Here's what to expect from gold, oil and other commodities in the second half of 2024

By Myra P. Saefong

'Supply fragilities and robust demand' set to contribute to a rise in commodity prices: analyst

Commodities have erased most of their 2023 losses in just the first half of this year, thanks in part to robust purchases of gold by central banks that look set to continue.

Cocoa took on the bulk of the market's gains, with weather-related supply issues leading prices to more than double year to date, while energy and precious metals also scored an impressive rise - and the overall rally for commodities has the potential to extend into the second half of the year, analysts said.

Despite some big moves, "there's nothing particularly surprising about the current markets," said David Waugh, senior researcher on the Neuberger Berman Commodity Strategy exchange-traded fund NBCM. "We're witnessing a typical rebound in commodities following a midcycle pause last year."

The S&P GSCI Index XX:SPGSCI was up by 8.8% so far this year as of Wednesday, after losing 12.2% in 2023.

Throughout history, the price of commodities has risen along with inflation, according to Paul Marino, chief revenue officer of GraniteShares, which runs the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF COMB. "If inflation is persistent, it's safe to say that commodities prices will continue to rise."

Inflation ran hotter than expected in the first quarter, though recent readings have shown the pace has slowed down, bolstering expectations among market participants that the Federal Reserve will have room to deliver one or two quarter-point rate cuts in 2024. Investors had come into 2024 expecting six or more such cuts.

The S&P GSCI subindex for cocoa XX:SPGSCC was up nearly 116%. The subindex for precious metals XX:SPGSPM has climbed 15.6%, while the one for energy XX:SPGSEN is up 10.7%.

"Generally looser financial conditions and the largest fiscal deficit in a non-recessionary environment have supported growth and coincided with low inventories across the board," Waugh told MarketWatch. Factors such as geopolitical tensions and weather risks have also "played a role in bolstering the markets."

As long as "macroeconomic conditions don't lead to increased risk aversion and dampen sentiment, we expect micro-level strength, supply fragilities, and robust demand to continue driving spot [commodity] prices upward," he said.

Gold, other metals and China

Among the precious metals, gold "reverted back to being a safe haven" in a very uncertain geopolitical environment, along with central banks - specifically China buying gold for its reserves, said GraniteShares' Marino.

Gold futures (GC00) (GCQ24) reached a record intraday high on May 20 at $2,454.20 an ounce and may have room to run even higher in the long term. It traded 14.4% higher year date as of Thursday, according to Dow Jones Market Data.

In the short term, demand for gold is likely to increase from Chinese buyers, as they turn "sour on Chinese real estate or Chinese stocks," Waugh said.

The highest percentage of central bankers in at least six years expect their holdings of gold to increase, according to the World Gold Council's annual survey released on June 18. The survey found that 29% of the central bank respondents plan to increase their gold reserves in the next 12 months, the highest since the survey began in 2018.

Last year, central banks added the second-highest amount of gold ever, 1,037 metric tons, following a record of 1,082 tons in 2022, the council said.

Still, gold prices trade 3.5% below their record intraday high. The recent pullback in the metal's prices may be due to the People's Bank of China "discontinuing their accumulation of gold for reserves purposes," said Tom Schneider, a chartered market technician and NinjaTrader analyst.

In a note dated Thursday, analysts at J.P. Morgan said they remained "structurally bullish" on both gold and silver over the medium term, and see the ongoing consolidation in precious metals prices as a "buying opportunity" for long-term investors to further accumulate the metals.

The J.P. Morgan analysts said they see an 8% to 10% upside for gold and silver prices into the end of the year, on their way to their targeted highs of $2,600 an ounce and $34 an ounce, respectively, in 2025.

On Thursday, August gold delivery settled at $2,369 and July silver (SI00) (SIN24) ended at $30.82, with both marking the highest daily finish for a most-active contract in two weeks.

Meanwhile, the "China effect" is taking hold when it comes to the metals that have seen declines this year, said Marino. Those metals include U.S. Midwest domestic hot-rolled coil steel and 62% iron-ore fines delivered to China.

