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Gold outlook 2019 – recovery expected to continue

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29 januari, 2019

Gold staged a recovery late in 2018. The yellow metal has recovered most of its losses since June 2018. A collapse in speculative positioning in gold futures drove prices down in the second half of the year, sentiment toward gold is clearly recovering in recent weeks. We expect the recovery to continue as many risks that were being ignored by the market start to get priced-in to gold. Our base case scenario is for gold to reach close to US$1370/oz by year end.

Figure 1: Gold price forecast

Source: WisdomTree Model Forecasts, Bloomberg Historical Data, data available as of close 31 December 2018. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.

Approach

Using the framework we outlined in our paper Gold outlook: gold to flatline out to June 2019 in the absence of shocks, we apply our views on inflation, exchange rates, interest rates and investor sentiment to try to project where gold will be by the end of the year.

Speculative positioning drives recovery

In 2018 speculative positioning fell to the lowest level since 2001 briefly before recovering very late in the year. Judging by flows into gold Exchange Traded Products, sentiment toward the metal is clearly recovering. Asset market volatility in the final weeks of the year was one of the main catalysts behind the recovery in gold positioning. The S&P 500 lost 14% and Brent oil fell by 35% in the final quarter of 2018. Moreover, the volatility of both benchmarks has risen substantially.

A government shutdown in the US acted as a jolt to investors to remind them that the world’s engine of growth (at least in recent times) is not invincible. Meanwhile concerns around China’s slowing growth rate also led investors to become less optimistic about cyclical assets.

Fed to continue to tighten policy

We expect the Federal Reserve (Fed) to raise rates twice in 2019 (50 basis points), in line with the dot-plots in the central bank’s recent economic forecasts . That’s also in line with consensus forecasts by economists, however, Fed fund futures are not pricing in any rate increases for 2019. We side with the Fed’s guidance as we believe that economic data from the country is strong enough and labour markets are tight enough for the central bank to continue to raise rates. However, we acknowledge the risk to rates is on the downside – which in general should play to the upside for gold prices.

US Treasury bond yield curve to invert

Although we expect a total of 50 basis points increase in policy rates by Q4 2019, we think that 10-year bond yields will only increase around 25 basis points to 3.0% in that time horizon. 2-year bond yields are likely to capture more of the gains in policy rates, but further out in the curve, we are likely to see less yield increases. That’s because the Fed’s holding of a large stock of bonds is likely to hold yields back from rising too aggressively. Also, recent tax cuts are likely to have the most impact in the very short term. As the growth impact peters out over longer horizons, the uplift to yields at the longer end of the curve will be less than at the short end. Although many people see yield curve inversion as a financial signal of impending economic downturn, we believe that an inversion can occur for the less benign reasons outlined above and so it is not necessarily a precursor to an economic recession. If anything, we believe the Fed will err on the side of dovishness, as it will be reluctant to drive policy too far from other central banks. In fact, Fed fund futures indicate that the market thinks that the Fed will stop raising rates altogether this year. That could prove to be supportive for gold prices over the course of 2019.

Figure 2: Nominal US 10 year Bond Yields forecast

US Dollar appreciation to be short-lived

While the Fed remains the only major central bank raising interest rates over in the first half of the year, we expect the US Dollar to continue to appreciate, especially as judging by Fed fund futures, the market is currently not expecting further tightening. However, as other major central banks – the European Central Bank, Bank of Japan, Bank of England for example start to think about policy normalisation, we could see interest rate differentials narrow and the US Dollar weaken. Additionally, with growing indebtedness in the US – exacerbated by recent tax cuts – we expect a depreciation in the US Dollar.

Figure 3: US Dollar Exchange Rate Forecast

Inflationary pressures to persist, but remain contained by Fed’s policy

US consumer price index (CPI) inflation peaked at 2.9% in July 2018 and declined to 2.2% in November 2018. Volatile energy prices were responsible for a large part of the rise and decline. We expect the Fed’s policy tightening to continue to keep demand-driven inflation in check, but a recovery in oil prices will likely place upward pressure on inflation at the headline level. We expect a small increase in inflation to 2.3% by year-end.

