Baseline View: Precious Metals
As we approach the end of the year, let’s reflect on gold’s performance during 2022, and the outlook going forward. The main driver of yellow metals prices this year has been high-interest rates which have taken the lustre away from gold given the fact that it is a non-yielding assets. As we move into 2023 we are likely going to see central banks pushing the pause button on hiking and this coupled with the safe haven appeal could well cause a rotation back into gold.
Baseline View: Industrial Metals
The expectation of the Fed slowing interest rate hikes will be supportive of the base metal counters from both a growth perspective. The bullish sentiment has however been capped given the rise in COVID-19 infections in China and the response from Beijing. This is likely to keep metals bracketed for much of the month with liquidity expected to reduce as we enter the Christmas lull.
Spot gold has been trading in a narrow range over the last few weeks as investors have all been waiting on clues into the Fed’s path forward in terms of interest rates. Most investors are of the opinion that the Fed will soon scale back on the size of the rate hikes. Monetary dynamics have changed considerably in the US with many expecting a pivot away from the hawkish narrative. The worst is behind us, and the Fed will be mindful of pushing the tightening too quickly and unnecessarily damaging the economy.
A global slowdown is already underway, and reports of layoffs are becoming more regular, especially among tech companies. The cycle has turned, and the data will guide the Fed on how to act, but investors will be super-sensitive to any guidance confirming that the Fed will slow its tightening rate and prioritising growth a little more. Currently, markets are expecting to see the Fed start to become less aggressive in terms of interest rate hikes in 2023 which will make gold a more favourable bet going forward.
Our view: Gold will continue being driven by the dollar in the next few months. The Fed pivot is certainly on the cards for the first quarter of 2023 which will see the dollar underwind its overvalued status even further.. Lower USD and expectations of smaller interest rate hikes will likely support spot gold prices in the coming months. The next key level that we will likely see gold testing is $1800/oz.
The World Platinum Investment Council (WPIC) is expecting a deficit of the metal used in vehicle exhausts, industry and jewellery in 2023 after a hefty surplus this year. It said use by auto makers would rise and investors would flip from net sellers to net buyers, pushing demand in 2023 up 19% to 7.77 million ounces, the most since 2020. The main factor that is expected to result in the supply shortage is the intensifying power outages and deteriorating maintenance at mines in South Africa. SA is the top producer of platinum and is expected to create a deficit of 303000 ounces next year.
Our view: We are unlikely to see any significant improvement in platinum supply from South Africa, due to the constraints being structural and therefore supply-side pressures will keep platinum prices elevated in 2023. The next key level to the upside is $1045.00/oz.
Base metals have had the following factors driving price action during November:
- China’s COVID lockdowns tempering demand out of the world’s second largest economy.
- Speculators turn net bearish on the USD for the first time since July 2021
The current market focus is on the rise in Covid-19 cases in China and the response of Beijing given its zero-COVID policy. The official manufacturing PMI fell further from 49.2 in October to 48.0 in November, this was below the Bloomberg consensus forecast of 49.0. The non-manufacturing PMI reading which includes activity in the construction and services sector fell to 46.7 from 48.7 and was also lower than the market expectation of 48.0. China’s growth for 2022 has been revised lower a number of times, and we are currently expecting 3% for the year. Markets will however look through the current phase of economic malaise in China due and there is a rebound expected in 2023.
Pulling back the lens and taking a look at the base metals complex over the next decade, a major structural change for industrial commodities is on its way as China’s frenzy of urbanization begins to cool, hitting what’s been the main source of demand growth for the past two decades. Europe and the US will become more important drivers of metals demand in the coming decades, in a tilt away from China. The major factor is the transition to green energy which is a clear imperative from EU policymakers. This will boost the need for materials such as copper in the coming years.
Given the importance of the dollar’s ultimate direction in the metals markets and its impact on inflation across Africa, it is worth having a look at the latest speculative positioning on the greenback. The CFTC data for the week ending 15 November shows that the USD net long position fell below the neutral level for the first time since July last year, suggesting that sentiment towards the greenback has finally shifted. Following a weaker-than-expected CPI release and some less hawkish Fedspeakers, the aggressiveness of the US rate hike trajectory has been dialled down and removed a major pillar of support that the US dollar enjoyed for most of 2022.
Even with the recent retreat, the trade-weighted USD Index (the DXY Index) continues to trade at very expensive levels, last seen in the early 1980s. Historically, these levels have been difficult to sustain and there is no reason to believe that this time will be any different. The USD has surged on expectations of higher rates relative to its trading partners and that expectation has now moderated.
The shift to a net bearish position in the US dollar signals that the currency has likely peaked. It does, however, also mean that for any significant further weakness to materialize, we would need to see quite a major catalyst in order to push speculators to go even more net short.
From a macro perspective, copper demand in China, is expected to grow faster in 2023 due to rising investment in renewable power projects and the production of electric vehicles. The zero-COVID policy and related lockdowns will weigh on China’s demand in the short term, however, the longer-term demand outlook for copper is still positive.
Globally, the pressure is on the reduce greenhouse gases and therefore the world’s demand for copper to be used in renewable projects will keep the price of copper elevated in 2023.
Market dyamics have been influenced by copper stockpiles in the LME warehouses which have fallen by 3075 tonnes in the last month, raising supply concerns. This coupled with a weaker dollar and the prospect of the Fed slowing its pace of interest rate hikes has boosted sentiment within the copper market.
Our view: 3m LME copper has changed its path and is starting to rise once again, we expect copper prices to continue to rally in 2023, as demand continues to rise. For the time being, the next key resistance level is $8718.45/tonne.
Recent support measures for the Chinese property market have aided in the rebound of iron ore futures. Three of China’s biggest commercial banks have agreed to provide fundraising support to property developers, including industry giant Vanke, in a coordinated effort to support the country’s embattled property sector. Continued support of the property sector will outweigh the concerns surrounding rising Covid-19 cases, and will keep iron ore futures elevated.
Our view: Support measures for China’s property market have supported iron ore prices, and will likely continue to do so. Dalian iron ore has risen to $771/tonne. Prices are on an upward path at the moment and therefore the next key resistance level is $800 which was the high reached in September. If the metal breaks through this resistance level the next key level is $850/tonne, which was reached at the beginning of August.
LME aluminium prices have been falling, we could see price pressures remaining intact in the coming months following the LME decision to allow Russian metals to be stored in its registered warehouses. Markets are expecting that we will see a significant inflow of Russian metals in the coming months. The potential risk of a flood of Russian aluminium entering the LME system will be something that is watched closely as it has the ability to create pricing anomalies which following the nickel debacle at the start of the year would be unwelcome.
Our view: Aluminium prices have fallen from their record highs that we saw at the start of 2022, however, if the markets continue to self-sanction Russian aluminium we will likely see prices start to rise. 3m LME aluminium is trading around $2362.50, the key support level to the downside is $2040.23/tonne and the key resistance level to the topside is $2665.25/tonne.