would trigger an even bigger need for rate cuts. Record central bank buying in the past two years was the main reason gold managed to rally, despite surging real yields, and why silver suffered more during periods of correction. It did not enjoy that constant, underlying demand. With ETFs, demand is likely to return, and with central bank demand continuing, potentially supported by a weaker dollar, we could see gold reaching a fresh record high at $2300. Silver may find additional support from the expected rally in copper and challenge the 2021 high at $30, signalling a fall in the gold-silver ratio below the 10-year average around the 78.3 ratio.
In platinum, the combination of largely inelastic demand and risks to uneconomic supply being curtailed have the potential to exacerbate deficits and tighten market conditions. This would enhance a recovery in ETF holdings from a four-year low, and as with silver, create the prospect of platinum doing better than gold next year. It could potentially drive a 250-dollar reduction in its discount towards the five-year average around $750 an ounce.
Copper and aluminium supported by supply disruptions and green transformation
The industrial metal sector also stands to benefit from the prospect of lower funding costs driving a long overdue period of industry restocking from China to the rest of the world. Copper remains our favourite industrial metal, because there are expectations for robust demand, as seen in China this past year. This has kept exchange monitored stocks near a multi-year low. Increasingly, there’s also a risk of supply disruptions and production downgrades.
We‘ve seen major supply disruptions, specifically for copper, the so-called King of green metals due to its multiple application usage. These disruptions have been led by the government enforced closure of the First Quantum operated Cobra Panama mine. Other mining companies such as Rio Tinto, Anglo American and Southern copper have all been making downgrades, primarily due to rising challenges in Peru and Chile. Overall, it paints a picture of a mining industry challenged by rising costs, lower ore grades and increasing government intervention.
For now, given the wide spectra of challenges mining companies will face in the coming years, some of which have raised the all-in costs of production and with that their profitability, we prefer direct exposure to the underlying metals, primarily through ETFs.
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