Annons

Figure 4: Consumer Price Index inflation forecast

What will help sentiment toward gold improve?

Summarising the monetary/economic drivers of gold – small increases in interest rates, minor appreciation followed by depreciation of the US Dollar and inflation moving marginally higher – are not going to move the dial for gold in a big way. We believe that that gold prices will end the forecast period higher mainly as a result of sentiment towards gold continuing to move out of a depressed state. This process had started already in the final week of 2018 as most markets displayed excessive volatility. We have had multiple bouts of equity market volatility in 2018, but for most part developed world equities have snapped back. That does not guarantee resilience in the face of the next shock. We note that the last time speculative positioning in gold hit levels as low as they did in 2018 was in 2001 – the year when an Argentine debt crisis was brewing, and an overvalued technology sector was imploding. Gold reacted to the stress scenario but with latency. Gold prices rose 25% in 2002 (compared to 2% in 2001).

There are other risks, that could be supportive for gold as historically a safe haven asset, which could drive positioning in gold futures higher:

No deal Brexit– The UK’s prime minister appears to have insufficient support for the terms of withdrawal from the EU that she has been responsible for negotiating. Although she survived a vote of no confidence from her own party, it clear that the proposal is detested by leave and remain MPs alike. Renegotiating the terms of withdrawal appear impossible at this stage and so it is difficult to see how either side will be appeased by the current deal. We believe the most likely outcome will be for some form of extension beyond the March 30th deadline, however, there is a risk that doesn’t happen and there would be` no withdrawal deal in place. Leaving the EU in such an uncertain manner is likely to be very disruptive for both the UK and EU. Even if there is an extension to the deadline, uncertainty will linger, which will support demand for haven assets.
Trade-wars – Our working assumption is that rising protectionism in the US is not going to damage global economic demand. In fact, there are signs that the rift between the US and China is beginning to thaw. However, we have seen similar signs before which have been followed by a deterioration of the relationship. If tit-for-tat protectionist measures escalate, the market could be driven into a risk-off mindset.
The US government is currently shut down as President Trump vies congress to fund his border wall with Mexico. The risk of the standoff becoming prolonged could support demand for haven assets. Indeed, even if the government reopens soon, the risk of the Trump administration continuously using the threat of shutdowns as a strategy to gain leverage over congress is likely to hurt investor confidence in cyclical assets.

In our forecast, we bring back speculative positioning in gold futures to levels consistent with what we have seen in the past five years.

Figure 5: Gold futures speculative positioning

Combining the monetary, economic and sentiment driven factors affecting gold, we believe gold will reach close to US$1370/oz by the end of this year.

Alternative scenarios

We have also developed alternative scenarios for gold as summarised below. Most of the sensitivity comes from our measure of sentiment, speculative positioning. But even in our bear case, we increase positioning into positive territory. In our bull case scenario, we assume the Fed will allow the economy to run hot, only raising rates once, which will put less pressure on bond yields to rise, aid US Dollar depreciation and keep inflation elevated at 2.9%. In the bear case, conversely, we assume the Fed acts more hawkishly and has more impact on the longer bond yields. The US Dollar appreciates as the Fed surprises the market with its hawkishness.

Conclusion

In our base case scenario, we expect gold prices to rise close to US$1370/oz by Q4 2019, mainly as a result of speculative positioning in the futures market being restored. Some US Dollar depreciation and small gains in inflation will also aid gold’s rise.

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Crude oil comment: A little sideways with new tests towards the 80-line likely

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1 dag sedan

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17 januari, 2025

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Brent moves into sideways trading around USD 81.5/b with new tests to the 80-line likely. Brent crude traded down 0.9% yesterday to a close of USD 81.29/b and traded as low as USD 80.39/b within the day. This morning it is gaining 0.3% to USD 81.6/b. No obvious major driver for that and the move in oil is well in line with higher industrial metals this morning. The technical picture for Brent 1M is still overbought in terms of RSI at 70.2. But as Brent now has traded a bit sideways for some days the overbought bearish calculus has started to ease a bit. But new tests towards the 80-line seems likely with current RSI at 70.2.

