Commodities
6–7
The bulks and energy markets may have the greatest upside
potential over the next two to three months, as seasonal
demand rises.
Commodity markets have been choppy in recent months with
investors showing signs of returning after heavy selling in the first
quarter. Notably, recent price gains have been skewed towards
the precious metals and energy markets. However, this is a result
of safe haven flows, or concerns of an oil supply disruption on
the back of Iraqi tensions, rather than a reflection of greater
confidence over commodity demand.
While Chinese data has started to improve, there is still a healthy
level of caution on its sustainability. Therefore while the coming
months could usher in stronger prices, particularly for the
oversold bulks markets, much still hinges on the confidence of
Chinese consumers.
20%
15%
10%
5%
0%
Agriculture
Energy
In South Africa, striking platinum miners have returned to
work after a wage agreement ended a 5-month strike. As a
three month lag time is usually needed for full production to
resume, the news so far has had limited impact on platinum
and palladium prices in the near term. However, net positioning
in palladium and platinum have recently reached record longs,
potentially presenting substantial downside risks in prices
when inventory levels normalise.
Any positive Chinese data in the months ahead could trigger
a relief rally in iron ore prices.
2014 Commodity market returns
-5%
We had pointed out in May, that a gold/silver ratio of 67
was stretched relative to historical standards, and the risk for
silver prices was to the upside. Since the beginning of June,
silver prices have rallied by 12%, outperforming gold prices.
Accordingly, the ratio has retraced to a 3-month low of 62.
If gold were to continue to rise in the near term, we would
expect silver to continue outperforming and for the ratio to
move lower.
Precious Metals
Industrials
-10%
-15%
1Q14
2Q14
Source: Bloomberg. July 2014.
As long as physical demand remains lacklustre, gold’s recent
rally in June is unlikely to be sustainable.
The escalation of unrest in Iraq spurred renewed buying of
gold, lifting prices above its June low of US$1240/oz. However,
we believe that the longer term trajectory for gold prices
is downwards. Notably, China’s demand for gold remains
subdued and the domestic gold price is currently trading at a
low premium to the London spot price. It would likely require
greater CNY appreciation or lower gold prices before Chinese
demand for gold improves. In addition, it would take time to
run down the large stock holdings of gold which was built up
in the mainland over 1Q14, thereby keeping fresh