Gold suf­fers on trade un­cer­tainty

Business a.m. - - FRONT PAGE - Sto­ries by Ken­neth Afor

GOLD PRICES MOVED SIDE­WAYS on Fri­day, with mar­kets await­ing fur­ther de­vel­op­ments on how U.S.-China trade talks would pro­ceed af­ter Beijing said it would take re­tal­ia­tory mea­sures against Wash­ing­ton for pass­ing a law in sup­port of Hong...

GOLD PRICES MOVED SIDE WAYS on Fri­day, with mar­kets await­ing fur­ther de­vel­op­ments on how U.S.-China trade talks would pro­ceed af­ter Beijing said it would take re­tal­ia­tory mea­sures against Wash­ing­ton for pass­ing a law in sup­port of Hong Kong pro­test­ers.

The metal was on track for its big­gest monthly de­cline since Novem­ber 2016.

Spot gold inched 0.1% higher to $1,460.08 an ounce. It has shed around 3.5% this month alone. U.S. gold fu­tures were 0.4% higher at $1,459.40 per ounce.

China warned on Thurs­day it would take “firm counter mea­sures” in re­sponse to U.S. leg­is­la­tion back­ing anti-govern­ment pro­test­ers in Hong Kong.

“(The sign­ing of the bill) takes an­other step back at the pos­si­bil­ity of a trade agree­ment with China, which re­ally up­set them quite a bit. That is why we saw eq­ui­ties come off and gold fu­tures push up,” said Phillip Streible, se­nior com­modi­ties strate­gist at RJO Fu­tures.

In­vestors have hopped on to the pos­si­bil­ity that a “phase-one” trade deal be­tween the world’s two largest economies could be signed soon, spurring world stocks to hit record levels and damp­en­ing de­mand for safe haven as­sets such as bul­lion.

Gold, gen­er­ally con­sid­ered a hedge dur­ing times of fi­nan­cial or po­lit­i­cal un­cer­tainty, fetches little in­ter­est and costs money to store and in­sure. How­ever, gold prices were still on track for their best year since 2010, hav­ing gained 13.5% so far in 2019.

Un­cer­tain­ties sur­round­ing the long-drawn trade war and re­ces­sion­ary fears have pro­vided sup­port.

“Gold has man­aged to hold above $1,450 since there is some bar­gain hunt­ing. This is a good en­try level for the ones who missed out pre­vi­ously,” said UBS com­mod­ity an­a­lyst Giovanni Staunovo.

In­vestors are closely watch­ing U.S. data for signs on the health of the world’s largest econ­omy, which could in­flu­ence the U.S. Fed­eral Re­serve in its de­ci­sion on fur­ther mon­e­tary eas­ing.

Re­duced ex­pec­ta­tions of fur­ther in­ter­est rate cuts by the Fed has weighed on spot gold prices, RJO Fu­tures’ Streible added. “We could go down to $1,425 by the end of the year.”

Weekly com­modi­ties wrap up (Novem­ber 2529, 2019)

Cop­per - Trade con­cerns and macro still in fo­cus

Cop­per prices have been weighed down heav­ily by con­cerns over the on­go­ing trade war and slow­ing global man­u­fac­tur­ing ac­tiv­i­ties. A con­struc­tive mine sup­ply side has pro­vided little sup­port to the prices over the year. On the re­fined side, both re­fined ca­pac­i­ties and out­put are still grow­ing out of China while de­mand growth has strug­gled across ma­jor Chi­nese and ma­jor Euro­pean con­sumers.

Mov­ing into 2020, cop­per mine sup­ply growth is set to in­crease although the out­look still looked vul­ner­a­ble to po­ten­tial dis­rup­tions. The bench­mark TC/RC for 2020 came in at US$62 per tonne/US¢6.2/lb com­pared to US$80.8/US¢8.08 in 2019, a level that is cut­ting into some mar­ginal smelters’ mar­gins. De­mand in China is hop­ing for some sup­port from stim­u­lus mea­sures from the in­fra­struc­ture sec­tor, but it is still too pre­ma­ture to be san­guine on the global de­mand re­cov­ery un­til we see solid signs of sta­bil­i­sa­tion in global ac­tiv­ity as well as solid de­vel­op­ments from China-US trade talks. We are cur­rently slightly bear­ish to­wards prices in 2020 and fore­cast LME 3M cop­per to av­er­age at US$5,750/tonne as base case prices, but the risks are largely de­pen­dent on macro un­cer­tain­ties.

