The “everything rally” in commodities continues to gather steam with the Bloomberg Commodity Spot index rising for the fifth straight week to reach its highest level since 2011.
Spurred on by multiple factors from a vaccine-led rebound in global growth, transportation bottlenecks crimping supplies, weather concerns in key growing regions along with rising inflation concerns and a speculative frenzy triggering increased investment demand.
All the major commodities traded higher this past week led by iron ore, lumber, Arabica coffee and corn. Metals of all colours rallied as well with copper reaching a record high while gold, supported by silver, managed to break above $1,800. The energy sector came bottom with crude oil, rightfully so, struggling to break higher with virus outbreaks in Asia creating a very uneven demand recovery.
On a macroeconomic level, both the dollar and US Treasury yields provided further support with the Greenback trading softer and nominal yields holding steady. The latter receiving a great deal of attention with rising inflation focus sending 10-year breakeven yields to an eight-year high and real yields back down towards minus 1 per cent.
One of the biggest concerns related to the current surge in global commodity prices is the impact rising food costs have on those populations and economies that can least afford it.
The UN FAO’s Global Food Price index, which tracks a basket of 95 food quotations from around the world, surged higher in April to record an annual rise of more than 30 per cent.
Food inflation has not risen this fast since 2011 — when higher food prices helped trigger the Arab Spring — with all sectors rising led by a 100 per cent jump in edible oils, sugar 58 per cent and cereals at 26 per cent.
Brent and WTI crude oil both lagged the momentum seen across metals and agriculture, and despite increased calls for +70 dollar Brent, the market has sensibly adopted a wait-and-see approach.
Before drifting lower, Brent got tantalising close to $70/b, a level it briefly breached two months ago before suffering a 15 per cent correction. The market, already supported by investment demand, has also increasingly been focused on reopening’s in Europe and the US driving a strong recovery in fuel demand.
Oil bulls, however, may have to remain patient given ongoing production increases from Opec+, the prospect for a renewed Iran nuclear deal leading to increased production, and not least the current risk to demand in parts of virus-hit Asia. Since late March, Brent crude oil has traded within a four dollar wide uptrend, currently between $66.50 and $70.50.
Precious metals: Having failed on a handful occasions during the past couple of weeks, gold finally managed to mount an attack strong enough to take it above $1,800.
While lower US real yields and a softer dollar provided the fundamental tailwind the yellow metal needed support from in-demand silver, one of the best performing commodities this week.
During the past month, the continued rally across industrial metals have supported silver relatively more than gold. This can be seen through the gold-silver ratio which has been declining since late March.
Silver is currently trading within a rising channel and after hitting the upper end at $27.55 it may need to spend some time consolidating before mounting a fresh upside attempt towards the 2021 high at $30.
In order for gold to continue higher, it first needs to establish support above $1,795 before chasing after long-term trend following short positions. The next level of upside interest is $1,851, the 200-day moving average and 61.8 per cent retracement of the January to March sell-off.
[Ole Hansen is the Head of Commodity Strategy at Saxo Bank]
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