Silver is a standout in September's commodities rally. Here's the bigger winner.

By Myra P. Saefong

Natural gas offers 'quick and easy' way to meet growing AI data center power demand: analyst

Commodities have done well in September but silver - and natural gas - stand out from the pack for reasons all their own, and show few signs of an end to their price rally.

"September's commodities market felt like a long-distance race where, after months of pacing themselves, the runners finally kicked into high gear," said Adam Koos, president of Libertas Wealth Management Group.

Natural gas has been the "metaphorical sprinter, breaking away from the group, gaining strength as cooler weather arrived and with hints that demand from [artificial intelligence] data centers might be adding to its fuel tank," he told MarketWatch.

"While it's still too early to say if AI is a definitive factor, it's like seeing a runner with fresh shoes - there's a sense that it could carry them further in the race," he said.

Silver, on the other hand, has been the "steady Olympic gold medalist, pacing itself well, all while finding a second wind as inflation concerns eased and industrial demand picked up," said Koos.

Against this backdrop, the Bloomberg Commodity Index XX:BCOM, a benchmark composed of 24 exchange-traded physical commodities contracts, was 4.3% higher month to date in Friday dealings, on track to notch a monthly gain for the first time since May.

A chart from Peak Trading Research offered a bird's eye view on which commodities took the lead in the over rise in the commodities sector. The biggest gains are seen in natural gas, sugar, coffee, and silver.

Gas rig counts and AI data centers

Natural-gas prices have climbed strongly in September as supplies have tightened and demand strengthens, analysts said, with a portion of that higher demand coming from the power needs of AI data centers.

Prices for the commodity (NG00) (NGX24) traded 29.4% higher month to date as of Friday, when it posted a climb of 5.4% to settle at $2.90 per million British thermal units.

"Look no further than the Baker Hughes rig count to understand the natural-gas price rebound," said Manish Raj, managing director at Velandera Energy Partners.

The number of rigs drilling for gas is around at the lowest it has been since 2021, he said. Baker Hughes (BKR) pegged the number of active U.S. rigs drilling for gas at 96 for the week ended Sept. 20, though they edged up to 99 in the latest week.

The demand story for natural gas is "holding strong, with substantial growth from power producers this year," Raj told MarketWatch. As a result, U.S. gas storage that had been "bloated" since the spring is rapidly closing the gap to its five-year average.

"Utilities do not want to be short of natural gas heading into the winter, and hence are rushing to buy some," he said. Demand for heating during the winter tends to drive up demand for natural gas a heating fuel.

Growing power needs tied to the rise in artificial intelligence has also been playing a part in the natural-gas market - albeit a small one so far.

Overall, the world's demand for electricity grew by 2.2% in 2023 and it's expected to rise at a faster rate over the next three years, growing by an average of 3.4% annually through 2026, according to a report from the International Energy Agency. "Electricity consumption from data [centers], artificial intelligence (AI) and the cryptocurrency sector could double by 2026," it said.

"As power demand from AI data centers grows, natural gas is a natural beneficiary of this trend," said Raj. " Since it takes many years to develop nuclear and coal-fired power plants, natural gas provides the quick and easy way to meet AI demand."

Read: Vistra's stock is up more than 200% this year. Can it power still higher?

Despite outsized news coverage, however, "data centers consume only 1-2% of power and 3-4% of electricity in the U.S.," he said.

"Given the base is so small, a rapid growth in data centers is unlikely to change the narrative," Raj said. "Still, it does provide a respite to an otherwise flat U.S. electricity demand growth in the last two decades."

Silver's 12-year high

Silver, meanwhile, climbed to a nearly 12-year high, and has the "perfect market dynamics here to really make a big move higher," said Peter Spina, founder and president of investor websites GoldSeek.com and SilverSeek.com.

Silver has seen four consecutive years of structural supply deficits and that's "eating through inventories" while Western silver exchange-traded fund investors for years have been divesting out of silver holdings, he said. Those sellers have not become buyers.

"The gold price is making the silver price look "extremely cheap, and with the silver prices well supported by the industrial, green-metal demand components, then we have a pretty interesting set up" for silver prices, said Spina.

Most-active silver futures (SI00) (SIZ24) traded as high as $33.02 an ounce on Thursday, the highest intraday level since January 2013. As of Thursday, it was on track for a month gain of about 11%.

Read: Silver has been outperforming gold this year - and may rise to its own record highs

Silver had been a comparative laggard through he summer months as rising global growth risks, most notably in China, led to worries about demand destruction," said Peter Grant, vice president and senior metals strategist at Zaner Metals. However, the "consistent series of new record highs in gold helped to underpin the silver market" and silver started playing catch up with gold in September amid talk of impending Chinese stimulus.

The Chinese stimulus news provides a lift for gold (GC00) for all the same reasons it lifted silver and broader complex - "lower rates and more liquidity lifts all boats," said Grant.

Read: China stimulus plans spark a commodities rally, but a global soft landing still isn't a sure bet

Even so, Spina warned that the silver price is very volatile so investors should be ready for large swings, and have a "higher risk tolerance" for silver.

Silver 'under $30 an ounce now looks cheap.'Peter Spina, SilverSeek.com

"Silver has the potential to make very quick, rapid price moves," he said, and market conditions are right for such aggressive price moves now.

Through the gold perspective, however, the silver price looks "very cheap" given that it would would take more than 83 ounces of silver buy one ounce of gold, said Spina.

"Add the silver investor returning with strong industrial demand for the greenest precious metal - [and I see much m ore upside than I do downside," he said. "Under $30 an ounce now looks cheap."

-Myra P. Saefong

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09-28-24 0731ET

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