Commodity Wrap - Gold, Natural Gas, Copper, Silver (09.05.2023)

Gold

• World Gold Council report showed a decline in gold demand in Q1 2023, compared to previous two quarters. On the other hand, official sector (mostly central banks) continued with high pace of purchases and set a fresh Q1 record

• Central banks purchased 228 tonnes of gold in Q1 2023, led by central banks from Singapore and China. While central banks purchased just 88 tonnes in Q1 2022, purchases in full-2022 exceeded 1000 tonnes, what was a record year

• ETFs kept selling out gold holdings in Q1 2023 but at a much slower pace than in previous three quarters. Back in Q1 2022, ETFs increased their net gold holdings in the aftermath of Russian invasion of Ukraine

• WGC also points to increase in investment gold demand

• Gold briefly traded at record highs, above $2,075 per ounce, after FOMC decided and what looks like to be a final hike in a cycle

• Drop in inflation as well as increasing hopes for a central banks' dovish turn could help boost demand for gold not only from ETFs but also OTC investors

Gold demand dropped in Q1 2023 compared to a year ago quarter or previous too. On the other hand, demand structure looks solid and should ETFs join the buying spree, gold may be set for even stronger gains. Source: WGC, XTB

Gold is highly correlated with 10-year US yields, which have been holding up on quite elevated levels (limiting outlook for gold price gains). Should yields break out of a trading range, gold may enjoy elevated volatility even if ETFs' activity fails to pick up. Source: Bloomberg, XTB

It should be noted that futures on US bonds are currently extremely oversold by speculators. The previous such extreme situation took place in 2018, just after the Fed pivot. Should the situation repeat itself one may expect a drop in yields from current levels. Source: Bloomberg, XTB

Natural Gas

• US temperatures are on the rise and forecasts for mid-May point to above-average temperatures on the West coast and in Florida. Temperatures are expected to remain relatively low in Texas and around

• Number of cooling degree days is on the rise but still remains within 5-year range

• Natural gas production in the United States remains above 100 billion cubic feet per day, but exports are rising as well, mostly thanks to Freeport LNG terminal resuming operations. Exports data hit a record high for maritime and land natural gas exports in April

• The latest EIA report showed an inventory build of just 54 billion cubic feet. However, the biggest inventory builds ahead of summer season should occur near the end of May

• Futures curve points to weakening demand for July and August contracts. Prices for August and October contracts are dropping slightly less. November contract is quoted higher compared to a month ago

Weather outlook for the United States suggests that natural gas consumption may be boosted by increased demand for cooling. Source: Bloomberg, NOAA

Number of cooling degree days is on the rise but remains in a 5-year range. Source: Bloomberg

Positioning data for natural gas shows that investors are not as active as they used to be in February or March. Source: Bloomberg, XTB

NATGAS is trimming gains it made during April. Seasonal patterns suggest that prices may be moving sideways until mid_june. Simultaneously, history shows that periods of range trading at lower prices used to be rather long, and lasted as long as half a year. Source: xStation5

Copper

• Copper launched trading mixed after a long weekend (trading in London was suspended for Kings Charles III coronation)

• Copper stockpiles on global exchanges are dropping again and are now close to record lows. This should be a positive information for prices but inventory drops in 2021, 2022 and March this year did not turn out to be such bullish triggers

• Chinese credit impulse is once again positive, after a brief drop in January, but remains at relatively low levels

• Net speculative positioning are dropping below 0 again, meaning that sellers are now more abundant in the market than buyers

• Copper trades near record levels in terms of seasonality. 5-year average suggests that prices may struggle in Q3 2023 and recover in Q4 2023 (after a rather flat Q2 2023), while long-term average points to declines until mid-year and recovery afterwards

Copper stockpiles are dropping again but changes in inventory levels were a rather poor predictor of copper's moves over the past 2 years. Source: Bloomberg

Seasonal patterns for copper are not flashing any clear signals as well. 5-year average points to a flat performance in Q2 2023 while long-term average suggests a possibility of a drop. Source: Bloomberg, XTB

Silver

• Similarly as it is in the case of gold, ETFs are not too active on silver market right now

• Gold gained more this year than silver but move on silver is accelerating

• Upside potential for silver looks large, especially when we consider that this precious metal has not yet reached 2020 highs

• Gold-to-silver price ratio is around 80 currently, while in historical terms it was more closer to 60-70

• Should gold continue to range trade in the $2,000 area and silver continue to gain, silver price may rise to as high as $28-33 per ounce

Gold-to-silver price ratio remains elevated. Long-term averages for this ratio are closer to 60-70. Source: Bloomberg