Bjarne Schieldrop, Chief analyst commodities, SEB

Scott Bessent says he fully supports harder sanctions on Russian oil exports if Donald Trump wishes to use such a tool in the coming negotiations with Russia over Ukraine. That may add some support to oil this morning. The latest US sanctions towards Russia clearly have an effect with one example being the tanker Bhilva which has made a U-turn back towards Russia after having been on course to India (Bloomberg).

US EIA projects US liquids growth of 538 kb/d/y in 2025. The US EIA released its monthly STEO report earlier this week. What is clear is that the boom-years in US oil production are behind us for now. But exactly pinning down at what level US oil production will grow in 2025 is hard. The EIA forecast for US hydrocarbon liquids looks the following:

Estimated US crude oil production growth is projected to be virtually zero in 2026. But including all sources of liquids it still sums up to 312 kb/d y/y in growth. A lot or a little? If global oil demand in 2026 only grows with 1 mb/d in 2026, then the US will cover 30% of global demand growth. That is a lot. For 2025 the EIA expects a total growth in US liquids of 538 kb/d y/y.

Smaller losses in existing shale oil production. If we instead look at EIA estimates for US shale oil production right here and now and how its components are changing, we see that 1) New monthly production is 666 kb/d, 2) Losses in existing production is 622 kb/d and thus 3) Net monthly growth is 44 kb/d m/m which equals 4) A net marginal annualized growth of 12*44 of 523 kb/d/y. What stands out here is that the EIA in its December report estimated that this marginal annualization only equated to 378 kb/d/y. So, it has been lifted markedly in the latest report. It is however on a downward trajectory and as such the EIA estimate in the table above of y/y growth for US crude oil of 331 kb/d/y may be sensible.

US shale oil new production, losses in existing production, net new production and marginal, annualized production growth in kb/d/y.

Change in EIA STEO forecast from Dec-24 to Jan-25. What stands out is that estimated losses in existing production is adjusted lower by 16.8 kb/d since November. That is the marginal monthly change. In other words, production in existing production is falling less agressively than estimated in December. But a monthly decline of 622 kb/d/m is of course still massive.

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Crude oil comment: The rally has legs, but it takes time to wash out ingrained bearish sentiment from H2-24

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2 dagar sedan

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16 januari, 2025

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Brent crude jumped jet another 2.7%. Brent crude jumped 2.7% yesterday to USD 82.03/b following a pull-back on Tuesday. Intraday it reached USD 82.63/b and its highest level since 26 July last year. Bullish US oil inventory data was a key reason for the jump higher yesterday coming on top of a steady tightening market since early December and fresh US sanctions on Russia last week.

US crude stocks down 17.6 mb since mid-November and total US commercial stocks down 65 mb since mid-July. US crude stocks fell 2 mb last week to its lowest level since April 2022. US crude stocks have declined every week since mid-November with a total of 17.6 mb. Total US commercial oil inventories fell 3.4 mb last week and have been in steady decline of close to 300 kb/d since early July. These declines in US oil stocks are the proof of the pudding in terms of the balance of the global oil market and explains well the rising oil prices since early December.

The IEA estimates a 400 kb/d deficit in H2-24. If so, then all global draws took place in the US. The IEA released its monthly Oil Market Report (OMR) yesterday with an estimate that the global oil market ran a deficit of about 400 kb/d through H2-24. If so, then close to all inventory draws in the whole world solely took place in US inventories which drew down by around 300 kb/d. That is hard to believe.

If we assume that US inventory draws were proportional to the US demand share of the world (about 20%), then global inventory draws in H2-24 probably was closer to 0.3/20% which equals 1.5 mb/d. Maybe a bit high but estimates by FGE indicates that global inventory draws were close to 1.0 mb/d in H2-24 depending on whether you equate on apparent demand or real demand. Higher if equated on real demand.

