Material Matters: A Golden Age & Other Commodities

Commodities | 11:00 AM

A glance through the latest expert views and predictions about commodities: tailwinds ongoing for gold; price outlooks for other commodities.

-Will geopolitical risks and supply-side constraints moderate the effect of monetary easing on commodities?
-Current Fed easing cycle expected to be benign
-Multiple factors underpin a new bull market for gold, and everybody is enthusiastic
-UBS’s favourite gold stocks

By Greg Peel

Central Bank Easing Cycle

Monetary policy easing cycles have traditionally been positive periods for commodity markets, ANZ Research notes. Support of commodity markets from easing monetary policy tends to be driven by several interlinked mechanisms.

The most immediate impact is through the currency markets. The US dollar tends to weaken, boosting the appeal of commodities. Additionally, lower rates improve investor appetite for risk assets. Lower borrowing costs improve the cost of storing and holding commodities. Easing cycles also signal a central bank’s intention to support economic growth, which improves demand expectations for industrial commodities.

However, every cycle is different. This time ANZ expects geopolitical risks and supply-side constraints can moderate the effect of monetary easing. The risk of supply disruptions in Russia and the Middle East is likely to remain elevated for the foreseeable future. Trade flows in metal markets remain disrupted by the US trade war.

This easing cycle also looks relatively benign, ANZ suggests. The subsequent depreciation in the US dollar is also expected to be mild, though the impact may differ by sector.

The analysts expect gold to outperform early in the easing cycle. Oil and base metals may lag until real economic activity picks up.

The Golden Age

The price of gold has soared this year-to-date by 39%, with another surge over the past month of 5%. This suggests gold may be overbought in the short-term. However, one would be pressed to find an analyst who doesn’t believe gold still has further to run.

A range of factors has been pushing gold prices up recently, Wilsons notes, with a number of these drivers seemingly linked by a couple of overarching macro mega-themes, namely, aggressive monetary and fiscal expansion, de-dollarisation and heightened geopolitical instability.

A key causal driver of gold’s recent run appears to be central bank accumulation. After tailing off in the 1990s, central bank gold holdings have been rising strongly for some time now. Emerging central banks have been strong buyers since the early 2000s. The pace of central bank gold accumulation has re-accelerated since the Russia/Ukraine war as many central banks seek to diversify away from the US dollar.

De-dollarisation represents the desire of not just central banks but many institutions and private investors to diversify holdings beyond US dollars. The rationale for de-dollarisation is multi-faceted, Wilsons notes, but revolves around the historical “reserve currency” role of the US dollar in the global financial system.

When this “monopoly role” of the US dollar is juxtaposed against burgeoning US budget deficits and general US policy uncertainty, Wilsons suggests the desire for de-dollarisation is not surprising. De-dollarisation appears to have been a key driver of the rally in the gold price in recent years, and in particular the gain in the current year.

Gold is also seen as a hedge against geopolitical tensions which have been on the rise, particularly since 2022. Increasing political polarisation and rising signs of authoritarian leadership across both the developing and developed world is arguably supporting the case for gold as a tail risk hedge in Wilsons’ view.