Gold May Hit New Highs, Crude Oil May Return to $90
The first half of the year has just passed, and the overall performance of the commodity market has been commendable. The S&P GSCI Commodity Index rose by 8.8%, erasing most of the losses incurred in 2023. Geopolitical tensions and weather risks have been the main drivers pushing up commodity prices. Institutions generally believe that as long as the macroeconomic situation remains stable, supply fragility and strong demand will continue to drive the overall rise in commodity prices into the second half of the year.
Can gold challenge new highs?
Gold became a safe haven in the face of geopolitical risks in the first half of the year, with May gold futures once breaking through $2,450 per ounce, setting a historical high. In the long term, there may still be room for gold prices to rise. The World Gold Council's annual survey released last month showed that 29% of central bank respondents plan to increase their gold reserves in the next 12 months, the highest level since the survey began in 2018. The council pointed out that the amount of gold added by central banks last year was the second-highest in history, at 1037 tons, second only to the record 1082 tons in 2022.
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BK Asset Management's macro strategist, Boris Schlossberg, said in an interview with First Financial that the decline in international gold prices at the end of the second quarter may be due to the People's Bank of China's "pause in increasing gold reserves" and the uncertainty of the Federal Reserve's timing on interest rate cuts. From the current situation, as signs of a cooling U.S. economy gradually accumulate, expectations of monetary policy easing are expected to help gold prices make another冲击 at historical highs in the second half of the year.
JPMorgan remains "structurally bullish" on gold and silver in the medium term, and the bank expects gold and silver prices to rise by 8% to 10% by the end of this year, with a target high of $2,600 per ounce for gold and $34 per ounce for silver by 2025.
Both Bank of America and Citigroup have given a target price of $3,000 for gold. Bank of America expects gold prices to reach this level within the next 12 to 18 months, but current market liquidity does not support this price target. BofA explained that reaching $3,000 depends on an increase in non-commercial demand, which may be triggered by Federal Reserve interest rate cuts, leading to capital inflows into physically supported gold ETFs and increased trading volume. In addition, central bank purchasing power is another key factor. "Central banks' continued purchase of gold is also important, and efforts to reduce the share of dollars in foreign exchange investment portfolios may prompt more central banks to buy gold."
In terms of base metals, copper, the barometer of the global economy, has retreated after breaking through the historical high of $11,000 per ton in May and is currently trading near $9,500 to $10,000. The market is watching changes in consumption trends, and in June, the registered copper inventory of the world's three major exchanges exceeded 500,000 tons for the first time in two and a half years. Since mid-May, LME inventory has surged by 72%, approaching 180,000 tons.
The outlook for the global economic recovery in the second half of the year is expected to boost market demand. GSC Commodity Intelligence estimated in its latest research report that the demand for data centers powering artificial intelligence servers will reach 1 million tons of copper in the next three years.At the same time, renewable energy spending and electrification generally rely on copper, especially electric vehicles. Each electric vehicle uses 180 to 190 pounds of copper, which is more than 3.5 times the amount used in conventional internal combustion vehicles. According to the "Global Electric Vehicle Outlook 2024" report released by the International Energy Agency (IEA), the growth in electric vehicle sales remains "strong," potentially reaching around 17 million units in 2024, accounting for more than one-fifth of global car sales.
The World Bank believes that globally, clean energy investments characterized by metal intensity are growing at a double-digit rate. This provides a strong incentive to expand metal production, especially for materials such as copper and aluminum, which are crucial to green technologies. However, the commissioning of new mines takes a long time, which means that supply will remain relatively tight for some time in the future, keeping base metal prices at a high level.
Challenges in coffee and cocoa production capacity still exist
As tropical cash crops, cocoa became the best-performing commodity variety in the first half of the year, with a cumulative increase of more than 110%.
