“Year of Metals” boosts gold and silver. Commodities are ready for revival – FAEI.cz

The sharp run in prices between 2020 and 2022, when the Bloomberg Commodity Total Return Index more than doubled in response to the post-pandemic surge fueled by minimal key rates, was followed by a year-long consolidation phase that is now showing signs of abating. In this year’s first quarter, the index traded almost unchanged for the fifth quarter in a row.

Some sectors continued to feel pressure, while others prospered. The quarter is coming when major central banks, notably the US Fed and the European Central Bank, may start cutting rates, and Japan is likely to see its first rate hike since 2007, so the prospect of a weaker dollar and lower funding costs supporting growth may trigger more general recovery.

With the exception of natural gas, the price of which decreased by 25 percent year-on-year, commodities will be roughly 2.5 percent more expensive. Due to the announced reduction in the production of major American suppliers, which will begin to reduce the oversupply of natural gas in the coming months, we think that this commodity will no longer drag the index lower.

In addition, growth-promoting rate cut prospects, a balanced oil market and an oversold grains sector increase the likelihood of recovery even during the important growing season in the Northern Hemisphere, so the index can be expected to deliver a positive return in the coming months.

Willingness to buy gold rises despite high real rates

In our outlook for this year’s first quarter, we mentioned that 2024 will be the year of metals, especially gold, silver and copper.

In the case of precious metals, this forecast has so far been fulfilled, the second best performing sector behind soft commodities, although the realization has come a bit earlier than we expected due to the continued headwinds of increased government bond yields and lower expectations of a US rate cut .

Nevertheless, gold managed to strengthen significantly and, supported by strong physical demand from central banks and small investors in Asia, reached a new record.

While this demand may wane in part in the second quarter as investors react to higher gold prices, the prospect of lower funding costs may lead to an increase in demand for gold ETFs from high-purchasing investment managers for the first time since 2022 (exchange-traded funds, editor’s note).

Gold has already reached $2,300 an ounce this year, and technical indicators suggest it could climb as high as $2,500. Accordingly, we are lowering our target level for silver by two dollars to $28.

Will China’s stimulus efforts bring a revival to industrial metals?

A combination of lower funding costs as falling interest rates finally usher in a long-awaited period of industrial inventory replenishment and continued government support for China’s ailing economy could see some industrial metals improve in the coming months.

Our favorite industrial metal remains copper, which has been trading in a tight range for almost a year. The reason is not only the expected robust demand, which we have seen in China in the last year and thanks to which the level of inventories monitored by stock exchanges is holding close to a multi-year low.

But also the increasing risk of supply interruptions and production cuts. Most major mining companies are facing rising labor and construction material costs, as well as lower ore quality, as their mines near the end of their life.

As we have already mentioned, we continue to favor copper, the “King of the Green Metals”, which has applications in many areas.

The first sign of an end to the year-long trading range would be a break above $4.3 a pound and above $9,500 a tonne for high-grade (HG) metal on the London LME (London Metal Exchange). In our opinion, a successful breakthrough could lead to a new record this year.

The author is Saxo Bank’s Chief Commodity Strategist
(Editorially modified)