Commodities weekly: Tariff-led recession pain triggers sharp reversal

By Ole Hansen, Head of Commodity Strategy at Saxo

This past week, we saw a justified meltdown in risky assets as markets absorbed the blow of Trump’s far larger than expected tariffs on all its major counterparts, sparking threats of retaliation and a broad selloff around the world on concerns that a global trade war on this scale and magnitude will drive an economic slowdown—not least in the US, where inflation forecasts have spiked, and sentiment among consumers and businesses has fallen sharply during the past couple of months.

There is a general understanding of why Trump wants to reshape the global economy, with his primary goal being the reversal of a two-decade trend of US companies moving production overseas—especially to Asia—to capitalise on cheaper labour costs, which, in turn, has boosted their stock prices but contributed to domestic job losses and economic stagnation in certain sectors and parts of the nation. This shift has had significant impacts on American manufacturing and the broader economy, as well as its ability to be self-sufficient in key materials.

Economic implications: short-term pain, long-term uncertainty

What Trump delivered on this so-called "Liberation Day" was an economic war declaration likely to cause chaos across global supply chains, while in the short term raising the risk of an economic fallout, hurting demand for key commodities, with energy and industrial metals being the sectors most at risk. While stock markets crumbled, investors sought shelter in secure government bonds, and for a change not in the US dollar, which normally acts as the go-to currency during times of heightened uncertainty. Instead, the euro, yen, and especially the Swiss franc have served as safe havens, while the US dollar weakened broadly. The narrative driving the US dollar lower is one of reduced portfolio allocations to the US as the policy will bring most disruption to the US economy in the near term.

BCOM’s year-to-date gain cut in half

The Bloomberg Commodity Total Return Index (BCOM) trades down 4% on the week, and following a brutal week the annual gain has been cut in half. As per the table below, the growth- and demand-dependent sectors of energy and industrial metals suffered the steepest losses; the precious metal loss was limited by gold’s resilience while the agriculture sector traded mixed to lower.

On an individual level, major losses were recorded in crude oil and refined products, copper, silver, and cotton, while a handful of different commodities barely scraped even, led by natural gas, gold, corn, sugar, and not least wheat, the best performer benefiting from a weaker dollar.

Gold’s safe haven credentials grow despite setback

Gold’s safe-haven role temporarily received a setback with spiking volatility driving another burst of deleveraging similar to, but so far nowhere near the same scale seen during the early stages of pandemic panic back in 2020 when gold over a ten-day period slumped by 13% before recovering strongly as inflation worries and stimulus helped create fresh demand. Gold prices hit a record high on Thursday before the mentioned deleveraging helped drive a USD 100 correction.

However, the combination of heightened global economic tensions, the risk of stagflation, a weaker dollar combined with collapsing US real yields as nominal yields fall and inflation expectations rise, will in our opinion continue to support bullion, and we maintain our forecast for gold reaching USD 3,300 this year. Adding to this a market that is now aggressively positioning for the Fed to deliver more cuts this year—at current count a full 100 basis points of easing by year end. The recent transfer of gold from around the world to US warehouses monitored by the COMEX futures exchange in order to get supplies behind a potential tariff wall may now see a part reversal after bullion was made exempt, potentially weighing on prices in the short term.

Gold’s correction from a fresh record has once again been relatively shallow with several key levels of support yet to be challenged. The most important in our opinion being an area around USD 2,950 which apart from being the February top also represents a 0.382 Fibonacci retracement of the run-up from late December. A rejection before and at this level would signal a very weak correction within a strong uptrend.

Silver slumps on rising recession fears and COMEX indigestion

Silver, meanwhile, was heading for an 8% weekly slump, with most of the damage being inflicted by economic growth concerns as silver derives around 50% of its demand from industrial applications. The weakness was led by selling in the New York futures market after a fact sheet distributed by the White House stated that bullion (gold) and "other certain minerals that are not available in the United States" should not be subject to reciprocal tariffs.

With silver and platinum imports accounting for the bulk of US consumption, traders concluded that these two metals would not be impacted, and with that, the tariff premium on futures prices in New York compared with spot prices in London collapsed, hurting an already weakened sentiment. A 51% year-to-date increase in silver flows to COMEX-monitored vaults now faces the risk of a partial reversal, potentially adding supply to a market already weakened by short-term recession concerns.

In addition, prices were hurt by a collapse in the COMEX futures premium on speculation silver, just like bullion, would be exempt from tariffs after a fact sheet from the White House potentially hurting industrial demand which accounts for around 50% of silver’s total demand. Thursday’s slump most certainly qualified for its worst since December 2023, driven by a double whammy of economic worries hurting its industrious credentials, and not least a complete deflation of the COMEX futures premium after a fact sheet provided by the White House raised doubts about silver being included in tariffs.

Silver’s dramatic slump extended into Friday’s session, and with gold holding steady around USD 3,100, supported by the dollar and yield slump, the gold-silver ratio has surged above 100 ounces of silver to one ounce of gold, the highest since 2020, potentially offering some relative value once the dust from this latest setback settles. In the short term, traders will focus on support just below USD 31, where we find the 0.618 retracement of the run-up since late December, as well as the 200-DMA and trendline from February last year.

Crude prices tumble on recession risks and accelerated OPEC+ production hike

Crude oil, meanwhile, was heading for its worst week in a year, with Brent crude tumbling more than 11%, in the process slumping through previous strong support in the USD 68 area. China’s aggressive countermove to US tariffs, announcing their own 34% duties on US goods, with Europe likely to follow soon, all but confirms we are heading towards a global trade war—a war that has no winners, and which will hurt economic growth and, with that, demand for key commodities such as crude oil and refined products. At this stage, we have not only entered a demand destruction phase, but also supply destruction from high-cost producers, which over time will help cushion the fall.

The weakness was further accelerated by an OPEC+ surprise decision to accelerate planned production hikes starting in May. To understand this strategy, it’s crucial to examine the WTI forward curve, which is showing prices below USD 60 from next January and onwards. A recent Dallas Fed survey of US producers revealed that an average price of USD 65 is needed to profitably drill a new well. With crude oil prices under pressure, US production risks stalling sooner than anticipated, potentially allowing key OPEC+ members to regain lost market share.

Partly or potentially fully offsetting this production increase are the impacts of sanctions and tariffs on countries like Venezuela, Iran, and Russia. These nations may struggle to maintain production in the coming months, providing an opportunity for GCC producers, particularly Saudi Arabia, the UAE, and Kuwait, to increase output and reclaim market share both within OPEC and globally.

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