Silver often exhibits a leveraged relationship with gold. We experienced this in the twelve months after the March 2020 Covid crash in markets when silver meaningfully outperformed gold while both metals rallied. In 2022, things went in the other direction. As gold’s sentiment deteriorated, investor sentiment towards silver fell even further. But since November, once again, gold’s recovery is enabling silver to bounce back even more strongly. Silver is, of course, affected by the dynamics of industrial metals as well given more than half of its demand comes from industrial applications. This was also a factor for its lacklustre performance last year as industrial metals were pricing in a slowdown in China and recessionary fears across major economies more widely. If in 2023, China’s lockdowns are lifted for good and the economic engine starts firing again, fuelled by accommodative monetary policy, this could be the catalyst for the recovery of industrial metals. It could also spur silver’s rally further.

Industrial metals are like the growth stocks of commodities. They are cyclical but promise long-term growth. For most of last year, they faced headwinds from aggressive monetary policy tightening in the same way as growth stocks. Since November, however, sentiment in markets started to change and consensus expectations are for policy tightening to moderate in the first half of this year given declining inflation numbers, particularly in the US. This is helping lift industrial metals once again. Naturally, industrial metals also have a correlation with manufacturing activity in China. While it remains to be seen if, and by how much, manufacturing activity improves in China in the coming months, easing lockdown rules are expected to move the needle in the positive direction.

Gold prices were revived in the first two weeks of November as dollar strength eased slightly alongside a moderate retreat in US Treasury yields. Net speculative positioning in gold futures has risen from around 60,000 contracts at the start of November to around 140,000 contracts (as of 22 November) indicating the improvement in sentiment.

Nickel prices spiked sharply on 15 November when news of an explosion in an Indonesian nickel factory emerged. This was later denied by Indonesia and prices have come down again. The strong reaction illustrates nervousness in markets on very low levels of nickel inventories in London Metal Exchange (LME) warehouses. Low inventories are among the reasons why the LME recently decided against banning Russian metal (including nickel). Low inventories could also create a situation of acute tightness if demand shows signs of improvement.

The Organization of the Petroleum Exporting Countries (OPEC) has revised its oil demand forecast by 100,000 barrels for this year and next pointing to concerns about a global recession and weak Chinese demand. In contrast, the International Energy Agency (IEA) has raised its forecast for oil demand this year taking a more optimistic view on the global economy compared to OPEC. Brent oil prices have fluctuated between $92/barrel and $99/barrel during the first two weeks of November.

Brazil is the world’s largest Arabica producer and exporter, and higher production tends to occur during an on-year of the biennial crop cycle. Brazil’s Arabica coffee-growing regions have received more than 160mm of rain since the start of September, putting the rainfall tally for the country’s upcoming on-year crop near totals seen during the same period in 2018, Brazil’s third highest production year. This strong start to the rainy season has lifted soil moisture levels in coffee-growing areas of Minas Gerais and Sao Paulo, Brazil’s top coffee production states, from their lowest level in 12 years to the middle of their normal historical range, as seen in Gro Climate Risk Navigator. A weaker Brazilian Real is also increasing the incentive for exporters to export coffee. Amid these improvements in growing conditions, coffee prices declined 25.8% in October approaching a 15-month low. It is worth noting that exchange monitored stocks are near a 23-year low which, coupled with the recent sell-off, could provide some support for coffee prices.

In its latest report, the United States Department of Agriculture (USDA) revised its global wheat and corn ending balance lower while the global soybean balance was lifted higher. Yet grain prices have come under pressure owing to ambiguity over whether the Russia Ukraine grain corridor would be extended in November. Initially on 29 October 2022, Russia announced its intention to pull out of the grain deal that UN and Turkey brokered with Russia and Ukraine. Shortly after Russia agreed to rejoin the Ukraine export deal ending the stand-off that threatened to re-ignite a global food crisis. Russia’s back-to-back announcements are a stark reminder of just how volatile the situation in the war-torn Black Sea region has been and its impact on agricultural commodity prices.

Platinum and palladium diverged notably in terms of their performance last month. Platinum was up around 10% while palladium was down nearly 12% during October. According to Metals Focus, Platinum’s green credentials (given its use in the production of hydrogen), Chinese investor interest and growing substitution (of palladium in internal combustion engine cars) will see it weather economic turmoil better than palladium in 2023. In contrast, palladium is struggling to ward off the drag of battery vehicles, weak economic conditions, and lower cost metal alternatives.

The macro backdrop for industrial metals remains challenging for now. Cyclical commodities, including industrial metals, are fixated on the prospect of a recession hurting demand in the coming months. This continues to weigh on prices despite the tightness in the physical market. Economic activity in China also remains lukewarm offering little support to industrial metals currently. China’s Manufacturing Purchasing Managers’ Index (PMI) remained in contractionary territory in October, i.e., below 50, which now marks three consecutive months of contraction. In contrast, the prospect of a London Metal Exchange (LME) ban on Russian metals looms. If this materialises, sentiment may turn quickly as markets may move to price in material tightness in metals markets.