The price of the yellow metal broke above the $1,930/oz level on Friday morning for the first time since end-April 2022, driven by some safe-haven demand, a softer dollar and yields, and weaker-than-expected U.S. macroeconomic data.
Investors have been moving some funds into the safety of Gold in recent weeks on the prospect of a global economic slowdown, as record-high inflation, energy crunch, and soaring interest rates could hit hard economic activity, and consumer confidence.
Gold is heading for a fifth straight week of gains allowing it to add almost $300/oz, or up nearly 20% off November’s low of $1,620/oz, rallying in tandem with a sharp drop in the U.S. dollar for the same period over the path of Fed’s monetary policy.
The prospect of smaller rate hikes by the Federal Reserve has pulled out steam from the hawkish Fed-led 2022’s greenback rally, letting the dollar-denominated gold recover toward the $2,000 key psychological level.
DXY, Daily chart
DXY-U.S. dollar index which tracks the value of the greenback against six major currencies, hit a fresh seven-month low of 101.57 on Wednesday, while the yields on the 10-year U.S. bond fell to nearly 3,35%, on hopes of less-aggressive U.S. rate hikes by the Federal Reserve.
Economists expect the Federal Reserve to hike its benchmark borrowing rate by 0.50 percentage points on February 1st; a 0.25 increase will demonstrate a slowing from what has been a blistering pace in 2022, possibly hinting to no more raises or even cuts by year end. The Fed hiked the rate by 0.75 percentage point four straight times last year before approving a 0.5 percentage point move in December.
The yellow metal also gained some traction after a series of weaker-than-expected corporate earnings and U.S. macroeconomic data this week, such as retail sales, and the PPI-Producing Price Index, which drove up the expectations for a lower U.S. inflation reading ahead, and an eventual pivot in the Federal Reserve’s hawkish rhetoric.
China’s reopening optimism, the hopes for an economic rebound in China together with tight copper supplies, and low global inventories have been driving up the price of the red metal recently, gaining nearly 30% since July 2022.
The China-led large-scale optimism on the metal market has pushed copper prices as high as $4.17 per pound, or $9,18 per tonne on Wednesday, recording their highest levels since mid-June 2022, despite the growing concerns about rising covid-19 cases in China and weakening global manufacturing and construction activity.
Dollar-denominated copper also receives support from the softer U.S. dollar, which has slid to near a seven-month low against major peers as forex traders see the Federal Reserve turning less hawkish after cooler inflation and employment data.
Robust demand for copper:
Metal traders turned bullish on copper in late December 2022, as they believe that Chinese demand for industrial metals will rebound after the country eased most of its anti-Covid measures, improving the demand growth outlook for copper.
According to Chinese state media CCTV, the southern manufacturing hub of Guangzhou plans 1,722 projects in 2023 worth nearly $1 trillion, lifting demand for copper throughout the year.
China is the world’s largest consumer of copper and the resurgence of industrial activity in the country will lift the demand for the red metal at a time when the copper market is experiencing tight supplies, and mining is becoming increasingly difficult and expensive due to the rising operational costs (fuel and raw materials).
Hence, the demand for copper is soaring amid the green transition, as metal is one of the main components for EV batteries and other renewable technologies.
Tight supplies:
On the supply side, prices were pushed further after news that the global copper smelting activity-especially in China and Chile- dipped in December as smelters shut for maintenance after a year of slow activity.
Overall, the global smelting activity for 2022 fell to its lowest level in the six-year history of data from SAVANT, the satellite analytics service Marex launched with Earth-I, tightening further the copper market.
The supply problem is worsened as many of the easily accessible copper deposits have already been mined around the world, while there have been several supply chain disruptions last year due to military and geopolitical instability (Ukraine war, Russian sanctions) or natural disasters in countries that are the major producers of copper (Chile, Kongo, Zambia).
Low copper inventories:
The supporting catalysts for copper prices continue at the stockpile front as well, with stockpiles holing by metal exchanges remaining low after a year when copper production was hit by energy shortages in Europe and China.
All these main catalysts are contributing to a tight supply-demand balance for copper, leading to higher prices and potential shortages in the next years as the falling supply won’t be able to match soaring demand.
The precious metals have extended last year’s rally into 2023, driven by the ongoing weakness in the U.S. dollar, and the falling bond yields on hopes for a less hawkish Federal Reserve in the next months, coupled with safe-haven demand amid fears of a potential economic recession in 2023.
The price of Gold touched the $1,880/oz key level this morning, its highest since early May 2022, while Silver traded above the $24/oz key resistance level, its highest since late April 2022.
Gold prices jumped from $1,830/oz to near $1,870/oz, or up 2% last Friday, boosted by softer U.S. jobs data (U.S. NFP-nonfarm payrolls grew at their slowest pace in a year in December), which pushed up the expectations for a lower U.S. inflation reading this week and an eventual change in the Federal Reserve’s hawkish rhetoric.
