Let’s take a look at where some of the major commodities sit in the grand scheme of things and consider some factors to keep an eye out for over the next 12 months.
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In many ways, the World Gold Council (WGC) is right to say central banks will play a major role in the performance of gold in 2023 – central banks always have a major influence.
The Fed this week reminded everyone that it’s all about US interest rates and the value of the greenback – and it got support from half a per cent rate rises from the Bank of England and the European Central Bank.
In an outlook report for 2023 the WGC pointed out that how central banks respond to inflation and possible recession will be key for gold prices in 2023, with the precious metal likely to restore its value as a hedge against economic strife.
But the Council didn’t point to an even bigger influence from central banks this year on gold – how the market activities by a group of around 15 banks have seen a gold buying spree at record levels in 2022.
This buying has so far been responsible for 34% of the gold bought this year in markets – that’s more than 600 tonnes with 399 tonnes of that being snapped up in the three months to September, the last available figures from the WGC.
Much of the buying has been done by central banks in Turkey, Mozambique, Uzbekistan and India but there was a large amount of gold apparently without a home – China has owned up to a big buy in November but not in the September quarter.
Without this buying the 8% slide in gold prices in the third quarter would have been deeper and more damaging.
Earlier this month, China reported an increase in its gold reserves for the first time in more than three years in its monthly report on its foreign reserves.
The People’s Bank of China raised its holdings by 32 tonnes in November from October. That brought its total to 1,980 tons, the sixth-biggest central bank bullion holding in the world.
China has previously gone long periods without disclosing changes in its gold holdings. When the central bank announced a 57% jump in reserves to 53.3 million ounces in mid-2015, it was the first update in six years. It took another break from the end of October 2016, before reporting more purchases at the end of 2018.
In many respects this central bank market activity has been far more positive for gold than the monetary policy tightening from central banks this year, led by the Fed’s rapid rate rises which have helped drive the value of the US dollar higher and gold and commodity prices lower.
We saw that this week in the wake of the Fed rate rise and new interest rate and economic forecasts which pushed the Comex gold price down 1.7% or more than $US31 an ounce on Thursday. That saw the US dollar rise almost 1% on the day as it shook off a recent weakening trend.
The WGC says that rising inflation rates and higher interest rates in response from central banks were the biggest driver of gold prices this year, and this “interplay” is likely to be key again in 2023.
The WGC said that the economic consensus is that in the coming year, weaker global economic growth is likely with the possibility of small localised recessions.
“Consensus forecasts now expect global GDP to rise by just 2.1% next year. Excluding the global financial crisis and Covid-19, this would mark the slowest pace of global growth in four decades and meet the IMF’s previous definition of a global recession,” the WGC said.
The WGC points out that mild recessions have historically been positive for gold, while a tapering of interest rate rises would likely result in a weaker dollar, further adding support for the yellow metal. Add to this, geopolitical flare ups and a re-opening of China should bring further demand for physical gold too.
But a recession of more sluggish economic activity will weigh on demand for commodities, including gold – especially from the consumer sector, led by jewellery.
The WGC added that a soft landing that avoids recession would likely benefit risk assets like equities and LME metals, while gold as a risk-hedge would likely face further pressure.
Comex gold for the year is down 2.3%. By contrast, the S&P 500 is down 18% year-to-date.
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Meanwhile, Goldman Sachs took a novel approach to analysis by comparing gold to bitcoin (some analysts in fact argue that many gold bugs are also crypto enthusiasts – if so, then 2022 has been a doubly miserable year for them).
In a recent research paper, Goldman Sachs analysts said they expect gold, with its real demand drivers, to outperform the highly volatile bitcoin in the long term.
Gold is less likely to be influenced by tighter financial conditions, meaning it is “a useful portfolio diversifier,” said Goldman, especially given that gold has developed non-speculative use cases while bitcoin is still looking for one.
(Although the performance of gold this year in the face of the rapid rises in interest rates and soaring US dollar might cause one to think again about that argument from Goldman Sachs).
Goldman’s analysis showed that while traders use gold to hedge against inflation and dollar debasement (not very well this year), bitcoin resembles a “risk-on high-growth tech company stock.”
The value proposition of bitcoin, which the bank called “a solution looking for a problem,” comes from the scope of its future real use cases, making it a more volatile and speculative asset than the precious metal.
Goldman Sachs argued that with financial conditions becoming tighter, investors’ willingness to explore the decentralized currency that aided bitcoin adoption, will fade.
“Bitcoin’s volatility to the downside was also enhanced by systemic concerns as several large players filed for bankruptcy,” it noted, citing the collapse of the FTX exchange and the 3AC hedge fund.
