Gold sees worst month since 2016, as markets seek clarity on trade talks

By Kenneth Afor

Gold prices moved sideways on Friday, with markets awaiting further developments on how U.S.-China trade talks would proceed after Beijing said it would take retaliatory measures against Washington for passing a law in support of Hong Kong protesters.

The metal was on track for its biggest monthly decline since November 2016.

Spot gold inched 0.1% higher to $1,460.08 an ounce. It has shed around 3.5% this month alone. U.S. gold futures were 0.4% higher at $1,459.40 per ounce.

China warned on Thursday it would take “firm counter measures” in response to U.S. legislation backing anti-government protesters in Hong Kong.

“(The signing of the bill) takes another step back at the possibility of a trade agreement with China, which really upset them quite a bit. That is why we saw equities come off and gold futures push up,” said Phillip Streible, senior commodities strategist at RJO Futures.

Investors have hopped on to the possibility that a “phase-one” trade deal between the world’s two largest economies could be signed soon, spurring world stocks to hit record levels and dampening demand for safe haven assets such as bullion.

Gold, generally considered a hedge during times of financial or political uncertainty, fetches little interest and costs money to store and insure. However, gold prices were still on track for their best year since 2010, having gained 13.5% so far in 2019.

Uncertainties surrounding the long-drawn trade war and recessionary fears have provided support.

“Gold has managed to hold above $1,450 since there is some bargain hunting. This is a good entry level for the ones who missed out previously,” said UBS commodity analyst Giovanni Staunovo.

Investors are closely watching U.S. data for signs on the health of the world’s largest economy, which could influence the U.S. Federal Reserve in its decision on further monetary easing.

Reduced expectations of further interest rate cuts by the Fed has weighed on spot gold prices, RJO Futures’ Streible added. “We could go down to $1,425 by the end of the year.”

Weekly commodities wrap up  (November 25-29, 2019)

Copper – Trade concerns and macro still in focus

Copper prices have been weighed down heavily by concerns over the ongoing trade war and slowing global manufacturing activities. A constructive mine supply side has provided little support to the prices over the year. On the refined side, both refined capacities and output are still growing out of China while demand growth has struggled across major Chinese and major European consumers.

Moving into 2020, copper mine supply growth is set to increase although the outlook still looked vulnerable to potential disruptions. The benchmark TC/RC for 2020 came in at US$62 per tonne/US¢6.2/lb compared to US$80.8/US¢8.08 in 2019, a level that is cutting into some marginal smelters’ margins. Demand in China is hoping for some support from stimulus measures from the infrastructure sector, but it is still too premature to be sanguine on the global demand recovery until we see solid signs of stabilisation in global activity as well as solid developments from China-US trade talks. We are currently slightly bearish towards prices in 2020 and forecast LME 3M copper to average at US$5,750/tonne as base case prices, but the risks are largely dependent on macro uncertainties.

Iron ore – More supply to return

2019 has been a volatile year for the iron ore market. The unfortunate Vale (NYSE:VALE) dam accident in Brazil raised concerns over supply tightness, with Vale forced to take around 90mtpa of capacity off the market. This pushed prices to as high as US$124/t. Although this move was clearly exaggerated by speculative activity. However, as we have seen a return of some capacity, along with a recovery in Chinese iron port stocks, prices have come under pressure once again, with the market trading sub US$80/t recently. To add to the bearish tone, steel mill margins have come under pressure, leading to some steel producers cutting operating rates.

For 2020, we continue to hold a fairly bearish outlook for iron ore prices. We expect that further Brazilian capacity will be brought back to the market over the course of the year, whilst there is still plenty of uncertainty around the global economy, and so this is likely to keep some pressure on steel mill margins. We currently forecast that iron ore prices will average US$81/t over 2020. The risk to this view is that we do not see Vale capacity continuing to return as quickly as anticipated, which could keep the seaborne market tighter than expected.

Coal – Weakness persist

Coal prices remain under pressure, with European prices down more than 35% since the start of the year, leaving them to trade just above US$50/t. For Europe, the outlook for prices remains weak. This is due to two factors. Firstly, EU carbon prices have been fairly strong. Secondly, gas prices in Europe have been very weak, with a significant amount of LNG making its way into the region, as LNG export projects ramp up. These two factors have supported a coal to gas switch for power generation, which has weighed on coal demand.

Soybeans – Trade war dependent

Soybeans have been the poster child for the trade war between the US and China. However more recently, as we have seen progress with phase one of the trade deal, Chinese buyers have returned to the market for US soybeans, with the government providing tariff free quotas. This has clearly been supportive for CBOT soybeans. However, we will likely need to see tariffs fully removed rather than just quotas being provided, in order to turn significantly more bullish on the market. On the supply side, the US soybean crop is set to be significantly smaller this marketing year. Firstly, given the ongoing trade war, farmers reduced 2019 soybean plantings. This lower acreage combined with weaker yields means that US soybean production is expected to fall year on year, and this smaller crop should help to lower elevated stock levels.

For 2020 US plantings, a lot will depend on how trade talks evolve over 1Q20. However, right now, the soybean/corn price ratio suggests that farmers should plant more corn at the expense of soybeans. Overall, we expect the CBOT soybean price to trend higher moving into 2020, with prices averaging US$9.10/bu over the year, driven by falling global ending stocks. A quick resolution to the trade war, however, could mean further upside. While a trade deal would provide upside to CBOT soybeans, it would in fact be bearish for Brazilian soybean cash values, with Chinese buyers likely to switch back to US soybeans.

Gold – Safe haven appeal

The gold market has had a strong year, with prices up as much as 21% at one stage, hitting a multi-year high of US$1,554/oz. This strength shouldn’t come as too much of a surprise, given the growing uncertainty in the global economy, with slowing growth and escalating trade tensions. These factors have increased the appeal for safe haven assets such as gold. Furthermore, more dovish policy from central banks has also provided support to gold.

Looking to 2020, we believe that prices will be dictated by the same themes as this year. As a result of trade uncertainty and concerns over global growth, we do see upside to gold prices from current levels. While if the US Fed turns increasingly more dovish, this only provides further upside. We currently forecast that gold prices will average around US$1,475/oz over the course of 2020.