Iron ore - More sup­ply to re­turn

2019 has been a volatile year for the iron ore mar­ket. The un­for­tu­nate Vale (NYSE:VALE) dam ac­ci­dent in Brazil raised con­cerns over sup­ply tight­ness, with Vale forced to take around 90mtpa of ca­pac­ity off the mar­ket. This pushed prices to as high as US$124/t. Although this move was clearly ex­ag­ger­ated by spec­u­la­tive ac­tiv­ity. How­ever, as we have seen a re­turn of some ca­pac­ity, along with a re­cov­ery in Chi­nese iron port stocks, prices have come un­der pres­sure once again, with the mar­ket trad­ing sub US$80/t re­cently. To add to the bear­ish tone, steel mill mar­gins have come un­der pres­sure, lead­ing to some steel pro­duc­ers cut­ting op­er­at­ing rates.

For 2020, we con­tinue to hold a fairly bear­ish out­look for iron ore prices. We ex­pect that fur­ther Brazil­ian ca­pac­ity will be brought back to the mar­ket over the course of the year, whilst there is still plenty of un­cer­tainty around the global econ­omy, and so this is likely to keep some pres­sure on steel mill mar­gins. We cur­rently fore­cast that iron ore prices will av­er­age US$81/t over 2020. The risk to this view is that we do not see Vale ca­pac­ity con­tin­u­ing to re­turn as quickly as an­tic­i­pated, which could keep the seaborne mar­ket tighter than ex­pected.

Coal - Weak­ness per­sist Coal prices re­main un­der pres­sure, with Euro­pean prices down more than 35% since the start of the year, leav­ing them to trade just above US$50/t. For Europe, the out­look for prices re­mains weak. This is due to two fac­tors. Firstly, EU car­bon prices have been fairly strong. Se­condly, gas prices in Europe have been very weak, with a sig­nif­i­cant amount of LNG mak­ing its way into the re­gion, as LNG ex­port projects ramp up. These two fac­tors have sup­ported a coal to gas switch for power gen­er­a­tion, which has weighed on coal de­mand.

Soy­beans - Trade war de­pen­dent

Soy­beans have been the poster child for the trade war be­tween the US and China. How­ever more re­cently, as we have seen progress with phase one of the trade deal, Chi­nese buy­ers have re­turned to the mar­ket for US soy­beans, with the govern­ment pro­vid­ing tar­iff free quo­tas. This has clearly been sup­port­ive for CBOT soy­beans. How­ever, we will likely need to see tar­iffs fully re­moved rather than just quo­tas be­ing pro­vided, in or­der to turn sig­nif­i­cantly more bullish on the mar­ket. On the sup­ply side, the US soy­bean crop is set to be sig­nif­i­cantly smaller this mar­ket­ing year. Firstly, given the on­go­ing trade war, farm­ers re­duced 2019 soy­bean plant­ings. This lower acreage com­bined with weaker yields means that US soy­bean pro­duc­tion is ex­pected to fall year on year, and this smaller crop should help to lower el­e­vated stock levels.

For 2020 US plant­ings, a lot will de­pend on how trade talks evolve over 1Q20.

How­ever, right now, the soy­bean/corn price ra­tio sug­gests that farm­ers should plant more corn at the ex­pense of soy­beans. Over­all, we ex­pect the CBOT soy­bean price to trend higher mov­ing into 2020, with prices av­er­ag­ing US$9.10/ bu over the year, driven by fall­ing global end­ing stocks. A quick res­o­lu­tion to the trade war, how­ever, could mean fur­ther up­side. While a trade deal would pro­vide up­side to CBOT soy­beans, it would in fact be bear­ish for Brazil­ian soy­bean cash val­ues, with Chi­nese buy­ers likely to switch back to US soy­beans.

Gold - Safe haven ap­peal

The gold mar­ket has had a strong year, with prices up as much as 21% at one stage, hit­ting a multi-year high of US$1,554/oz. This strength shouldn’t come as too much of a sur­prise, given the grow­ing un­cer­tainty in the global econ­omy, with slow­ing growth and es­ca­lat­ing trade ten­sions. These fac­tors have in­creased the ap­peal for safe haven as­sets such as gold. Fur­ther­more, more dovish pol­icy from cen­tral banks has also pro­vided sup­port to gold.

Look­ing to 2020, we be­lieve that prices will be dic­tated by the same themes as this year. As a re­sult of trade un­cer­tainty and con­cerns over global growth, we do see up­side to gold prices from cur­rent levels. While if the US Fed turns in­creas­ingly more dovish, this only pro­vides fur­ther up­side. We cur­rently fore­cast that gold prices will av­er­age around US$1,475/oz over the course of 2020.

Mele Kyari (right), group man­ag­ing di­rec­tor, Nige­rian Na­tional Pe­tro­leum Cor­po­ra­tion (NNPC),pre­sent­ing a plaque to Mark Robin­son, ex­ec­u­tive di­rec­tor, Ex­trac­tive In­dus­tries Trans­parency Ini­tia­tive (EITI), at the NNPC in Abuja, when the lat­ter vis­ited on Mon­day, Novem­ber 25, 2019

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