Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen

Key points

• Multiple uncertainties, including the US presidential election will continue to underpin demand for investment metals, potentially led by silver, provided emerging signs of stabilising demand for industrial metals in China can be sustained
  
  
• The energy sector will be watching the US presidential election closely, given the two candidates’ opposing views on traditional versus renewable sources of energy. Having spent a considerable time this year trading in the USD 80’s we now see Brent being stuck in the 70’s for the foreseeable future
  
  
• We see additional but at this stage not spectacular gains for copper supported by lower funding costs as the US Federal Reserve cuts rates, further reducing the risk of a recession, a stabilising growth outlook in China amid government support and continued demand towards the green transition

In early 2024, we focused on the metal sector as a potential winner for the year and beyond. Following an already strong first half, the precious metal sector, led by gold, continued higher in the third quarter, as investors sought protection in an uncertain world, culminating in September with the start of a supportive US rate-cutting cycle. The energy and industrial metals sectors—two growth-dependent sectors—suffered setbacks amid a deepening slowdown in China and rising recession risks elsewhere, most notably in Europe.

As of now, the Bloomberg Commodity Total Return Index is up around 3.5% for the year, with strong gains in precious metals, soft commodities, and, to a lesser extent, industrial metals being offset by losses across the energy sector, and not least the grains sector, where prices remain subdued following another strong production year. While adverse weather drove large gains in coffee, cocoa, and sugar, the year so far has belonged to metals, especially gold and silver. These two investment metals have seen strong demand from investors.

Election impact on commodities

The energy sector will be watching the US presidential election closely, given the two candidates’ opposing views on traditional versus renewable sources of energy. Trump’s pro-energy policies may, over time, add downward pressure on energy prices from higher production and upward pressure on OPEC+ to keep them supported, while a Harris presidency would maintain policies that promote the use of electric vehicles and renewable energy, both of which require large amounts of green transformation metals, from copper and lithium to silver, aluminium, and cobalt.

Overall, the risk of large-scale unfunded government spending—whether it’s infrastructure, renewable energy focus, or social programmes—as well as US-China trade wars or tax cuts may all raise fresh concerns about inflation and rising levels of government debt, leaving the market to speculate that investment metals such as gold may find support no matter the outcome of the election. And in the event the US election results in a gridlocked Congress, even if fiscal spending is restrained, this would raise the risk of a recession, requiring more forceful Fed easing – also gold supportive.

Gold and silver have more upside

As we head towards the final quarter and the November US presidential election, we see multiple uncertainties continuing to underpin demand for investment metals, potentially led by silver, provided emerging signs of stabilising demand for industrial metals in China can be sustained. The reasons investors continue to pay record prices for gold boil down to concerns about global developments from fiscal profligacy, geopolitics, and “de-dollarisation” from central banks, as well as its general safe[1]haven appeal. A supportive rate-cutting cycle from the US Federal Reserve adds to the mix.

Given the prospect of these underlying demand trends not going away anytime soon, we forecast further upside to gold ahead of year-end and into 2025, when the yellow metal has the potential to reach another psychological mark of USD 3,000. Supported by a stabilising industrial metal sector, silver could potentially do even better, not least considering its relative cheapness to gold, which could see it take aim at USD 40 next year. This represents a conservative target of the gold-silver ratio at 75 versus the current level of around 83.

Crude’s sluggish demand outlook forcing a downward range shift

Brent crude oil’s September slump below USD 70 proved to be relatively short-lived. The market concluded that at such low prices, and with hedge funds holding a record short position (belief that prices would continue to fall), lower prices would require a recession to be justified. We estimate the probability of a US recession in 2025 is at only 25%, but with the impact of higher interest rates still uncertain. Despite some economic weaknesses, key indicators such as growth, capital expenditures, and job postings suggest the economy is not in a recession yet.

However, the combination of robust non-OPEC+ production growth and sluggish demand, especially in China, which has seen its 2024 demand growth slow to a few hundred thousand barrels a day from around 1.3 million barrels per day in 2023, is likely to keep the upside capped in the coming months. Some of the supply side focus is on Libya, where prolonged supply disruptions may help tighten the market, and on OPEC+ as we watch for whether they will continue to delay a planned production increase, now set for December. Having spent a considerable time this year trading in the USD 80’s we believe these considerations point to a Brent crude price stuck in 70’s for the foreseeable future, with a geopolitical event or a recovering China the possible drivers of any upside surprise.

Copper demand on the mend following mid-year slump

Copper prices have stabilized following a mid-year slump the came after a brief spike to all-time highs in late May, mostly from speculators looking for higher prices amid rising demand from the energy transition, and on the expected surge in demand for power from AI-related datacenters. The May to August slump was further exacerbated by a continued rise in stocks held at warehouses monitored by the major futures exchanges, most notably in China, which was seen as a sign of sluggish demand, eventually forcing prices lower to levels that by now have started to stimulate demand.

With the demand outlook stabilizing, a troubled supply side has also received some attention following production downgrades in Chile and Peru, two of the world’s top suppliers. Into the final quarter and beyond, we believe the combination of lower funding costs as the US Federal Reserve cuts rates, the avoidance of a recession in the US, a stabilising growth outlook in China amid government support and continued demand towards the green transition, will all help underpin prices, leaving the door open for additional but at this stage not spectacular gains as those we saw in early 2024.

Ole Hansen joined Saxo in 2008 and has been Head of Commodity Strategy since 2010. Ole focuses on delivering strategies and analyses of the global commodity markets defined by fundamentals, market sentiments and technical developments.

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