Commodity wrap - Gold, Coffee, Corn, Aluminum (03/03/2020)

Gold:

• Gold ended the month with the second largest upper wick in history, what may herald an impending correction or even a trend reversal

• The price pullback at the end of the month was associated with a search for liquidity - currencies and bonds offered more liquidity than the bullion market

• The potential target of the rally, resulting from the 2008-2011 sequence, is located at around $1890

• Potential interest rate cuts by the central banks around the world may lead to further increase in demand for gold, particularly from ETFs

• Seasonality on gold does not hint that March will be a good month for gold bulls. 5-, 10-, 15- and 20-year average are all negative for the month. The size of declines in bad years significantly exceeded the size of increases in good years (20-year period is an exception).

• Gold gained 4 times in March during last 10 years

Seasonality on gold is not very kind to the bulls in March. Source: Bloomberg

Yields in the US are at their record lows and this indicates that the copper-to-gold price ratio should be even lower. Source: Bloomberg

Coffee:

• The price of coffee has been recouping losses despite rising concerns over the impact of coronavirus

• A drop in coffee supplies on the stock exchanges stopped. If supplies start to decline once again, coffee prices may experience upward pressure

• Good weather conditions for budding coffee trees in Brazil. Good weather conditions for coffee harvests in Central America. Rainfall in Indonesia supports coffee cultivation.

• Mixed weather in Vietnam in the autumn may lead to weaker harvests. Decline in Vietnam’s coffee exports volume in January-February period

• Convergence of short and long positions on the coffee market. A similar situation from 2017 suggests possible further price decline over the medium-term.

• Situation on Brazilian real market still does not support coffee prices

Coffee supplies have stopped falling. If the last decline was simply an adjustment to temporarily higher prices, the baseline scenario assumes further price increases in the medium term. Source: Bloomberg

Positioning on coffee does not give hope for price increases. Similar convergence from 2017 suggests further price declines in the perspective of mid-year. Source: Bloomberg

Corn:

• Rebounce in the number of short positions on corn futures.

• Net positioning on corn is already negative and very close to the minima from the middle of 2019

• A study is currently being carried out in the USA regarding planned sowing this season. Results to be released at the end of March.

• Looking at price behavior since the beginning of the year, current declines are the largest ones in 5 years. Seasonal patterns hint at increases starting at the end of April at the earliest

• CPrice broke out of the triangle formation amid coronavirus concerns. Price, however, tries to jump back

Positioning suggests possible further declines. However, at the same time net speculative position is approaching local lows from the Q2-Q3 2019 period. Source: Bloomberg

The price change since the beginning of this year indicates the worst market behavior in 5 years. At the same time, it can be seen that the seasonal rebound should start at the end of April at the earliest. Source: Bloomberg

The price returns to the consolidation channel between the 50% and 23.6% retracement levels. Source: xStation5

Aluminum:

• Construction market in China, which is responsible for a huge part of the demand for industrial metals about 40% of steel demand), stagnated

• Earlier forecasts pointed to a 1 million tonnes increase in supply this year. Demand was expected to increase by 1/3 of this forecast (Wood Mackenzie)

• Without China's involvement on the market, the aluminum market may find itself in a difficult position, in terms of both supply and demand

• Possible protests in Guinea may cause turbulence in terms of bauxite exports (maritime transport covers 2/3 of world exports)

• The current slowdown in aluminum production in China is contributing to the decrease in inventories. In the event of falling below the minima from the 2017-2018 period, pressures for a price rebound may increase 

• After taking into account operating costs, around 50% of aluminium production is currently unprofitable

• Net speculative positioning is starting to rebound and can be found at the highest level since July 2019

Aluminum inventories have fallen over the last two months. A decline below multi-year lows from 2019 could lead to pressure for a more pronounced price rebound. Source: Bloomberg

Aluminum is currently testing support at around 78.6% retracement. High correlation with the US dollar can be spotted in the past 3 years. In the case of a pronounced depreciation of the dollar, there is a chance that the prices on the aluminum market will rebound. The first target should can be found slightly below 1,800 USD per tonne, while 1,900 USD (61.8% Fibo retracement) should act as the next one in line. Source: xStation5