BASELINE VIEW – PRECIOUS METALS:
Gold will face headwinds in the coming month given the strength of the USD and higher bond yields. The Fed is committed to reining in the inflation monster and continues to walk the hawkish line, this implies higher rates at least in the short term which will keep the pressure on gold given that it has no yield. Investors with a longer-term outlook will favour accumulating on any dips as a hedge against geopolitical and macro-economic risks, which currently include stagflation, even as the Fed downplays the risk of the US entering a recession. The noble group metals have a slowdown in the global economy and supply constraints playing tug of war with price action.
BASELINE VIEW – INDUSTRIAL METALS:
Fears of weakening global economic growth have continued to weigh on industrial metals. Meanwhile, spiralling energy costs have also forced producers to cut the production of energy-intensive metals such as aluminium.
Following the FOMC meeting this month, the USD has continued to rise to its highest levels in twenty years. Expectations are for further aggressive interest rate hikes as major central banks remain committed to getting inflation under control, this has resulted in gold becoming less attractive compared to yielding investments such as treasuries especially in the near term. Casting an eye towards 2023 the potential for a global recession and a trimming of hawkish central bank rhetoric should see investors shifting back towards gold due to its safe-haven appeal. Therefore, current levels would be attractive to those looking to top up their gold holdings.
Our View: Gold will remain at the mercy of the dollar for now. The first major support level comes in at $1620/oz. This level provides value for those seeking to add gold to their portfolio as a hedge against the potential for stagflation developing in the next 18 months. To the topside $1700/oz is the first major resistance/congestion area.
Impala, Sibanye has said that power outages in south Africa could hit output this month as operations have been disrupted. Other factors such as flooding at Sibanye’s Stillwater mines in Montana and delays at Anglo American Platinum smelters rebuild there are chances that upward pressure could be put on the price of palladium as well as platinum. Palladium is mined alongside platinum in South Africa.
Meanwhile, the world’s biggest maker of electric-vehicle batteries, China’s Contemporary Amperex Technology Co. Ltd., is considering a third factory in Europe. General motors have agreed to sell up to 175000 electric vehicles to Hertz Global over the next five years, which illustrates how quickly the world is staring to shift to electric vehicles. Higher demand for EV’s will support platinum and palladium prices in the coming months and years.
Our View: Platinum has taken its direction from the dollar for the most part this month. The noble metal remains vulnerable in the short term to both dollar strength and the threat of an economic slowdown which will hit demand. Technically $829.3/oz is providing the first major support level, while the topside sees resistance first at $896.58.00/oz, and following that $967.77/oz.
Base metals have had the following factors driving price action during August:
1. USD driving price action
2. Higher energy costs curtailing the production of the likes of aluminium in the EU.
3. Chinese stimulus
One of the main factors that have been impacting the performance of base metals has been the surge in the dollar. The Fed has implemented a very aggressive tightening cycle over the last few months in order to try and get inflation under control, such tight monetary policy conditions have resulted in the dollar rising to record highs.
The dollar and commodity prices have an inverse relation therefore, the current dollar strength has resulted in commodity prices falling. Looking at the y/y performance of the Bloomberg commodity subindex, industrial metal prices have decreased the most around 17.7% followed by precious metals which have decreased by 14.7%.
Historically, the dollar has been unable to sustain such high levels when it has been so overvalued. Our expectations are for the dollar to remain elevated for the remainder of the year, however next year we may see the dollar starting to correct to lower levels as the market moves out of its current risk-off position and the central bank is no longer able to maintain its very hawkish position on interest rates given the impact of higher rates on global growth.
Higher energy costs:
European energy prices remain at stratospheric levels during the month of September which has all but sidelined the production of aluminium given its massive energy requirements. Germany has been bold in its approach and will nationalise the gas behemoth Uniper in order to avert the collapse of its energy sector. The EU has already received a taste of what is to come if Russia turns off the gas taps, following an extended maintenance period at the start of September 2022. The length of the maintenance was according to Russia due to sanctions and the fact that they were unable to secure the services of Siemens Energy to repair faulty requirements. What is clear is that the Kremlin has fired a warning shot over the bow of the EU, showing it what is potentially on the horizon.
Chinese stimulus: China’s housing market remains a treacherous place with investors shunning the sector and contagion risks remaining entrenched following the Evergrande crisis which has accelerated since the start of the month. The Evergrande Group has seen creditors seize its head office while it has reached out to a firm owned by the Shenzhen government to complete four property developments in the tech hub. Evergrande currently has more than $300bn worth of liabilities. Against this backdrop, Beijing has allowed over twenty cities the ability to lower mortgage rates for the purchase of primary residences. The new policy is applicable to cities where newly constructed house prices have declined during the June to August measurement period.
Copper prices have risen by nearly 123% from the start of the Covid-19 pandemic until March of 2022 when copper reached record highs. In the last six months, we have seen copper prices falling and China has been taking full advantage of this and has been restocking its reserves. Since the start of this year, China’s copper imports have risen by 9.8%, these are the strongest year-to-date volumes since 2020. China’s high demand is likely preventing some losses in copper prices currently, however in the longer-term copper prices are expected to face some headwinds and we may see a further drag downwards. The major headwinds are the potential for a global recession and China’s demand falling, while a weak dollar could result in a recovery in copper prices.
Another factor that has been copper price stable is the concern of potential shortages in the metal due to low inventory levels. ShFE copper stocks are down 78% since March, while COMEX copper inventories have also dropped to their lowest level since July 2021.
If low inventory levels persist or get even more worse copper prices could improve.
Our View: The benchmark 3m LME contract has tested the $7000.00/tonne level and failed to break below suggesting a line in the sand to the downside is evident at this level. Equally the topside seems somewhat stretched on levels approaching $8200.00/tonne in the short term.
The latest data from the American Iron and Steel Institute shows that operating rates at steel mills in the US have dropped to around 76% over the last week. These are the lowest level since January 2021. Logistical issues, high power prices and shortages combined with a slowdown in demand growth are the major factors weighing on operating rates. Meanwhile, iron ore futures have been rebounding as China has resumed ramping up output to cash in on increased construction activity during its peak construction season. The recent market gains indicate that the market is quite optimistic about a recovery in China’s steel production.
Our View: Iron ore is vulnerable at present and much depends on the ability of Beijing to support their economy and thus consumption. Singapore front month Iron Ore contract remains below the $100/tonne mark which is the resistance level for now.
Aluminium has dropped to an 18-month low earlier this week, as concerns about weakening demand and a stronger dollar weigh on the market. High power prices and high-interest rates undermine industrial production and hurt aluminium consumption. As of the 10th of June 957000 tonnes of European aluminium production have been cut due to high power costs and energy shortages.
Meanwhile, China has dramatically increased exports to Russia and has shipped 577000 tonnes of aluminium to Russia since march compared to just 1750 tonnes in 2021. The flows have been strong enough to tilt China towards being a net export for the first time since early 2019.
Our View: Weaker demand as a result of slowing growth will likely push the aluminium market into surplus despite the production cuts in Europe and China due to power problems and consumers shunning Russian produced aluminium. for longer periods.