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Commodities

Precious Metals

Pressure from rising Treasury yields likely to resume

This week the prices of most commodities got a boost as investors pared back expectations for rate hikes in the US, following lower than expected inflation data. That said, we still expect a further small rise in the US 10-year Treasury yield by the end of the year, which could put renewed downward pressure on the prices of commodities, and particularly gold, in the coming months. Supply disruption caused by the war in Ukraine seems to be easing, as grain ships have continued to leave Ukrainian ports. Meanwhile, there were renewed efforts to revive the 2015 Iran nuclear deal. While there are still hurdles, if a deal were agreed, we would expect a rapid rise in Iranian oil output, which would weigh on oil prices. Next week, we’ll be paying close attention to the latest activity and spending data from China on Monday. We expect that the data will show that the post-lockdown recovery lost steam in July, alongside a renewed deterioration in the property sector, which could weigh on industrial metals prices next week.

12 August 2022

Oil prices fall, but supply risks remain

In a week of relative financial market calm, there was a pause in the large, sentiment-driven swings that have characterised most commodity prices in recent weeks. Instead, prices seemed to take direction from more fundamental drivers. That said, the largest moves were to the downside. Fears about softer demand have weighed particularly heavily on oil prices. But, we would not place too much emphasis on one week of price moves. Volatility in commodity prices has been incredibly high in recent months, and given the scale of supply risks that remain, we suspect there is scope for oil prices to recover some ground. Next week, we’re expecting trade data from China to show that weakness in the construction sector kept imports depressed in July, which will probably weigh on industrial metals prices. However, we expect metals prices to receive some support from a pick-up in Chinese economic activity in the coming quarters. Indeed, despite the deteriorating market backdrop, we suspect that the sharpest falls in industrial metals and agricultural commodities are now behind us.

5 August 2022

Gold’s lustre to return in 2023

Having fallen sharply in Q2, we think that the gold price is now close to a cyclical trough. What’s more, the price should revive a little in 2023 as markets factor in the prospect of US monetary tightening.

3 August 2022
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Prices to find a floor

While non-energy commodities prices may fall a little further, we think the big move down in those prices is now behind us. Admittedly, the demand outlook has undeniably deteriorated in recent months, but many of the supply risks that prompted prices to soar earlier in the year are still with us. Moreover, our forecast of persistently high energy prices means that the cost of production of most other commodities will remain elevated for much of this year and into 2023.

Dollar strength likely to return and weigh on prices

It was a more positive week for prices, in large part owing to some softness in the US dollar. Otherwise, the news was not particularly positive for prices given the ECB’s surprise decision to hike its policy rate by 50bp (having signalled 25bp), persistent upheaval in China’s property sector and economic data showing clear signs of a downturn in most Western economies. As it happens, we think that the dollar will strengthen again in the coming weeks given that the Fed faces fewer constraints on its monetary policy than the ECB (upward pressure on periphery spreads and uncertain energy supply) and is likely to hike rates aggressively, as soon as next week. This will put downward pressure on “risky” assets like commodities. That said, supply of most industrial commodities is still highly constrained and stocks are low, which should at least limit the downside for prices.

We think the gold price has further to fall

While the price of gold has fallen sharply over the past couple of months, including another small decline today, it still appears much higher than its typically strong inverse relationship with the yields of longer-dated US TIPS would suggest. We suspect that the gold price will fall further from here, as the usual relationship with TIPS yields partially reasserts itself.

Strong US dollar to remain a headwind for prices

There was no clear direction in commodity prices this week, even within the same types of commodities. The takeaway is that commodity prices were dancing to their own tunes. Take energy, for example. Natural gas and coal prices rose on fears that Russia will export less gas to Europe. By contrast, oil prices fell on heightened concerns about slower global economic growth and oil demand. What we can say about this week is that most prices were dragged on by a stronger US dollar. Indeed, the US Dollar Index hit highs last seen in the early 2000s. Our FX Markets service is the place to go for our analysis on the dollar, but, in summary, we think that it will remain strong for a while and potentially strengthen further. This will act as a headwind for most commodity prices, particularly gold. Turning to next week, US inflation data for June will be released on Wednesday. We expect a slowdown in monthly core consumer price growth to 0.4% from 0.6%. Elsewhere, our China Economics team will host a Drop-In on Friday to discuss Q2 GDP and June IP and fixed investment data. We expect GDP growth to have slowed further in Q2, but the data for June should point to a recovery.

Softer demand, but supply to remain tight

Non-energy commodities prices generally fell in June on the back of concerns about the outlook for demand amid global monetary tightening and slower economic growth. Energy prices may also fall a little from here, but constrained supply will mean that they stay higher for longer.  

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