Baseline View – Precious Metals:
Gold will remain focused on the movements in the dollar and US treasuries for short-term trading bias. 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 the slowdown in the global economy and supply constraints playing tug of war with price action. The Fed’s comments have softened the thoughts of a worldwide slowdown, allowing the supply issues to rise in prominence again.
Baseline View – Industrial Metals:
Economic growth concerns and tighter monetary policy have been the predominant drivers of base metals over the past month. The pressure on that front has lifted slightly due to the Fed being less hawkish at its July meeting. Underpinning the longer-term prospects for metals are supply constraints in individual metals such as aluminium. At the same time, even further out, the likes of copper remain a buy given the need for the metal in the green energy revolution.
Gold has had a torrid July much in line with other asset classes as the broader investment community priced for much tighter monetary conditions from a number of developed market central banks which resulted in rising yields and a stronger dollar, both of which are gold negative.
The sell-off at the start of July was brutal with two days recording drops of over $30.00/oz. The yellow metal broke below the $1700.00/oz handle and touched lows of $1680.99/oz before recovering and regaining the $1700.00/oz mark.
The reason for the recovery is that bargain hunters found the lower levels attractive while other investors were looking to gold as a hedge against the fallout being seen in the equity markets.
Bloomberg quoted a research document from the Pepperstone Group saying that “I am warming to gold and think the yellow rock works in this backdrop where traders are questioning if the US dollar is our default hedge against equity drawdown.”
Our view: Gold is likely to continue with its recovery given the Federal Reserve’s less hawkish tone at its last meeting. Expectations for the September meeting have pared back to a 60 bp hike which has taken the shine off the dollar. A break of the $1800.00/oz mark cannot be ruled out.
Platinum and palladium as with other metals have focused on the impact of tighter monetary policy and subdued economic growth. The sanctions on Russia remain a focal point for palladium consumers, however, there is the potential for platinum to be substituted if supplies become too unstable or prices become stretched. This is undoubtedly a positive for South Africa given that the country is the largest producer of platinum globally.
Platinum production has recovered with the May reading coming in at 3.3% year on year versus a contraction of 22.6% year on year in the April measurement month.
Our view: Palladium is above the $2000.00/oz handle with the ultimate floor being $1500.00/oz. We favour accumulating on any levels approaching $1800 as bargain hunters have been noted buyers in this area previously. Looking at platinum could find $1050.00/oz toppish for now while value is evident approaching $850.00/oz.
Base metals have had the following macro factors driving price action during July:
1. China is the world leading consumer of base metals, and there are growth concerns emanating from the global superpower.
2. The potential threat of a global slowdown.
3. Understanding the shift towards renewable energy in the coming years
The Chinese growth concerns:
Chinese growth figures released for the second quarter of 2022 have underwhelmed. The Chinese economy grew at the slowest pace since the COVID-19 virus outbreak in Wuhan two years ago. The world’s second-largest economy recorded growth of 0.4% for the quarter against forecasts of 1.2%, and this will result in Beijing missing its 2022 goal of 5.5% by a wide margin. Economists have recalibrated their predictions and are now suggesting that a massive recovery in the Chinese economy will be needed to achieve 4% overall, never mind 5.5% as initially pencilled in.
The economic slowdown may result in Chinese demand for industrial metals tapering off. Currently, China is at a different point in its economic cycle than the rest of the world and its commodity imports in the coming months are likely going to reflect this. Another factor that also may result in a slowdown in Chinese demand is how much they have actually stockpiled. It seems as though since the begging of the year China has been increasing their copper imports, in June they increased by 15.5%, this is likely due to copper prices being low at the moment. Therefore, in the coming months, their demand for copper may decline.
The global economic slowdown:
The talk of stagflation has not disappeared, it has however faded somewhat following the less aggressive tone taken by the Fed at its meeting on the 27th of July 2022. The Fed hiked rates by 75bp in a unanimous vote, matching expectations. The statement revealed that the Fed remains committed to bringing inflation back under control, although it did note that there has been a softening in spending and production within the economy. Interestingly, the Fed also referred to “robust job gains”, which is not necessarily what recent data or corporate earnings results have shown. Across the Pacific, there have been some positive data releases out of China which is welcomed, we do however stress that the risk here remains in the property sector and Beijing’s commitment to its no COVID-19 policy.
Shift towards renewable energy:
The world remains squarely focused on achieving carbon neutrality within the next three decades although the war in Ukraine has caused a shift to coal power as the Eurozone aims to transition away from Russian gas. Granted this is likely to push forward the agenda for renewables given coal’s dirty status.
Industrial metals are to benefit given their uses in future new electrification endeavours, global demand for copper is estimated to reach 53 million tonnes by mid-century, this is more than double the current amount of copper being produced.
In the next section, we unpack the metals which are the most prominent on the month.
The nickel market has stabilised after the wild swings earlier in 2022 saw the metal quoted above $50000/tonne and the LME halt trading and cancel filled orders as the market collapsed. We are currently marking time just ahead of the $21500/tonne level however there are certainly after-effects of the market dislocation which are currently being felt. The first point to note is that there is reduced liquidity in the market currently and the costs to trade have risen, the second is that confidence in the market has not returned, and investors are concerned about Russia and the supply chain. It is important to note that while Russia only makes up around 9% of the world’s nickel production, it is responsible for 20% of class 1 nickel which is the nickel used in battery manufacturing.
Currently, there are no sanctions on Russian nickel, but should this change we can expect the market to be upended again.
Our view: The nickel market will remain underpinned with $20000/tonne seen as the floor for now.
Aluminium inventories at LME registered warehouses are at levels last seen in 2000 and we cannot rule out a further drop in the coming weeks and months given that European smelters have not been able to produce at adequate levels given the massive surge in energy costs.
When we last updated this report, LME stocks were recorded at 404 450 tonnes, we are currently at 299700 as we exit July and the expectation is that we could fall further still.
This supply crunch has resulted in the futures curve remaining in a state of backwardation, cash is currently trading at a $6.5/tonne premium to the 3m benchmark.
Our view: The market remains subdued with the benchmark holding below the $2500.00/tonne psychological level. That said, now that the Fed has pared back its hawkish outlook we could see focus shift from the demand to the supply side of the equation which should translate to a strong bid tone manifesting in the coming months.
Concerns surrounding global economic growth have been the major theme driving copper prices over the past month. The 3m LME contract has slipped below the $7000.00/tonne mark briefly as thoughts of stagflation hit the global bellwether for economic growth through the month of July.
LME inventories are currently at 132 500 tonnes which is just a whisker off the 12-month average of 137 502.70/tonnes.
The Fed has started to lift its foot off the monetary tightening peddle and we could see other central banks pull back on the hawkish rhetoric towards the backend of 2022 into 2023 which will underpin the copper market.
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. There is a potential for some consolidation around current levels with value to be found on any dips in price.