The softer NFP reading calmed concerns of the market participants an overheated U.S. employment market will prevent inflation from easing further this year and pushed up expectations that the Federal Reserve will soften its hawkish stance sooner than expected, letting up pressure on gold and other non-yielding assets.
On top of that, the dollar softened further on Monday morning as forex traders turned bearish on the greenback, with the DXY-U.S. dollar index hitting a fresh six-month low of 103.50 this morning while the yields on the 10-year U.S. bond fell to near 3,60%, on hopes of less-aggressive U.S. rate hikes by the Federal Reserve, making the dollar-denominated gold and silver further cheaper for overseas buyers.
The bullish outlook for precious metals is supported by the expectation that the Fed is ready to further slow its pace of interest rate hikes, with most of the traders pricing in only a 25-basis point hike in February, despite the warnings from the central bankers for higher rates for longer to bring back the inflation to Fed’s target of 2%.
Crude oil and natural gas prices have started the new year on the left footing as the growing worries about the global economy, the contraction of global manufacturing activity, the soaring Covid-19 cases in China, and the unexpected warmer winter weather have weighed on the energy prices.
Crude oil plunged 10% in two trading days:
The price of the international crude oil benchmark Brent tumbled 5.2% to near $78/b and the U.S-based WTI crude slid 5,5% to $73/b on Wednesday, as the energy participants worry that the resurgence of Covid cases in China could damage demand growth outlook for petroleum products in the coming months.
Both Brent and WTI prices have lost nearly 10% over the first two trading days of 2023, posting their worst yearly start since January 1991, as investors also worry about a potential global recession coupled with the deterioration of the industrial activity in the world’s three biggest oil consumers, the United States, China, and Eurozone.
U.S. and Chinese manufacturing activity contracted further in December, dropping for a second and fifth straight month respectively, while similar industrial weaknesses occurred in Germany and France during the final months of last year, adding to the pessimism around industrial crude oil products demand.
Natural gas price sink on warmer weather:
The record-high winter temperatures across Europe, the lower-than-expected gas demand, and the full gas storage have been weighing on the prices of Dutch TTF recently, the benchmark European gas contract, which fell more than 10% on Wednesday to as low as €64/MWh (per megawatt hour), the lowest level since November 2021.
Dutch TTF natural gas contract, Daily chart
The contract reached a record-high of €342/MWh last August, after Russia cut the gas flows to Europe via the Nord Stream 1 pipeline for maintenance reasons, as part of Moscow’s weaponization of gas to the Western allies. Russia was supplying as much as 40% of the EU’s yearly gas demand before the energy embargo at the end of the year.
The warmer weather in Europe has declined the demand for heating by more than 15%, allowing the countries to send more gas into their storage facilities, which stood at nearly 84% at the begging of 2023. The storage levels stand some 30% higher than in 2021 and more than 10% higher than the average of the previous five years.
At the same time, the milder-than-normal winter weather in China and Japan, the world’s two largest LNG buyers, has curbed the local gas demand in the heart of winter, which could free LNG cargo to go elsewhere, especially in gas-thirsty Europe and ease further the energy crisis.
A similar picture in the U.S. Henry Hub gas prices, which dropped as low as $4 per million British thermal units yesterday, near its lowest price in almost a year, and 40% cheaper than its level in mid-December.
Brent and WTI crude oil prices climbed to near $85/b and $80/b respectively on Tuesday morning as a severe Arctic snowstorm, frigid cold, and blowing winds, which swept across the U.S. over the last few days, have halted some crude oil and gas production and has also increased the demand for heating oil.
One of the coldest Arctic events on record is expanding across most of the United States, having pounded regions from the upper U.S. Midwest to the Northeast, and toward areas as far south as Texas and Florida.
According to Reuters, the crude oil production in North Dakota was cut by 300,000 barrels a day and the U.S. natural gas production declined by 10%-15% because of the blizzard.
Hence, the high winds in the Texas Gulf Coast also temporarily shut down LNG exports and petroleum products to other countries, especially in Europe and South America.
Market reaction:
Oil contracts have extended last week’s gains of 4% driven by the threats of Russian President Putin to cut production by between 500,0000 and 700,000 barrels per day in response to the price cap of $60 per barrel placed on Russian exports by the G7 grouping of countries on December 05, 2022.
Brent crude, 1-hour chart
Both oil prices have posted a significant rally over the last few days, trading over 12% higher relative to their 2022 lows of $75/b and $70/b respectively, set at the beginning of December, as energy traders bet on a potential China reopening which could provide a big boost in oil demand.
According to S&P’s latest forecast, oil demand in China could hit 15.7 million barrels per day in 2023, which would represent an increase of 700,000 barrels compared to 2022.
Increased oil demand from China could offset a potential slowdown in demand for petroleum products across the world amid the likelihood of an economic recession due to the hiking of interest rates and record-high inflation.