The commodities sector is heading for its first weekly gain in three weeks, supported by strong gains across the energy sector and grains, Saxo Head of Commodity Strategy Ole S. Hansen says.
Commenting on the global commodity markets ahead of the 5 November US presidential election, Hansen says precious metals gains have deflated after gold’s rally to a fresh record high attracted some profit-taking amid the USD strengthening and rising bond yields.
Hansen notes that financial markets are increasingly focusing on the upcoming US elections, as the outcome remains too close to call.
Overall, the Bloomberg Commodity Total Return Index, which tracks a basket of 24 major commodities split almost evenly between energy, metals, and agriculture, traded up 1.5% on the week.
On a year-to-date basis, the index has returned 5.5%, with the main contributing sectors being precious metals at 34% and softs at 21%, while losses have been concentrated in grains at -16.5% and energy at -4.7%, the latter primarily due to a 35% loss on natural gas.
“Gold and silver reached fresh highs earlier (last) week before encountering another correction attempt, largely influenced by rising US Treasury yields and a strengthening USD,” says Hansen.
“This unusual breakdown in typical market correlations indicates that traders are hedging against a potential ‘Red Sweep’, an electoral scenario in which Republicans gain control of both the White House and Congress. Such a political shift could lead to an unfunded spending agenda, further increasing the debt-to-GDP ratio and raising long-term fiscal sustainability concerns.
“Higher government borrowing might result in an oversupply of government bonds, pushing up borrowing costs across the economy. Conversely, the likelihood of a ‘Blue Sweep’ is lower, suggesting limited spending manoeuvrability under a Harris presidency, which reduces these worries.”
While gold’s record-breaking rally finally paused after the weight of profit-taking in response to rising bond yields and a stronger dollar saw prices reverse lower, silver, which in the previous week surged through key resistance-now-support at US$32.50, also ran into profit-taking after hitting a fresh 12-year high, according to Saxo’s Hansen.
He says the precious metals market has witnessed an unprecedented strong uptrend this past year, with gold and silver on a total return basis trading up by 31% and 38%, respectively, with only minor corrections seen so far during this extended rally.
“Whether that will continue at the same pace increasingly rests on the outcome of the 5 November elections, given what the result, as highlighted above, may do to the outlook for global trade relations, the dollar, government spending, and US debt levels,” Hansen adds.
Despite the risk of post-election correction based on a “buy the rumour, sell the fact” behaviour, our long-held bullish view on investment metals has not changed, given they are being supported by several drivers, most of which are unlikely to fade away anytime soon.
Hansen notes among others, these include concerns over fiscal instability — not least in the US — safe-haven demand, geopolitical tensions, and de-dollarisation driving strong demand from central banks, as well as China, where investors seek alternatives to rock-bottom savings rates and falling property prices.
While silver needs to hold support at US$32.50 to avoid another rush of long liquidation, gold will, following the latest US$153 rally, look for support at US$2,685, US$2,666, and ultimately the big one at US$2,600.
Write to Adam Orlando at Mining.com.au
Images: Saxo