While net speculative positions in both the assets fell sharply over the last year, gold is marginally down year-on-year (0.77% as of Thursday against bitcoin’s 75% plunge the bank noted.
“Tighter liquidity should be a smaller drag on gold, which is more exposed to real demand drivers” like Asian consumer buying, central bank monetary demand, safe-haven investments, and industrial applications, it said.
“Moreover, gold may benefit from structurally higher macro volatility and a need to diversify equity exposure.”
But it has to be pointed out that in the wake of the Russian invasion of Ukraine, Goldman Sachs became mega gold bulls, forecasting a price of $US2,500 an ounce by year’s end in 2022 – it is trading around $US1,786 an ounce on Comex on Thursday.
But March was a confusing month and no one saw the quick inflationary surge in the wake of the invasion, especially for key commodities like oil, gas, wheat (and other grains) and some metals and the way those rises found their way into wider price structures across various economies.
That then saw a surge in consumer and producer price inflation and central banks, led by the Fed, switch from a rapid tightening of monetary policy and higher cash rates.
The higher energy prices and sanctions by the west against Russia and Russia against the west saw an energy – especially gas crisis – that shook Europe, the US, Australia and other developed economies and raise the prospect of a sharp slowdown in 2023 or recession (in the case of the UK).
After discussing the impact of the Russian invasion and early monetary policy moves by some central banks, Goldman Sachs forecast a big buying splurge by central banks (which it got right). It speculated that Russia could become a buyer again.
In the second half of 2022, Goldman Sachs expected the gold demand by central banks to reach its historical high level as they globally have both strong diversification and geopolitical reasons to shift reserves into gold.
“We expect that by the second half of 2023, global central bank demand hits a record 750 tonnes annual rate versus 450 tonnes in 2021. This, together with an upward revision in our ETF build forecast should push year-end gold prices to $2,500 per troy ounce,” the note said.
The buying by central banks was spot on and the tonnage could end up being on the money as well, but not the price forecast.
That’s probably because Goldman Sachs analysts got one piece of analysis very wrong. Goldman Sachs believes gold’s typical negative relationship with real rates would break down as they become a poor barometer of fear when the US Fed is hiking rates.
“As we found in the past, gold prices tend to rally during Fed rate hiking cycles,” the note said.
Comex gold was $US1,943 an ounce on March 17, the day the Fed started its rapid rate rises this year. It has eased by around $US160 to current levels or 7.8%, which is roughly what the current US inflation rate has been in the past couple of months.
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Besides lithium, copper and nickel are the boom renewable metals and, of these, copper is the major metal of interest at present.
The red metal is attracting a lot of attention because its more common than nickel, easier to find and process and some of the world’s mining giants have a continuing interest in supplying more copper as the transition to a low carbon future accelerates.
Despite the boom in electric vehicles and the push into more solar, wind and revamping transmission grids, copper has had a rough year and for that we can thank Vlad Putin and Russia’s invasion of Ukraine which disrupted commodity prices for most of the year, with help from higher inflation and the rapid tightening of monetary policy by central banks, led by the US Federal Reserve.
That saw copper prices ‘enjoy’ a rollercoaster year – from a high of $US5.04 a pound on Comex in the wake of the invasion to a low of $US3.13 a pound in July, and back to $US3.77 on Thursday.
Seeing the metal started 2022 around $US4.42 a pound, a loss of around 15% for the year is on the cards.
But it will be China that drives copper prices in 2023 – as usual. And next year will see that even more apparent with the country’s easing of Covid restrictions and slow re-opening set to worry markets, prices and investors.
That will be subject to the damage the current and subsequent waves of infections does to the economy, domestic demand and the impact of slowing global growth on Chinese exports and therefore its appetite for the metal in its various forms.
Noel Dixon, global macro strategist at State Street Global Markets, told Marketwatch.com this week that China’s reopening will “not be a straight line up, and stimulus will take a while to filter through to economic activity.”
“Stabilization for commodities is possible by the end of 2023 as global central banks decide to ease policy and China recovers. Until then, commodities will be faced with lower demand and tight financial conditions,” he said.
While copper demand was solid, November’s economic data showing a slide in investment, production and a slump in exports and imports, won’t help confidence in Chinese demand heading into 2023.
In the 11 months to November China imported 5.36 million tonnes of copper, up 8.5% from the same period a year ago.
In November, China imported 2.41 million tonnes of copper ore and concentrates, a new record high and up 10.26% year-on-year. That took cumulative imports from January to November to 23.17 million, also up 8.5% from the corresponding period in 2021 and a record.
