Gold falls amid a hawkish tone from central banks

This is the last Commodities Wrap for 2022. Our first edition for 2023 will be on 16 January. I would like to wish all readers a safe and enjoyable festive season.

Weak economic data and a stronger USD weighed on sentiment across commodity markets. Easing supply constraints in energy were also headwinds.

Copper led the base metals sector lower amid a weakening economic backdrop. China’s economic activity fell sharply in November before Beijing abruptly dropped its zero-COVID strategy. Industrial activity grew by only 2.2% y/y, while retail sales fell 5.9%. The current surge in COVID-19 cases raises the prospect of that weakness persisting into December and early 2023. The US is also showing signs of slowing. Retail sales slumped more than expected in November, down 0.6%. Factory production also dropped 0.6%, the first decline since June, while overall industrial output was down 0.2%. Base metals also faced pressure as the US dollar rebounded following the Fed hawkish statement. The market shrugged off supply side issues. Major roads to copper mines in Peru have been blocked by protestors, which are operating with their existing inventories, according to local unions.

The stronger USD also weighed on the precious metal sector. Gold fell amid the decline in investor demand. Nevertheless, the global economy is at an inflection point. Tighter monetary policies amid high inflation are likely to slow economic growth in 2023. This backdrop is typically positive for gold. Synchronised rate hikes have weighed on gold in 2022. Although we expect the US fed funds rate to peak at 5%, a pause in rate hiking should turn market sentiment in favour of gold. This comes as we approach the end of US dollar dominance, and a depreciation in the currency would add further support to investor demand. With the Fed suggesting rates will remain high through 2023, the risk of weak economic growth next year. Gold prices tend to come under pressure ahead of recessions, but then outperform other markets (such as equities) during them.

Crude oil edged lower amid fears of a global economic slowdown. Several central banks outside of the US joined the Fed in hiking rates yesterday. The tighter monetary policy is already having an impact on industrial activity. The prospect of further tightening following hawkish comments from policy makers weighed on sentiment. This was compounded by a partial restart of the Keystone pipeline. TC Energy restarted a segment of the key pipeline but said it is continuing repairs and remediation on the segment affected by last week’s oil spill. There are also tentative signs that key Russian oil exports from a port in Asia are dipping following G7 sanctions. Since 5 December, 4.4mbbl have been loaded onto tankers at Kozimon, tanker tracker data shows. That’s exactly half the level seen a month ago.

European gas gained on signs of further strong demand. The cold blast that boosted demand for heating fuels has eased in recent days. However, the spate of milder weather could be short lived. Below average temperatures are expected to return across the continent before the end of the year. This was exacerbated by low renewable energy generation. Wind and solar output in Germany could be as low as half of recent output in coming days. Europe will have to compete for cargo in a tight market, with China returning to the spot market. State-owned China National Offshore Oil Corp bought four to six LNG shipments this week, for delivery from February to December. It is one of China’s largest purchases on the spot market over the past year, as demand has been curtailed by strict virus curbs. This helped push North Asian LNG spot prices higher. The Japan Korea Market futures reached USD33.45/MMBtu, near a two-month high. The prospect of stronger demand is rising as a rare triple-dip La Niña threatens to plunge temperatures in Northeast Asia.