MacroVoices #442 Ole Hansen: Year of The Metals
Saxo Bank's Ole Hansen discusses the current state of commodity markets, explaining how the Bloomberg Commodity Index has returned to square one after rallies and corrections, with precious metals leading gains while agricultural commodities show divergent performance between soft commodities and grains.
Summary
Ole Hansen, Saxo Bank's chief commodities strategist, provides a comprehensive analysis of commodity markets at the halfway point of 2024. He notes that the Bloomberg Commodity Index tracking 24 major commodity futures is essentially unchanged for the year and past 18 months, despite significant rallies in the first half followed by deflation. Hansen argues that while a commodity supercycle may still be in play, it will be driven more by supply constraints than strong demand growth, particularly given China's disappointing performance and shift away from construction-heavy stimulus. He discusses how precious metals, led by gold and silver, have been the standout performers, driven by central bank buying, de-dollarization efforts, and safe-haven demand amid geopolitical tensions and US election uncertainty. Hansen explains the impact of funding costs on commodity investments, noting how declining interest rates could reduce the carry cost and attract fresh investment. Base metals like copper experienced speculative froth early in the year tied to AI infrastructure demand, but have since corrected as short-term fundamentals didn't support elevated prices. The energy sector remains range-bound, with OPEC+ successfully managing oil prices around $80 Brent, though Hansen questions whether spare capacity can be returned to the market given demand concerns, particularly from China where EV adoption is accelerating. Agricultural commodities show stark divergence, with soft commodities like cocoa and coffee hitting record highs due to weather challenges in the Southern Hemisphere, while grains face oversupply from favorable Northern Hemisphere weather.
Key Insights
- Hansen argues the Bloomberg Commodity Index is essentially unchanged for the past 18 months despite significant intra-period volatility, returning to square one
- Hansen contends that any future commodity supercycle will be driven more by supply constraints than strong demand growth, unlike previous cycles
- Hansen identifies China as the big negative surprise, noting it won't repeat previous stimulus patterns of throwing money at unused construction projects
- Hansen explains that gold buyers are not interest rate sensitive, as the rally occurred while rates were rising, indicating purchases for other reasons like geopolitical hedging
- Hansen highlights that central banks are buying gold due to concerns about Western asset seizure risks, citing the Russia precedent as a key driver
- Hansen notes that copper experienced speculative froth tied to AI infrastructure demand but corrected when short-term fundamentals couldn't support elevated prices
- Hansen observes that OPEC+ has successfully maintained oil prices around $80 Brent through production cuts, but questions their ability to return barrels to market
- Hansen points to China's oil demand potentially peaking this year due to aggressive EV and hybrid vehicle rollout affecting fuel consumption
- Hansen describes extreme divergence in agricultural markets between soft commodities hitting records due to Southern Hemisphere weather and oversupplied grains from favorable Northern Hemisphere conditions
- Hansen explains that commodities must balance on a daily basis, meaning you cannot buy based on future tightness expectations - the market must be tight now for prices to be supported
- Hansen argues that mining companies are focused on acquiring each other's assets rather than finding new ones due to the 12-year average timeline from discovery to production
- Hansen notes that hedge fund positioning in commodities collapsed during the August volatility spike, leaving markets extremely exposed to recovery if fundamentals improve
Topics
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