Displaying items by tag: Commodities
A big bank has just come out very bullish on gold. BNP Paribas says gold is going to shoot to over $1,600 per ounce in the medium-term as the Fed embarks on four 25 bp interest rate cuts between now and June 2020. According to BNP Paribas, as headline yields fall with each cut “real rates will move and stay in negative territory, raising the appeal of holding gold”. The ongoing, and seemingly endless trade war, will also be bullish to gold.
FINSUM: This argument makes perfect sense to us, though it is highly contingent upon the Fed cutting and the trade war continuing. In our view, both of these are likely, so this appears like a good buy.
The last month has been an unusually tough market. While the volatility itself is not highly irregular, what has been difficult is the rise of correlation. Over the last month, the market has traded the same way a whopping seven times. On those days, stocks, bond yields, and commodities have all traded in the same direction. When that happens it is very hard for investors to find a place to hide.
FINSUM: A couple of months ago using bonds as a safe haven seemed like a good idea. But prices have gone up so astronomically without a real change in the economy, that fixed income is looking like a fragile place to hide.
All the signs seem to point to commodity prices headed lower. Why you may ask? Pretty simple—the economy looks to be weakening, so demand will be lower at a time when supply will stay high. But no so fast, says Evercore, who argues that oil prices may be in for a counterintuitive rise of at least 19% by the end of the year. Evercore contends that production will be flat this year, as OPEC is curtailing output. At the same time, global monetary policy easing is likely to sustain demand, meaning the basic picture for oil may be more bullish.
FINSUM: We think this is an optimistic view that does not take full account of the worsening economic outlook.
Societe Generale, famed European investment bank, has just told investors they should load up on gold. Gold is seeing several value drivers at the moment. These include the economic cycle and fears over the trade war, a lack of other safe haven assets, and importantly (and much less known), central bank purchases. Global central banks (like China’s) are trying to diverse away from the Dollar, and gold is an attractive way for them to do so.
FINSUM: There are a lot of tailwinds for the yellow metal right now. The Fed is less dovish than most expected and there does not seem to be much risk of a huge risk-on shift that would leave gold forgotten.
The Chinese Yuan reached a landmark and worrying level today. It fell to below 7 versus the Dollar, marking its weakest point in 11 years. The weakening currency could help Beijing offset economic weakness from tariffs. “We will see a new wave of depreciation among Asian currencies in the foreseeable future, and there could be further risk-off movements in the global markets. It looks like a tsunami is coming”, said an economist at Commerzbank. This will have major implications for commodities as China is the world’s biggest consumer, and now that the currency is weaker, it will be harder to buy, meaning prices must come down.
FINSUM: Dollar prices for commodities (almost all are priced in Dollars) will need to come down commensurately with the Yuan in order for the Chinese to maintain their purchasing power.