The growing uncertainty about China’s demand, global growth and inflation saw the influential state-owned Chilean Copper Commission (Cochilco) this week cut its projection for the price of copper for 2023 to $US3.70 per pound due to greater supply.
The latest estimate from the agency is down from its July estimate of $US3.95 per pound in 2023.
The Commission should have an eagle eye view of the copper market – after all Chile produces 40% of global supply each year and is spending billions of dollars a year to revamp and nourish its huge mines, smelters and other facilities.
BHP and Rio Tinto control the world’s biggest mine at Escondida in the north of the country and BHP has two other copper mines in the country and South32 owns 45% of another mine.
“The lower copper price expectation is due to the fact that the supply of the metal would grow by around 3.9%,” Chilean Mining Minister Marcela Hernando said in Cochilco’s statement. “While demand would increase by only 2.4%, causing a significant surplus.”
Cochilco’s executive vice-president, Joaquin Morales, added that other factors, like “further deterioration of China’s growth, more persistent inflation, interest rates at high levels for a prolonged period and a deeper recession than expected in Europe” also contributed to the lower projection.
Cochilco also slightly lowered its 2022 forecast to $US3.98, from the average $US4.00 it estimated in July.
As well, the agency forecast a production for Chile this year of 5.3 million tonnes, down 5.8%. For 2023 the agency projects growth of 7.5% to 5.7 million tonnes. That will be just above 2021’s 5.6 million tonnes.
But several Wall Street investment banks have a more optimistic view of copper in 2023.
Bank of America commodity strategists believe copper could rally to $US12,000 a tonne (it was around $US8,500 on the London metal Exchange this week) in the second quarter of 2023, given the right set of circumstances.
Such a scenario would require a pivot by the U.S. Federal Reserve toward less aggressive monetary policy tightening, limiting upside in the greenback, but that’s not going to be the case, given the comments this week from Fed chair, Jay Powell and the expectation of at least four more interest rate rises in 2023.
“Notwithstanding the macro headwinds, physical markets have remained tight, highlighting the lack of spare copper units available at present,” Commodity Strategist Michael Widmer said in Bank of America’s 2023 metals outlook report.
Widmer also noted that global copper demand has proven resilient, rising on an annual basis year-to-date as purchases outside China run at record levels.
While macroeconomic headwinds will likely persist into 2023, Widmer said offtake should remain positive when modeled on global GDP growth.
“Taking this a step further … China’s grid spending has offset weakness in the wider economy: indeed, building out the electricity infrastructure has completely offset weakness in the housing market,” Widmer said, adding that the key question going forward was whether this is a one-off or the beginnings of a structural trend.
He also noted that the correlation between global copper demand and industrial production growth has broken down over the past year and a half.
“In our view, this confirms to some extent that green spending has already supported global copper demand and physical markets,” Widmer said.
Analysts at Goldman Sachs reckon the overhang has gone.
Goldman highlighted that the (copper) cathode market has remained in a “clear deficit (GS estimate 210,000 tonnes versus 131 tonnes previously), with global visible stocks falling to their lowest level in 14 years,” metals strategist Nick Snowdown said in a note issued last week.
“Equally important, the surplus we previously expected for 2023 (169,000 surplus) has also now disappeared in our latest balance iteration (GS estimate 178,000 tonne),” he added.
Strategists at Fitch Ratings think any short-term negative hit for copper will be offset by “supportive short- and medium-term supply-demand drivers.”
“We expect a moderate increase in global primary copper consumption of about 2% in 2023, similar to 2022. Mine supply will grow by around 4% in 2023, although disruptions may affect that,” they said in a research note earlier this month.
“A tightly balanced market and minimal global copper stocks (less than two weeks’ consumption) will sustain prices in 2023. Copper’s longer-term prospects are supported by demand from the energy transition.”
Fitch maintained a spot copper price assumption of $US8,000 a tonne for 2023, sliding to $US7,500 a tonne in 2024 and 2025.
More bearish was BNP Paribas which said in its 2023 outlook forecast it saw a three-month copper price of $US6,800 a tonne in the first quarter of next year, falling to $US6,465 a tonne in the second, but recovering to $8,250 a tonne by the end of 2024.
“We expect a fall in European manufacturing activity to add to the impact of slowing Chinese and U.S. activity,” the BNP Paribas analysts wrote
“Rising mine supply and accelerating output of Chinese refined copper are expected to push the market into a sizeable surplus in 2023, easing LME spread tightness and weighing on prices.”
