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Gold’s time to shine

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.mufg.jp

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Global commodities

Notwithstanding gold’s reversal this week after trading at a new nominal record high (UD2,135/oz) on 4 December, bullion’s bullish conviction remains resolute. Gold’s performance in 2023 has been closely tied to its attractiveness as a tail risk hedge and its relationship with real rates and the US dollar. Consistent with gold’s historical performance during episodes of elevated geopolitical tension, prices rose significantly (8%) over the first 25 days since the onset of the Israel-Hamas war, but subsequently fell on ebbing risk premia and strong US data. The pace at which this geopolitical risk premium was priced pointed to a market that was short entering this episode, and the subsequent fall in prices showed the pressure from elevated rates and a strong US dollar. Over the past month, gold prices have risen again on expectations of a Fed rate cut before summer 2024 and a weaker US dollar following the latest US inflation report, which showed inflation falling faster than expected. Looking ahead, gold is our most constructive structural story of 2024 and anticipate bullion to hit USD2,350/oz by end-2024. Whilst upward momentum in gold prices will be closely tied to lower US real rates and a weaker US dollar, we also expect strong consumer demand from China and India, alongside central bank purchases, to offset downward pressures from any upside growth surprises and rate cut repricing. We recommend leaning long gold and view any sell-off as a buying opportunity in an environment with elevated risk dimensions (geopolitics, recession repricing) which play into gold’s favourable hedging qualities.

Energy

The global oil market keeps hurling gauntlets at the feet of OPEC+, challenging the group about the trajectory of prices following the strategy to take more barrels off the table failed to stymie a leg lower. Given the degree of ambiguity and lack of catalysts, the path of least resistance in what is a “show me” type oil market is lower, in our view. Meanwhile, in a another sign that the European natural gas market is more concerned with macro risks than price risks, the German Ifo Institute said its twice yearly survey of German companies found they than “significantly reduced their investment plans” with a third planning or considering relocation.

Base metals

Copper’s micro support continues by a combination of increasing China cathode pull set against a local peak in (ex-China) LME inventory levels, as well as a phase of elevated mine supply breaks focused on the suspension of commercial operations at the 385/KTY Cobre Panama mine.

Precious metals

As with gold, silver has retraced its seven month high as investors zero in more closely on the directional path of the Fed and the US dollar. Core precious metals outperform when bets rise that the Fed is done hiking, which hampers the US dollar and Treasury yields but drives non-yielding assets incrementally deeper into investor portfolios.

Bulk commodities

Iron ore continues to extend losses after Moody’s lowered China’s sovereign ratings outlook to negative (from stable), eroding consider in the economic outlook at a time when its recovery remains fragile and sensitive to negative developments even as investors search for green shoots. 

Agriculture

Wheat has snapped the longest run of gains since March 2022 as prospects for a third consecutive bumper crop in Russia – the world’s largest exporter – offsets news of more Chinese purchases.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.