Commodity Wrap - Gold, Silver, Oil, Coffee

Gold

• Gold price reaches all-time high and halts rally just $20 below $2,000 handle

• Some profit taking can be spotted on gold as USD gains

• Copper-to-gold price ratio shows that gold is relatively undervalued. With copper traded at $6,500, gold could rally towards $2,170. With copper price at $7,000, and taking into account US yields, gold could trade as high as $2,333 per ounce. On the other hand, should we see copper price correct lower to $5,000-6,000, gold price could remain in $1,677-2,000 range

• Number of open long and short positions on gold is rising. Net positioning does not hint at gold being overbought

• ETFs have been buying gold for 22 days in a row already. ETF gold holdings increased 29% year-to-date

Copper-to-gold price ratio remains high. In theory, it means that more gains could be coming for gold in case central banks uphold loose monetary policy. Source: Bloomberg

Net speculative positioning does not hint at gold being overbought yet. ETFs continue massive gold buying spree. Source: Bloomberg

Global economy could still be at the beginning of a coronavirus related stimulus. Taking a look at 2008-2011 period, when unconventional monetary policy tools were first used, gold price could be set for more gains. Source: xStation5

Silver

• Silver follows gold higher. However, some profit taking can be spotted on the silver market as well

• Investment demand for silver remains very high. ETF silver holdings increased over 43% year-to-date

• Silver looks to have stronger fundamentals than gold. Not only silver demand has increased, its supply is limited. Silver Institute expects 7% decline in silver mine production this year

• Citigroup points out that silver seems to perform better as an inflation hedge than gold. Citi expects silver prices to reach $30 per ounce by mid-2021

• Citi expects gold-to-silver price ratio to reach 70 over the next 6-12 months

• On the other hand, UBS says that it still favours gold due to much higher volatility on silver

• US Mint limits amount of gold and silver coins available to authorized dealers due to supply constraints

Silver price reacted to a major supply zone at $26 and has trimmed part of recent gains. The next medium-term targets for silver can be found at $30 and $35. Source: xStation5

Oil

• Oil prices remain high thanks to a weak US dollar. Oil price volatility decreased significantly in previous weeks

• Market hints at weakness ahead. Current contango (spread between September and October Brent contracts) is the biggest since the end of May

• OPEC+ reduces output cuts starting from August. Around 2 mbpd of production may return to the market

• Amount of crude stored in off-shore facilities is still around 250% year-over-year higher. Stockpiles on tankers start to pick-up

• Dovish Fed message and quick approval of next US stimulus bill could keep oil prices support in near-term

Contango on the oil market increases, which points to its weakness. Source: Bloomberg

Oil stockpiles on tankers begin to rise once again, signalling potential demand issues. Source: Bloomberg

Coffee

• Coffee and sugar prices caught a bid amid BRL strengthening

• Coffee price jumps above 100 cents per pound and is the highest since mid-May

• Weaker US dollar and better performance of Brazilian economy boost BRL in spite of high number of confirmed Covid-19 cases in Brazil

• Fitch forecasts that global coffee spending should increase 5.8% in 2020 - above average from 2015-2019 period

• Speculative positioning looks interesting - number of long positions rises and number of short positions decreases. Such a setup heralded long upward waves in the past

• Coffee stockpiles on global exchanges continue to fall. Should pace of decline remain unchanged, stockpiles would reach lows from 2016/17 by the end of the year

Significant divergence between long and short positions is a good signal for coffee bulls. Source: Bloomberg

Stockpiles continue to fall. In theory, we may still expect a drop towards 2016/17 lows this year. Source: Bloomberg