Alternative investments Waiting for the upswing

Waiting for the upswing

Commodities have been on diverging paths this past year, with cyclical segments trailing precious metals amid slowing industrial production. Going forward, we expect this divergence to diminish.

In 2019, gold rallied, while industrial metals were subdued. If our base case of stabilizing global growth and flat to somewhat higher bond yields materializes, industrial metals have modest upside potential, while gold prices are likely to consolidate. Oil prices may face a period of weakness to force supply adjustments before recovering at some point. 

Cyclical commodities await improved industrial production 

The prospects for cyclical commodities are muted as long as the slump in industrial production (IP) continues. An easing of trade disputes and improved confidence would be needed for a recovery. However, it remains to be seen whether this happens as early as H1. Industrial metals prices additionally discount a negative growth scenario in China. Should growth stabilize, we see potential for upside surprises. These are more likely in copper, while other metals look more subdued unless IP recovers strongly. 

Oil: Oversupply vs. Middle East tensions 

Modest demand growth coupled with robust supply from countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC), particularly US shale producers, points to oversupplied oil markets in 2020. To prevent surpluses, OPEC+ (including Russia) will have to extend or even deepen existing supply cuts and US shale production must slow. Our base case foresees temporary price weakness to force supply adjustments, which then paves the way for a recovery. Military conflict in the Gulf region would be an upside risk to prices. However, regional powers and the USA are seeking to de-escalate the situation for now. 

Oil prices may face a period of weakness to force supply adjustments before recovering at some point.

Gold: Still supported by low yields 

Gold prices and other precious metals are likely to remain supported as long as (real) yields remain low or even negative and economic uncertainty persists. While speculative long positions in gold are high, we see no clear catalyst to trigger a major unwind of these positions. 

Two risk scenarios 

A stronger or earlier IP recovery would favor industrial metals the most, and hurt precious metals. Energy would also be supported, but less so given strong supply. In case of a full-fledged recession, precious metals would make further gains while energy prices would be particularly vulnerable.

Real Treasury yields (in %) and gold price (in USD/ounce)

Low real yields support gold

Real Treasury yields (in %) and gold price (in USD/ounce)