China decreased its demand for steel (HRN00) and iron ore (TION24) as the "economy has imploded and construction has halted," he told MarketWatch.

Cocoa and the softs

The cocoa market had been "primed for an explosion," said Waugh. "Years of underinvestment in [cocoa] trees, skyrocketing input costs, and a dwindling labor force set the stage perfectly. Then along came bad weather to pull the trigger."

Cocoa futures (CC00) (CCU24) reached a record intraday high of $11,722 per metric ton on April 19. They're up nearly 116% year to date.

Before this year, about 70% of cocoa grown globally came from Ghana and Ivory Coast, but their share of cocoa produced is down to about 50%, said Ninja Trader's Schneider. He said "unfavorable weather conditions" due to an extended El Niño period last year brought a longer dry season, followed by floods, which affected crop yield.

If weather conditions persist, cocoa prices could remain high and could even see new all-time highs again this year, he said.

Waugh, meanwhile, said coffee is "cocoa v2" - or version two - given poor growing conditions in Vietnam as "wider swings in weather have spilled over, affecting supply with very stable demand."

Year to date, coffee futures (KC00) (KCU24) traded on the ICE Futures U.S. exchange, have climbed by 22.3% and traded as high as $2.454 per pound.

'Challenging' view on oil

As for oil, Waugh said that the Organization of the Petroleum Exporting Countries has been "firmly in the driver's seat over the past few years, strategically cutting production to prop up prices."

The group of oil producers and their allies, together known as OPEC+, however, agreed at a meeting earlier this month to start phasing out voluntary production cuts after the third quarter, while leaving other curbs in place.

Read: OPEC+ decision on production cuts may be 'incremental negative' for oil prices

Crude prices sold off in the days following that announcement, only to recover with prices on Thursday having climbed back to their highest since late April. August West Texas Intermediate crude (CL.1) (CLQ24) ending at $81.29 a barrel on the New York Mercantile Exchange, while August Brent crude (BRN00) (BRNQ24) settled at $85.71 on ICE Futures Europe.

The positioning swings for oil have 'rivaled the emotional highs and lows of a teenager.'Rebecca Babin, CIBC Private Wealth U.S.

The positioning swings for oil have "rivaled the emotional highs and lows of a teenager," said Rebecca Babin, senior energy trader at CIBC Private Wealth U.S.

Right now, sentiment in the oil market "remains sour" and positioning in the market "apathetic, presenting an opportunity for crude to rally" another 5% to 7% throughout the summer, she said in recent commentary.

The outlook for the end of this year and into 2025 is "more challenging," said Babin.

"OPEC+ supply unwinds and increasing non-OPEC supply will cap upside potential in the medium term," she said. "This will likely prompt many investors to funnel dollars away from crude to other commodities with better risk reward profiles."

"For now, strategy is to trade the range: stay long through summer and sell rallies above $90 Brent," Babin said.

Commodities outlook

Taking a look at the big picture for financial markets, Waugh said stocks have already priced in a soft economic landing with no recession on the horizon and bonds are "singing the same tune." But commodities "haven't fully bought in the no-recession scenario just yet."

Most commodities are still trading below their recent highs, and they're either uncorrelated or natively correlated with your equities, those bubbly tech stocks, or bonds," he said.

Commodities can "really bail you out when it comes to stock valuation risks, and they offer substantial diversifying carry on top of flat price returns," said Waugh. And "if you dive into this space using futures contracts, you'll notice that a large portion of the markets are in backwardation - a positive roll-yielding condition." Backwardation refers to a situation in crude contract values where prices for oil for delivery in the near future are higher than those for later deliveries.

"This is the clearest sign of scarcity across the board," he said.

Given all of that, he offered this piece of advice: "If you're keen on buying tech, throw in some commodities to balance it out. If you're chasing yield in bonds, pair it with commodities."

The diversification benefits of commodities are such that they "make one plus one less than two in risk terms," said Waugh.

-Myra P. Saefong

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06-21-24 1215ET

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