Commodity Wrap - Gold, Palladium, Silver, Coffee

Gold

• Significant oversupply on the gold market is still expected this year

• Increase in investment demand is being offset by drop in jewelry demand

• Demand in China shrank nearly 50% in Q1 2020 and dropped to around 150 tonnes

• On the other hand, ETFs bought over 400 tonnes of gold over the first four months of 2020

• Gold mines do not seem to be at a big risk of closures due to Covid-19 pandemic

• Cheap money should continue to support prices over medium- and long-term

Oversupply is once again expected on the gold market. On the other hand, investment demand may be on the way for a record year. Source: Bloomberg

Covid-19 pandemic poses the smallest risk for gold demand and supply out of all precious metals. Source: Bloomberg

ETFs increase gold holdings by over 400 tonnes year-to-date. This is equal to around 10% of annual demand for gold. Source: Bloomberg

Steep increase in money supply. The last time money supply grew more than 11% YoY was in the 80s. It is expected that this growth will surpass 20% in annual terms in the coming months. Situation should support gold prices. Source: Bloomberg

Palladium

• South Africa is responsible for over 70% of platinum and 40% of palladium supply

• Mines in South Africa are currently closed due to Covid-19 pandemic and it will limit supply of palladium on the market

• Low platinum prices point to a possibility of lower palladium supply in the future as palladium is being extracted jointly with platinum

• Significant decline in palladium demand due to shutdowns of automotive factories all around the world

• Nevertheless, forecasts for 2020 still point to big deficit on palladium market

• Gold price hints at palladium being oversold

Palladium prices are very high but it is justified by fundamentals. Once production around the world returns to normal, palladium should get a boost. Source: Bloomberg

There is significant divergence between gold and palladium prices. Source: xStation5

Silver

• Silver supply may be limited as the precious metal is mined along with other metals, like gold or copper

• Big increase in ETF demand will likely lead to a big deficit on the silver market this year

• Drawing parallels to 2008, low on the silver market may be still ahead of us. It should be reached within 90 days from the first big sell-off. On the other hand, central banks reacted more quickly now

Significant increase in ETF demand and limited supply. Big deficit on the silver market is expected for the second year in a row. It could lead to increase in prices in medium- and long-term. Source: Bloomberg

Silver price is already performing better than it did in 2008. Drawing parallels to 2008, silver price should start gradual recovery within 90 days from the first big sell-off. Source: Bloomberg, XTB Research

Coffee

• After a period of coronavirus-related increase in volatility, implied volatility on the coffee market begins to decline

• Coffee stockpiles on exchanges keep declining, what should be a positive factor for oil prices over long-term

• Number of open short positions is extremely low, hinting at potential continuation of a sell-off. Net speculative positioning remains elevated

• Coffee traders, mostly from Europe, are delaying deliveries due to big inventories built up earlier

• Buyers of Brazilian coffee seek a 3-month delay in deliveries

• Coffee production in Brazil is higher than expected. New supply is expected to hit the market at the end of May or beginning of June (one month earlier than usual)

• Coffee prices in BRL terms are record high, what may encourage exporters to sell out inventories

• Selling pressures should remain on coffee market over the short-term (until mid-year)

• Futures curve is more steep than a month and a week ago. Market expects big supply

Coffee stockpiles continue to fall, what can be reasoned with record high prices in Brazil. Inventories are being sold out to lock-in high prices. Source: Bloomberg

Number of open short positions on coffee is extremely low. On the other hand, this is not a strong selling signal as the number of long positions also dropped noticeably. Source: Bloomberg

Futures curve for coffee points to an expectation of a big supply. Source: Bloomberg