The month of July, normally a relatively quiet period of the year across markets, ended up being nothing but quiet. During the month, US politics were rocked by the assassination attempt on Trump, followed by President Biden announcing that he would not seek re-election, instead passing on the baton to Kamala Harris. Elsewhere in China, the mid-July Third Plenary Session of the 20th Central Committee of the CCP was met with significant disappointment among analysts and observers, primarily due to its perceived lack of immediate and concrete economic reforms. Not least considering how economic data continued to spring negative surprises, thereby forcing the market to adjust and lower their demand outlook for key commodities from crude oil to industrial metals such as copper.
Also last month, the stock market saw a loss of momentum as investors began rotating out of this year’s high-flyers, especially the tech sector, and the volatility spike helped drive a general loss of risk appetite while sending key commodities lower. Elsewhere, US economic data increasingly pointed in the direction of a slowdown as consumers showed a loss of confidence, while inflation continued to track lower towards the Federal Reserve’s long-term target near 2%. Developments which helped bring forward the expected timing of the first 25 basis point US rate cut to September, followed by additional cuts at the following three meetings. These developments, together with ongoing geopolitical worries, helped drive gold to a fresh record high while other growth and demand-dependent sectors suffered.
Overall, the Bloomberg Commodity Total Return Index ended down 4% last month, its worst monthly performance since May last year, with all sectors apart from precious metals trading lower on the month. During the week, however, the overall monthly loss was somewhat reduced as key markets started to recover after weeks of heavy selling from hedge funds, cutting their exposure began to dry out. Year-to-date, the index, which does not include high-flying cocoa, Paris wheat and EU gas as well as platinum, trades up 1%, with the main sector moves being an 18.1% rally in precious metals and a 19% drop in the grains index.
In addition, a geopolitical risk premium returned to crude oil and also gold in response to renewed worries about stability in the Middle East after Hamas said Israel had killed its political leader, who was on a visit to Iran. Together with rumblings between Israel and Hezbollah in Lebanon, the market is once again forced to focus on the unlikely risk of the month-long conflict spilling over to other parts of the Middle East, which ultimately could see the supply of energy being disrupted for a period of time.
Finally, global markets, including growth and interest rate-sensitive commodities, received a boost after the FOMC made several changes to its statement that suggested a dovish shift. Chairman Powell laid the groundwork, depending on incoming economic data, for a September rate cut.
Gold’s 4% rally lifts the year-to-date gain to 17.3%:
Gold reached a fresh record this month just below USD 2500—Saxo’s end-of-year target—after traders, following a succession of weaker US economic data prints, lifted expectations that a US rate cutting cycle could begin in September with additional 25 basis points cuts now seen at the following three meetings. The latest strength was supported by another round of soft US economic data prints on Thursday, which helped drive the policy-sensitive 2-year yield down to a 14-month low. Combined with the ugly swings in equities, a soft US jobs report on August 2 may increase the risk that the Fed and other central banks are repeating the errors of history by waiting too long to cut interest rates and then being too slow when they finally start.
Lower funding costs for holding a position in a non-interest paying metal, such as gold, will increase its attractiveness, and during July, we have seen some early signs that interest rate-sensitive investors have started to warm up to gold, with the total holdings across the major exchange-traded funds showing the biggest monthly increase since March 2022 when total holdings peaked above 3200 tons, only to suffer months of net selling amid rapid rising US interest rates.
Also, this week, the World Gold Council published their Gold Demand Trends Q2 2024, and despite record prices, the organisation saw record demand with OTC investment driven by wealthy families and individuals worried about US government debt levels and uncertainty about the outcome of the US presidential election. Since April, gold has made three successive record highs, the latest to USD 2484 taking it close to our end-of-year target. With three US rate cuts priced in this year, as opposed to the FOMC’s projection of just one, some short-term disappointment cannot be ruled out, but overall, the direction towards higher prices in the months and quarters ahead remains. Key support can be found in the USD 2280 area, while resistance for now looks firm above USD 2450.
Copper correction drags silver down with it:
While gold performed very well last month, silver got caught up in the selling that hit the industrial metal sector (-6.8%, led by aluminium and copper. In addition, and as opposed to gold, both copper and silver had been left exposed to long liquidation from hedge funds holding elevated positions, bought at levels that could easily be reached as the short-term fundamental outlook began to deteriorate. However, the combination of bullish bets being cut to a four-month low, continued gold strength and silver’s recent +15% underperformance against gold may help re-ignite interest for a metal that by many is forecast to perform well in the coming years amid rate cuts, robust industrial demand, and supply constraints.
Ahead of July, we had highlighted the mismatch between elevated copper prices and the lack of fundamental support as exchange-monitored inventories continued to rise amid tepid demand in China. Selling of metals related to the energy transition, which includes silver and, not least, copper, picked up pace following President Biden’s dismal debate performance and Trump’s subsequent surge in the polls. Trump has consistently downplayed the significance of climate change and has prioritised boosting traditional energy sectors like oil and gas, and should he win, he would likely roll back the Inflation Reduction Act, dealing a blow to the US green transformation industry.
Copper has so far managed to find support ahead of USD 4 per pound in High Grade (NY) and around USD 9000 per ton on the LME in London. In recent weeks, the High-Grade net long has been cut by 74% to a three-month low. With the price for importing copper to China once again carrying a premium, we may see the first signs of a market stabilising. However, more is needed, not least regarding the lowering of funding costs to support demand, and the reduction in exchange-monitored warehouse stocks, currently near the highest level since the 2020 pandemic demand collapse.
Crude oil losses are limited to 3%, while natural gas slumps 21%:
The energy sector suffered a 7.6% setback last month, led by a 21.2% drop in natural gas amid ample supply from rising production and normal weather, keeping demand for cooling relatively subdued. With the US Henry Hub benchmark gas futures trading back to USD 2 per MMBtu, the discount to Europe’s Dutch TTF benchmark has widened to a December high at an astonishing USD 9.6 per MMBtu. European gas prices rose last month amid concerns about short-term risks to supply on escalations in tensions in the Middle East.
Crude oil’s loss was reduced to around 3% following an end-of-month boost from the mentioned geopolitical developments. Overall, both WTI and Brent crude remain stuck, having traded sideways for the past two years within some well-established and still wide ranges, which in the case of Brent is currently between USD 75 and USD 95 and within that range a narrowing one, currently between USD 78 and USD 87. It has been argued throughout the latest stage of the recent correction that the move had more to do with long liquidation from hedge funds and technical selling from others than an actual deterioration in the fundamental outlook, and we tend to agree with this observation, potentially setting the stage for another rebound in the coming weeks.
Apart from the mentioned developments in the Middle East and post-election unrest in Venezuela, the market will also keep a watchful eye on OPEC+ and whether they, as confirmed this week, will stick to an agreed plan to gradually increase production from October onwards. The group has been withholding supply for the past two years amid rising non-OPEC+ supply and the mentioned softness in demand, and the scheduled increase of 0.5 million barrels a day is part of a road map – market conditions permitting- for restoring 2.2 million barrels a day by late 2025.