Last year, the production capacity of the world's top two cocoa producers, Côte d'Ivoire and Ghana, was affected by more than 20%. Due to excessive rainfall at the beginning of the new production season, cocoa trees were attacked by black pod disease and witches' broom virus. On the other hand, since the beginning of the 21st century, African countries have not carried out a new round of large-scale planting, and many trees have exceeded their maximum production potential. The International Cocoa Organization (ICO), composed of cocoa-producing and consuming countries, stated in its latest monthly report that it is expected that the global supply deficit for 2023-2024 will expand from 74,000 tons in the previous season to 374,000 tons.
With speculative funds entering the market, cocoa futures once nearly doubled within the year. However, a liquidity crisis emerged as buying could not continue to follow up, and market speculation was somewhat balanced due to exchange restrictions on position sizes.
Broker Ninja Trader analyst Tom Schneider said that before this year, about 70% of the world's cocoa was planted in Ghana and the Ivory Coast, and their share in cocoa production has recently dropped to about 50%. He said that due to the prolonged duration of El Niño, adverse weather conditions have led to an intensified dry season. If the weather conditions continue, cocoa prices may remain high and may even set a new historical high again.
Famous cocoa expert and head of research at Tropical Research Services, Steve Wateridge, expects cocoa production to significantly rebound in the next production season. With the rise in cocoa prices, some farmers now have enough funds to fertilize, spray pesticides, and prune cocoa trees, thereby significantly improving production capacity. In contrast, replanting usually takes three to four years to release production. However, he warned that it is still too early to determine whether the global cocoa market can avoid a supply shortage for the fourth consecutive year.
Similar to cocoa, international coffee futures have seen their largest increase of more than 40% within the year, benefiting from weather and supply concerns.
The main driving factor is the tight supply of the world's largest Robusta coffee bean producer, Vietnam. The El Niño event this year brought drought to Vietnam's coffee regions, with persistent heatwaves and rainy seasons disrupting crop growth. In March, Vietnam's Ministry of Agriculture predicted that coffee production in the 2023/24 production season may decrease by 20%, to 1.472 million tons, the lowest in nearly four years. At the same time, Brazil, the main producer of Arabica coffee beans, is also facing climate anomalies.David Waugh, a senior researcher in the commodity strategy ETF at Neuberger Berman, predicts that coffee will be the 2.0 version of cocoa, given the adverse planting weather conditions faced by Vietnam. The extensive fluctuations in weather have spread, affecting the supply that has a very stable demand.
Crude oil targets $90
International oil prices rose and then fell in the first half of the year. Faced with the potential risk of overcapacity, the oil-producing countries' organization OPEC+ agreed in June to gradually cancel voluntary production cuts after the third quarter while retaining other restrictions.
Tamas Varga, a senior market analyst at PVM Oil Associates, said in an interview with reporters from First Financial Daily that OPEC+ has been firmly in the dominant position in recent years, supporting prices through strategic production cuts. He expects that consumer demand will increase in the summer, and as production cuts are fully implemented by October, global inventories should decrease.
The World Bank also believes that the global oil supply is still constrained. As of the end of June, the daily oil production of OPEC+ member countries was more than 6 million barrels lower than actual capacity, equivalent to nearly 7% of global demand. Coupled with the U.S. shale oil industry's greater emphasis on short-term profits, which has suppressed the stimulation of production by price increases, these factors have provided support for high oil prices.
Geopolitical risks cannot be ignored, and concerns about supply disruptions continue to support prices. Varga told First Financial Daily that the situation in the Middle East is still seen as a supporting factor for oil prices, at least in the short term. However, he emphasized that there is still uncertainty about the speed of demand from major global consumers, and the trend of changes in U.S. crude oil inventories needs special attention.
After being removed from its hottest long recommendation at the end of April, J.P. Morgan has once again included Brent crude oil in the list. The bank expects that inventories will be sufficient to push Brent crude oil above $90 before September.
Rebecca Babin, a senior energy trader at CIBC Private Wealth, said that the current strategy is to remain long throughout the summer, with Brent crude oil rebounding to a target above $90. However, the outlook for the end of this year and 2025 is more challenging. "OPEC+ supply restrictions will be lifted, and the increase in non-OPEC supply will limit the medium-term upside potential. This may prompt many investors to shift dollars from crude oil to other commodities with better risk-reward situations," she said.