Commodity Wrap - Gold, Copper, Nickel, Wheat

Gold

- Gold price remains close to the resistance level at 1430 USD handle
- Two previous US rate cut cycles (early 2000s and post-crisis) led to 100-200% rally on the gold market
- USD index sits near 20-year high hinting at the greenback being potentially overbought
- Gold-to-S&P 500 price ratio suggests that the precious metal outperformed broad equity market during periods of declining interest rates

Current situation looks similar to the one from the beginning of the two previous rate cut cycles. Will gold rally 100-200% this time as well? A lot will depend on the performance of the US dollar. As one can see on the chart above, in the early 2000s the US dollar began to weaken several months after the first rate cut was delivered. Source: Bloomberg

Gold-to-S&P 500 price ratio remains at depressed levels. Moreover, 2-year yields hint at 3 rate cuts over the next 2 years. Market may be underestimating the chance of Fed delivering more easing. Source: Bloomberg

Gold trades close to key resistance level. In case it is breach $1470 and $1500 handles could serve as the next targets. Source: xStation5

Copper

- Copper prices are strictly tied to what happens in the global economy
- Chinese as well as other countries’ PMIs signal further drops in the market
- Copper production costs (in 90% cases) hover around $6200 per ton, it supports copper prices (keep in mind about increased demand for copper from electric car producers)
- Chinese credit impulse has moved above 0% and it could bring a real effect in the market in 12-18 months
- Copper inventories situated in stock markets remain low (the largest falls have been seen in the LME)
-Net positioning remains extremely low, the same case took place at the turn of 2008/2009 and 2015/2016

Copper production costs should support prices. Source: Bloomberg

The Chinese credit impulse has moved above 0% which could be an important factor for the copper market. Source: Bloomberg, XTB Research

A clear signal that the copper market has become oversold as evidenced by the extremely low net positioning. Source: Bloomberg

Nickel

- Nickel reacted to the news on potential supply struggles in Australia, South Africa and Indonesia
- Demand for nickel is rising mostly due to EV manufacturers. Long-term outlook remains bright as it is likely that parts with higher nickel content will be used (they are lighter and more efficient)
- Majority of nickel demand still comes from steel producers. Record steel production in China on the monthly basis
- Further decline in nickel stockpiles may continue to support bulls
- Previous rate cut cycles in the US led to significant price gains on the nickel market

Steel production in China had a few solid months recently and provided a support for nickel prices. Potential near-term steel output struggles should have bigger impact than promises of increased demand from EV sector. Source: Bloomberg

Wheat

- Wheat price tries to rebound after a few weeks of heavy declines
- Winter wheat crop still sits below 5-year average (for example only 33% of wheat has been harvested in Nebraska or 14% in Michigan against, respectively, 79% and 65% a year ago)
- Crop quality of spring wheat remains high but has worsened against previous week highlighting impact of high temperatures in the US
- Rebound in the export outlook for wheat
- Lower output forecasts for Russia: 73.7 million tonnes against previous estimate of 76.6 million tonnes. Moreover, the strengthening of the ruble causes competitiveness of the Russian wheat on the global market to be limited
- Wheat may see similar price performance as in the previous year (price pulled back all the way towards rally’s starting point

Wheat price tries to bounce off the important support level marked by numerous local lows from 2018. Nevertheless, a pullback towards the 23.6% Fibo level around $450 handle (overbalance structure and long-term support level) cannot be ruled out. Weather conditions over the next 4-6 weeks will be a key factor for the wheat prices. Source: xStation5