Gold price consolidates strong gains; downside risks mount for crude
London (Aug 23) The commodity sector has maintained positive momentum so far this August with the Bloomberg Commodity Index trading higher for a fourth consecutive month. However, following the pandemic-led collapse during the first quarter, the year-to-date performance remains in the red by 11%. Gains have so far this month been broad-based, led by the energy sector and industrial metals.
The risk of rising inflation and the weaker dollar remain two key supporting themes that continue to attract attention. Improved U.S. data earlier in the month and the lukewarm approach to yield-curve control that was signalled in the latest FOMC minutes have led to a small rise in bond yields this month. This has helped to trigger profit-taking in gold which, following its July 8.5 per cent rally, has run into consolidation. This helps to explain why it is found at the bottom of the table while silver, in third place, has managed to build on its 30% rally last month.
Lumber, a small futures market that we do not normally spend time on in this update, has climbed to the top of the leaderboard, hence it’s deserving of a closer look. Home improvement companies around the world have experienced strong demand from stay-at-home consumers spending money on their home instead of going out. In the U.S. this trend can be seen through the strong performance and recent comments from Home Depot (HD) and Lowe’s (LOW). Both stocks have more than doubled since the March low as customers have flocked to their stores to buy goods, including lumber.
The Random Length Lumber Futures for September delivery have rallied by 98% year-to-date to reach a record $801/1000 board feet, more than double the average price during the past ten years. Apart from increased demand from stay-at-home consumers, record low-interest rates have spurred a jump in new constructions. This, at a time where inventories are low due to tariffs US President Trump introduced on lumber imports from Canada. The price has moved deep into overbought territory following several consecutive days of finishing at the daily limit allowed by the exchange.
HG Copper reached a fresh two-year high this past week, thereby continuing its strong recovery from the pandemic lows in March. Apart from the recent dollar weakness, demand, especially in China and more recently in the US, it has recovered strongly. Adding to this is a pandemic-related reduction in supplies of mined copper and scrap. These developments have led to sharp declines in stockpiles at exchange-monitored warehouses, not least on the London Metal Exchange (LME) where stocks have fallen rapidly to a 13-year low, thereby raising short-term supply concerns.
But copper’s continued advance depends to a certain extent on how much of the rapid inventory drop has been driven by speculation and how much is actual demand. Increased focus for inflation hedges, which have triggered strong demand for gold and inflation-protected bonds in recent months, may also have impacted the demand for other hard assets, such as copper. We remain sceptical about copper's ability to move higher at this stage where an economic dark cloud continues to hang over the market. A weekly close above $3/lb in New York and $6,600/t in London will be needed before any talks about a potential 10% extension to $3.3/lb.
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