IEA surplus in 2025 is adjusted down by 200 kb/d. In reality it is now only a surplus of 400 kb/d. We think this surplus estimate will erode further as demand will be adjusted yet higher and supply will be adjusted yet lower going forward. The IEA adjusted 2024 demand higher by 100 kb/d with base effect to 2025 with the same. It also adjusted its non-OPEC production estimate for 2025 down by 100 kb/d. The effect was that call-on-OPEC rose by 200 kb/d for 2025. The IEA still estimates that OPEC must reduce its production by 0.6 mb/d in 2025 to keep market balanced and prices steady. But within that estimate it assumes that FSU increases production by 200 kb/d as if it is not a part of OPEC+. IEA estimate for call-on-OPEC+ thus only declines by 400 kb/d y/y in 2025. We think that this surplus will evaporate as: 1) US production will likely deliver a bit lower than expected. 2) Supply will also disappoint here and there around the world. 3) Global demand estimates will be revised higher for 2024 and 2025.

The rally thus has legs, but the technical picture is still in overbought territory so there will be some pullbacks on the way higher. Unless of course we rally all the way to USD 95/b and THEN we get the technical pullback. The market still seems to have bearish skepticism deeply ingrained in its back following H2-24 doom and gloom and is partially reluctant to trade higher. But that is attitude and not fundamentals.

The Dubai 1-3 mth time-spread is going through the roof as Asian buyers scrambles for supply from the Middle East.

The average 1-3 mth time-spread of Dubai, Brent and WTI is now way up. Lots of room for Brent 1M to move USD 90-95/b

US crude stocks declined by 2 mb last week and total commercial stocks by 3.4 mb.

US commercial crude and product stocks in steady decline since June/July last year. Down 65 mb since mid-July.

US crude stocks at lowest level since 2022.

Brent 1M still overbought with RSI at 72.5. So, pullbacks will happen but from what level. On the upside the next targets are probably USD 87.95/b and USD 92.18/b.

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Crude oil comment: Fundamentally very tight, but technically overbought

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4 dagar sedan

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14 januari, 2025

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Technical pullback this morning even as the dollar weakens. Brent crude gained another 1.6% yesterday with a close at USD 81.01/b and an intraday high of USD 81.68/b which was the highest level since mid-August. The gain yesterday was supported by strong, further gains in the 1-3 mth time-spreads. This morning Brent is pulling back 0.6% to USD 80.5/b even though the USD is weakening 0.4% while time-spreads are strengthening even further. This makes it look like a technical pullback.

Brent is trading very weak versus current time-spreads. The current price of Brent crude at USD 80.6/b is very low versus where the 1-3 mth time spreads are trading. Brent should typically have traded somewhere between USD 80-95/b with current time-spreads when we compare where this relationship has been trading since the start of 2023. Brent is now trading in the absolute lower range of that with lots of room on the upside.

How long will the new sanctions last? Natural questions are: How long will Donald Trump leave the new sanctions operational? How strictly will they be enforced? How easily could Russia circumvent them?

A bullish H1-25 if Donald Trump leaves sanctions intact to negotiate over Ukraine. If Brent continues to trade around USD 80/b and not much higher, then the underlying assumptions must be that the new sanctions will not be enforced harshly and that they will be lifted by Donald Trump within a couple of months max. Donald Trump could however keep them in place as a leverage versus Putin in the upcoming negotiations over Ukraine. If so, they could stay intact for maybe 6 months or more which would put H1-2025 on a very bullish footing.

Fundamentally very tight, but technically overbought. Market right now looks technically overbought with RSI at 72 but also fundamentally very tight with the Dubai 1-3 mth time-spread at USD 2.74/b, its highest level since September 2023. As such the Brent crude oil price has the potential to coil up for further gains following some washing out of technically overbought dynamics. But maybe the current Asian panic over access to medium sour crude oil fades a bit over time and time-spreads ease with it.

Brent has been on a strengthening path well before the new sanctions. Worth remembering though is that Brent crude has been on a rising trend along with tightening time-spreads since early December. The latest bullishness from new US sanctions comes on top of that. Brent moving higher into the 80ies thus seems highly likely following a near term washout of technical overbought dynamics.

1-3 mth time-spread (average of Dubai, Brent and WTI spreads) versus the Brent 1M price. Very strong, bullish signals from the time-spreads, but Brent 1M is trading at the very lower level of where this relationship has been since the start of 2023. So, plenty of room for Brent 1M to move higher.

Brent 1M is technically overbought with RSI at 73. Pullbacks are likely near term to wash that out. On the low side the USD 70/b line has given solid support since mid-2023.