Precious metals to take centre stage in commodities narrative this year

The Bloomberg Commodity Total Return Index faced headwinds in 2023, ending the year almost 7 percent lower, a decline primarily attributed to the staggering 44 percent fall in natural gas prices. Stripping away this outlier, the index painted a picture of relative stability, with gains in precious metals offsetting losses in the grain sector. The current year, 2024, is expected to largely be favorable to commodities in general and precious metals in particular.

Prospects for 2024: Precious metals take the spotlight

Precious metals have taken centrestage in the commodities narrative. Gold, buoyed by consistent central bank buying, may see sustained support. The U.S. Federal Reserve’s indication of at least three rate cuts strengthens the case for gold. The yellow metal emerged as the top performer in 2023, soaring by 13 percent amid a backdrop of global uncertainties such as the Silicon Valley Bank (SVB) fiasco in the U.S., challenges in the Chinese housing market and ongoing geopolitical tensions like the Russia-Ukraine war and the Israel-Hamas conflict.

Historical trends suggest that gold tends to bottom out and rally sharply during periods of successive interest rate cuts. Furthermore, ETF demand, notably absent for almost two years due to rising real yields, higher inflation, and increased carry costs, could witness a resurgence, providing an additional boost to gold prices. Beyond the financial dynamics, geopolitical uncertainties may serve as an additional pillar supporting gold prices.

Silver, which has played second fiddle to gold in recent times, could find its momentum in 2024. Silver’s performance was more tempered in 2023 as it finished almost flat internationally but managed a 7 percent uptick in the domestic market, supported by a 4.25 percent net hike in import duty, strong local demand, and marginal rupee depreciation.

The physical silver market is poised to stay in deficit for the third successive year, and the metal could benefit from increased demand in the industrial sector. Factors such as the growing usage of silver in electric vehicles, power grids, 5G technology, and photovoltaics contribute to the optimistic outlook for silver prices, potentially pushing them into a higher range.

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Crude oil: Navigating a wide range

Crude oil experienced a rollercoaster, swinging in a $30 range last year. Despite a Q1 dip due to the SVB crisis, price recovery ensued in Q3 with OPEC+ production cuts. The year-end, however, witnessed a decline, courtesy of record U.S. production and dwindling oil product demand.

Crude oil price is now expected to tread a wide range of $60-90 in the current year, introducing a considerable element of uncertainty. The initial two quarters may witness a lower bias, attributed to lower demand from refineries due to planned maintenance activities and global growth uncertainties despite ongoing geopolitical concerns in the Middle East. Markets remain cautious, discounting the possibility that OPEC+ has exhausted its capacity for voluntary production cuts.

However, a potential gamechanger looms on the horizon—interest rate cuts by major central banks. Should these materialise, providing a boost to global growth activity, the second half of the year may witness a favorable environment for crude oil prices. The delicate balance between supply, demand, and geopolitical factors will shape the trajectory of crude oil throughout 2024.

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Base metals: Copper leads the pack

Copper has emerged as the top pick among base metals this year. Expectations for robust demand, coupled with potential risks of supply disruptions and lower ore grades from key producing regions like Peru, Chile, and Panama, have positioned copper favorably.

This stands in contrast to last year, when base metals had a lacklustre run, with zinc and nickel in the red (13.5 percent and 45 percent declines, respectively) and copper and aluminum holding flat. Global manufacturing contraction and subdued Chinese demand, particularly in housing, dictated the sector’s performance.

In 2024, however, the surge in demand from China, particularly in its green energy sector, encompassing electric vehicles and power generation, could act as a primary driver for copper prices. Notably, this trend gained momentum in the second half of 2023 and is expected to continue this year. Additionally, the weakness in the U.S. dollar, driven by expected interest rate cuts, is poised to further boost copper prices, providing a compelling investment thesis for this base metal.

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Investors should remain vigilant and capitalise on opportunities

Commodities as an asset class seem poised for a noteworthy performance. Gold, silver, and copper, driven by increased investment and end-use demand coupled with hampered supply, could chart a compelling course amidst the dynamic global market landscape. Investors, therefore, should remain vigilant and capitalise on opportunities arising within this complex and an ever-evolving scenario.

Data in the column is sourced from Bloomberg, Alpha Alternative Research