Commodity Market Monitor
Current Market Environment

  • Precious Metals: Gold and silver prices are largely inter-dependant on the continuing impact of the European sovereign debt crisis, which in our view is likely to outweigh the impact of a weaker euro/US$. Coupled with our house view of medium-term risks to global inflation remaining to the upside, the overarching macroeconomic environment should remain positive for gold and gold miners.
    • QE is helping to push US real 10 year yields deeper into negative territory. Gold and silver returns perform well when short- and long-term real interest rates are low or negative.
    • When measured in real terms, and versus physical and financial assets we believe gold prices need to move in excess of USD 2,000 to move into territory that can be considered extreme. 
    • Official purchases, largely from emerging markets, have been consistent and generally increasing; the breadth of buying is significant. 
    • Current Spot price at 1,250 USD/oz vs Q4 2013 forecast of 1,600 USD/Oz
    • Palladium fundamentals are strong with a rising market deficit over the next few years.
    • US labour market trends are worth watching closely since these will determine the extent and scale of any further recovery in auto sales.
    • Current Spot price at 680 USD/oz vs Q4 2013 forecast of 720 USD/Oz
  • Base Metals: We believe base metals will remain exposed to broader market weakness. Industrial metals have recently traded sideways. The sector is mostly undervalued, but the economic slowdown and a negative technical background mean that it will probably take considerable time before prices can close the valuation gap. In the coming months, most markets are likely to see price declines. Still Copper is expected to stand out and to benefit as the Chinese economy recovers.
    • Supply has disappointed over the past 10 years, and is doing so again in 2013.
    • Over the medium term, cost inflation remains a key challenge as does the decline in quality exploitable resources.
    • Chile output levels may not reach its potential due to power/water bottlenecks and grade decline.
    • Current Spot price at 7,720 USD/MT vs Q4 2013 forecast of 8,000 USD/MT
  • Natural gas remains oversupplied, with a sticky horizontal rig count and a large overhang of well inventory. Resilient drilling activity will keep production elevated in 2013. Even after producers pull back on their drilling activities, they still need to clean up a sizable well inventory.
  • Prices for grains and oilseeds have risen sharply as a severe drought is triggering considerable production losses in the USA. Market balances have tightened substantially, and the drought is not over yet. Prices have strong momentum and are in an uptrend. As a result, we expect to see more price gains in the next few months. Looking further down the road, we think agricultural prices are significantly overvalued. As we enter the next marketing year, prices could come down from current levels.

How these parameters could potentially work for you:
  • Volatilities for most commodities is realising significantly below their respective implied volatilities
    • Selling downside offers attractive premium to generate income.
      • Autocallables with Down & In Puts
      • Reverse convertibles with floating or fixed coupons
      • Interest rates are at historically low levels
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