Widespread commodities decline in July, with gold as the notable exception

The month of July, normally a relatively quiet period of the year across markets, ended up being nothing but quiet. A whole range of developments and ongoing geopolitical worries, helped drive gold to a fresh record high while other growth and demand-dependent sectors suffered.

US politics were rocked by the assassination attempt on Trump, followed by President Biden announcing that he would not seek re-election, instead passing on the baton to Kamala Harris. In China, the mid-July Third Plenary Session of the 20th Central Committee of the CCP was met with significant disappointment among analysts and observers, primarily due to its perceived lack of immediate and concrete economic reforms. Not least considering how economic data continued to spring negative surprises, thereby forcing the market to adjust lower their demand outlook for key commodities from crude oil to industrial metals such as copper. Also last month, the stock market saw a loss of momentum as investors began rotating out of this year's high-flyers, especially the tech sector, and the volatility spike helped drive a general loss of risk appetite while sending key commodities lower.

Overall, the Bloomberg Commodity Total Return Index ended down 4% last month, its worst monthly performance since May last year, with all sectors apart from precious metals trading lower on the month. During the week, however, the overall monthly loss was somewhat reduced as key markets started to recover after weeks of heavy selling from hedge funds cutting their exposure began to dry out. Year-to-date, the index trades up 1% with the main sector moves being an 18.1% rally in precious metals and a 19% drop in the grains index.

In addition, a geopolitical risk premium returned to crude oil and also gold in response to renewed worries about stability in the Middle East, after Hamas said Israel had killed its political leader, who was on a visit to Iran. Together with rumblings between Israel and Hezbollah in Lebanon, the market is once again forced to focus on the unlikely risk of the month-long conflict spilling over to other parts of the Middle East, which ultimately could see the supply of energy being disrupted for a period of time.

Finally, global markets including growth and interest rate-sensitive commodities received a boost following after the FOMC made several changes to its statement that suggested a dovish shift, with Chairman Powell laying the groundwork, depending on incoming economic data, for a September rate cut.

Precious metals

Gold (+4,1%) reached a fresh record this month just below USD 2500—Saxo’s end-of-year target—after traders, following a succession of weaker US economic data prints, lifted expectations that a US rate cutting cycle could begin in September with additional 25 basis points cuts now seen at the following three meetings. The latest strength was supported by another round of soft US economic data prints on Thursday which helped drive the policy-sensitive 2-year yield down to a 14-month low. Lower funding costs for holding a position in a non-interest paying metal, such as gold, will increase its attractiveness, and during July, we have seen some early signs that interest rate-sensitive investors have started to warm up to gold, with the total holdings across the major exchange-traded funds showing the biggest monthly increase since March 2022.

Also, this week, the World Gold Council published their Gold Demand Trends Q2 2024, and despite record prices, the organisation saw record demand with OTC investment driven by wealthy families and individuals worried about US government debt levels and uncertainty about the outcome of the US presidential election.

Silver (-1,6%) got caught up in the selling that hit the industrial metal sector (-6.8%) led by aluminium and copper. In addition, and opposed to gold, both copper and silver had been left exposed to long liquidation from hedge funds holding elevated positions, bought at levels that could easily be reached as the short-term fundamental outlook began to deteriorate. However, the combination of bullish bets being cut to a four-month low, continued gold strength and silver’s recent +15% underperformance against gold may help re-ignite interest for a metal that by many is forecast to perform well in the coming years amid rate cuts, robust industrial demand, and supply constraints.

Copper (-4,4%) has so far managed to find support ahead of USD 4 per pound in High Grade (NY) and around USD 9000 per ton on the LME in London. In recent weeks, the High Grade net long has been cut by 74% to a three-month low. With the price for importing copper to China once again carrying a premium, we may see the first signs of a market stabilizing.

Gas and oil

The energy sector suffered a 7.6% setback last month, led by a 21.2% drop in natural gas amid ample supply from rising production and normal weather keeping demand for cooling relatively subdued. European gas prices rose last month amid concerns about short-term risks to supply on escalations in tensions in the Middle East.

Crude oil’s loss was reduced to around 3% following an end-of-month boost from the mentioned geopolitical developments. It has been argued throughout the latest stage of the recent correction that the move had more to do with long liquidation from hedge funds and technical selling from others, than an actual deterioration in the fundamental outlook, and we tend to agree with this observation, potentially setting the stage for another rebound in the coming weeks.

Crop friendly weather sends grains lower

The grains sector suffered a 6.5% setback last month with corn, soybeans, and wheat all trading near four-year lows amid the prospect of another strong US crop production year, combined with slow economic growth and bumper domestic harvests in China potentially slowing imports of the three major crops from the world’s top importer of food commodities.

While the US weather forecasts point to crop-friendly weather during the run into the harvest period, some concerns have emerged in Europe where the Paris Milling wheat contract shows signs of consolidation as a period of heavy rains in France, a major exporter, look set to yield the smallest harvest in at least a decade. In addition, traders will also be monitoring the wheat harvest in the previously drought-stricken Black Sea region.

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