Federal Reserve's Key Support Sparks Commodity Rally
This week has been pivotal in the global market, often referred to as “super week” for central banks worldwide, as they have made significant policy announcements affecting currency valuations and commodity prices. In a surprising turn of events, the Bank of Japan raised interest rates to their highest level since 2008, resulting in a decline in the value of the dollar against a basket of currencies, particularly the Japanese yen. This decision came on the heels of Federal Reserve Chair Jerome Powell hinting at a potential rate cut in September, which pushed the dollar index down to test crucial support around 104, nearing a five-month low. The implications of these developments have sent ripples through the commodity markets, leading to notable increases across the board, with geopolitical factors providing additional support for prices of precious metals like gold and crude oil.
Specifically, the international gold price reached an unprecedented high this week. As of the latest reports, the price for December delivery gold on the New York Mercantile Exchange surpassed USD 2496 per ounce, breaking the previous record set two weeks earlier at USD 2488 per ounce. Analysts are attributing this surge to investors’ anticipations surrounding forthcoming central bank policies. Han Tan, chief market analyst at Exinity, indicated that the market’s hopes for the Federal Reserve to confirm expectations of a September rate cut have been reflected in the rising gold prices.
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However, the Fed had previously reiterated in its July statement that lowering interest rates would be inappropriate until there was more confidence in achieving sustainable progress toward the 2% inflation target. Yet, with growing concerns over the labor market, this situation appears precarious, as it could influence the Fed's decisions. Paul Marino, Chief Investment Officer of GraniteShares, pointed out subtle changes in the Federal Open Market Committee's statement, suggesting that the Fed might soon be preparing for a rate cut, which would further favor gold investments.
Tan suggested that if confidence in rate cuts persists, spot gold prices could continue to soar. Nevertheless, he warned that should the Fed retreat from these expectations and adopt an unexpectedly hawkish stance, gold prices might retract from recent gains, forcing bullish investors to be patient until another historical peak is reached. Concurrently, the geopolitical landscape has shifted dramatically with the assassination of Hamas leader Ismail Haniyeh in Tehran, triggering a flurry of risk-averse buying in gold. Jim Wyckoff, a senior analyst at Kitco, pointed out that such incidents could escalate military actions in the region, particularly involving direct confrontations between Israel and Iran.
In tandem with gold, oil prices experienced a sharp increase of nearly 5% after three consecutive days of declines. Good news from the demand side buoyed "the mother of all commodities," with the U.S. Energy Information Administration (EIA) reporting a fifth consecutive week of declining crude oil inventories. For the week ending July 26, U.S. crude stocks fell by 3.4 million barrels to 433 million barrels, with a notable drop of 1.1 million barrels occurring at the Cushing delivery hub in Oklahoma.
Moreover, refinery output across the U.S. dropped by 257,000 barrels per day last week, as refinery utilization decreased by 1.5 percentage points. The EIA also reported a decline of 3.7 million barrels in gasoline inventories, amounting to 22.38 million barrels. This robust gasoline demand surged to summer highs, with consumption reaching 9.25 million barrels per day, a year-on-year increase of approximately 400,000 barrels.
Tamas Varga, a senior market analyst at PVM Oil Associates, noted that the consecutive weeks of inventory reduction reflect a total decrease of nearly 25 million barrels, bringing U.S. crude oil stocks below the five-year average. Furthermore, expectations of additional capacity cuts from major producers, including OPEC+ and Canada, promise to keep the market tight. This, combined with renewed investor confidence stemming from strong gasoline consumption, has led to a more optimistic outlook on supply and demand dynamics for the summer and third quarter.
The resurgence of geopolitical premiums has also played a crucial role in driving up oil prices. According to reports from China Central Television, an emergency meeting of the United Nations Security Council was convened following the assassination of Hamas leader Haniyeh. Scheduled diplomatic efforts to de-escalate tensions between Israel and Palestine are now in disarray, with the situation in the Middle East taking a dramatic downturn.
Rania Gule, a market analyst from XS Markets, expressed concerns that the escalating geopolitical strife in the Middle East could disrupt the stability of global oil supplies. Although significant diplomatic efforts from the U.S. and U.N. have aimed to prevent further escalation, these recent developments threaten to unsettle the entire region.
In a statement released on July 31, U.N. Secretary-General Antonio Guterres emphasized the dangerous escalation following attacks in Beirut, Lebanon, and Tehran, urging parties to work towards a ceasefire in Gaza, the release of all detained individuals, and a humanitarian increase in aid for the Palestinian people. Such fervent calls for peace highlight the urgency of addressing the volatile situation, ensuring stability across borders.
Turning to industrial metals, the weakening dollar provided a boost in prices throughout the sector. On this trading day, all major industrial metals experienced significant gains, with London tin rising over 4%, while aluminum and nickel increased by approximately 3%. Notably, copper surged nearly 2.5%, marking the largest rise in the past month.
Copper, regarded as a critical barometer for the global economy, shows signs of stabilization. Recent industry data suggests that China's copper demand has leveled off in recent weeks, with indicators such as rising import premiums, a moderate decline in inventories, and an uptick in copper processing plant output. After collapsing into negative territory for most of May and June, copper import premiums have now reached three-month highs.
Analysts believe that this uptick in demand may correlate with the tightening supply of scrap materials, which serve as an alternative raw material source for copper wire and tubing manufacturing. Robert Edwards, chief analyst at CRU Group, affirmed that this year has not witnessed any significant decline in demand. Sectors such as electric vehicles, renewable energy, and even more traditional durable goods remain robust.