Gold has faced headwinds from a strong dollar and rising rate since March. Nevertheless, silver has underperformed gold over the period given relatively little support coming from industrial demand. Silver is often characterised as a leveraged play on gold as it can exhibit larger moves in either direction. In the twelve months after the March 2020 Covid crash in markets, silver outpaced gold meaningfully. At this juncture, the gold to silver ratio is around 85, meaningfully above its historic average which tends to be in the range of 50-60.

On October 19^th, President Biden announced that US will release 15 million more barrels of oil from its strategic reserves. This is the final tranche of the 180 million barrels in total that have been released from the reserve since May. The US administration has suggested that it will look to refuel the strategic reserve when prices fall below $70/barrel. Both WTI and Brent oil benchmarks have edged lower during the month of October.

Inventories of many commodities are significantly below historic average. And the number of commodities in backwardation - where spot prices are higher than futures prices - are at historic highs. Both signal tight supply and demand dynamics. Judging by net speculative positioning and pricing technical, pessimism has set into many commodities. Despite the recessionary fear, this pessimism appears unjustified, when looking at the fundamentals and we may see a short-covering rally in several commodities as those positions unwind. We expect supply of many commodities to continue to tighten. High energy costs are forcing metal smelters to halt operations. The Organization for Petroleum Exporting Countries and its partners (OPEC+) is clearly unsatisfied with recent oil price drops and has started to intervene. The safe passage of grains out of Ukraine isn’t guaranteed beyond November.

The entire precious metals complex has been weighed down by gold particularly in the second half this year. Having said that, Metals Focus envisage both platinum and palladium to finish the year in a supply deficit. This is mainly due to a reduction in new mining supply from South Africa, the largest producer of platinum group metals (PGMs). Autocatalyst demand for both metals remains strong. Furthermore, in recent days, news has also emerged of a potential London Metal Exchange (LME) ban on Russian commodities. If this does materialise, it is most likely to impact industrial metals like aluminium, nickel, and copper. But with Russia being a key producer of PGMs, it is possible that markets perceive this development as a bullish signal for platinum and palladium as well.

The Federal Reserve (Fed) delivered its third back-to-back 75 basis point rate increase in September. This maintained the upward pressure on the US dollar and Treasury yields, and downward pressure on gold. But even though the US is expected to keep tightening policy in the near term and do so at a faster pace than other major economies, the notion of peak hawkishness from the Fed is beginning to enter the market discourse. Peak hawkishness could be a prelude to an eventual dovish pivot from the central bank. Based on this emerging sentiment, gold bounced back in the last week of September and the first week of October. Gold’s net speculative positioning, a measure of sentiment, remains meaningfully subdued and is hovering around 2 standard deviations below the preceding 5-year average. This means that there is significant potential for sentiment to lift gold as the upward pressure on dollar and Treasuries eases.

Industrial metals have historically been cyclical. In this current downturn, we are finding that metal prices are suffering, as they have done in the past. However, the importance of base metals in delivering the energy transition has never been greater. We are currently living in an energy crisis exacerbated by the war in Ukraine. Europe wants to accelerate the energy transition to reduce reliance on Russian energy sources. That will place a higher onus on renewable energy sources coupled with battery storage to meet our energy needs. In short, that will require a lot more metals. However, the production of many base metals is declining. That’s partly due to falling prices, making it more difficult to justify the capital expenditure. Also, high energy prices are making the smelting of metals uneconomical. As a result, current inventory levels for industrial metals are meaningfully below their preceding 5-year average. We do not believe the year-to-date price performance reflects that degree of tightness. And there is ample room for an upward correction.

European Union carbon Allowances (EUAs) fell 17% in September. That marks the worst monthly decline since March 2020 i.e., at the depth of the COVID crisis. We don't think such pessimism is justified. Economic activity, while likely to decline, is unlikely to be as negative as we saw in the months of shutdowns in 2020. Also, the EU Parliament is likely to vote against the proposal by the European Commission to raid the Market Stability Reserve (MSR) to fund REPowerEU. As we commented on in Is the EU ‘shooting from the hip’ by raiding the Market Stability Reserve?, tapping the MSR would not only increase the supply of EUAs, but would send a negative signal about the EU’s resolve to control excess supply and make market participants fearful of excessive and ad-hoc policy interference. Parliament’s decision to reject the proposal we believe should reverse the price declines that came in June 2022 when the Commission put the proposal forward. Parliament and the Council (chaired by the Czech Republic) instead favour front-loading sales of EUAs member countries had planned to sell between now and 2030. We believe as aggregate supply does not change in this revised proposal, the plan should not be price negative. If prices do decline in response to the front-loading, that should open an even better entry point.

US Henry Hub natural gas, which had been posting outsized gains over the summer, came crashing down by 25% in the month of September. As we entered September, summer air conditioning demand waned (summer 2022 was extraordinarily hot in the US), thus driving a sharp decline in natural gas demand. While the demand for that natural gas is high in Europe and Asia, the US’s ability to export it to these markets has been hampered by the fire at Freeport’s liquefied natural gas (LNG) terminal. The terminal accounts for close to 20% of the US’s export capacity. The partial opening of this terminal is expected in November, and we expect that to reduce US inventories and send prices higher when the time comes.

Industrial metals remain down even though the energy crisis in Europe is brewing a very tight metals market in the coming months. Production of metals like aluminium and zinc is very energy intensive and many European producers have cut production given the surge in energy prices. Europe’s largest aluminium smelter, Aluminium Dunkerque said that it would close 22% of production by 1 October, equivalent to 64Kt, noting that electricity prices are “way too high to restart production at full capacity. Europe’s aluminium production has reached its lowest level since the 1970s (source: Bloomberg). The tightness in supply this drop in production will bring is currently not reflected in prices. Aluminium’s futures curve is still in contango (higher futures prices than spot prices). This suggests that, for now, markets are fixated on an impending recession and paying little attention to how tight the market might be when Europe comes out of recession, or somehow avoids it altogether.

The Ethereum network expanded the Bitcoin-conceived idea of a decentralised blockchain and added new functionality to the blockchain. It introduced programmable applications and smart contracts that would automate decisions and transactions. Smart contracts are self-executing pieces of code that create conditions for a certain action to take place. This means that it is the code that decides whether an action can take place or not, not a company or individual. This was a major breakthrough. Instead of having to rely on a centralised institution, or the subjective judgement of a person, the code would execute the transaction after certain code-determined conditions were met. Instead of having to trust a company or individual to conduct a transaction, the Ethereum network created a decentralised peer-to-peer network architecture where trust was decentralised. Ethereum developers say their main goal was to create a settlement layer for the internet of value.