To read the full report, please download the PDF above.

Gold-oil ratio is sounding alarm for risk assets

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: soojin.kim@ae.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Gold and oil – critical commodities in providing guidance into global macro conditions – which are usually considered in a silo basis, are sounding alarm when considered conjointly. Today, as the Fed is attempting to soft land the economy and China continues to struggle to prop-up its ailing economy, it takes more barrels of crude oil to purchase a single ounce of gold bullion – a clear warning signal for risk assets. Investors need to part with 32 barrels of Brent crude for one ounce of gold – the highest since January 2021 – and we believe this upward trend has further to run to the upside. Intuitively, the relationship has logic. Crude oil powers the real economy, and when growth slows, prices are pressured, especially in a market where there’s ample spare production capacity to withstand any tightening shocks. In tandem, gold’s stellar performance (up +20% year-to-date) is a testament of its role as a geopolitical hedge of first resort in an uncertain operating environment. With Fed Chair Powell cementing rate cuts in September during the Jackson Hole symposium, alongside a confluence of unprecedented EM central bank demand, bullion-backed ETFs expanding, the risk of inflationary US policies after the elections from shocks including tariffs and rising debt apprehensions, reinforce why gold is up north of 20% year-to-date. Looking ahead, with our above-consensus call for gold breaching the USD3,000/oz threshold in 2025, and Brent crude remaining in an OPEC+ managed USD80-100/b corridor, we are convinced that the gold-oil ratio has further to run on the upside.

Energy

The spike in oil over recent trading sessions spurred by the revival of geopolitical tensions in the Middle East (which is now fading), points to diverging narratives on the trajectory of crude prices. The threat of a halt in Libyan oil supplies, imminent Fed rate cuts and the likely delay in the reversal of OPEC+ production cuts due in October, are being offset by growing recession risks, Chinese economic malaise and oil options positioning that are skewing bearish. Reflecting a lower fair value estimate for long dated prices, we have mark-to-market down our Brent average price forecasts by USD6/b to USD82/b and USD87/b for Q3 2024 and Q4 2024, respectively.

Base metals

The quiet rally across the base metals complex continues, bolstered by renewed demand from money managers that has previously trimmed exposures during the sharp May-July correction. We believe that worst of the correction in base metals is now behind us and the latest uplift in prices has further room to run as the Fed embarks on its easing cycle – historically, the median price change in base metals 12 months after the first Fed cut is ~14 in non-recessionary episodes.

Precious metals

Gold’s banner year continues with levels finding support north of USD2,500/oz, after Fed Chair Powell confirmed that the “time has come” to ease policy rates during the Jackson Hole symposium. We hold conviction in our above-consensus call for gold and forecast prices to rise to USD2,750/oz by year-end owing to its role as a geopolitical hedge of first resort in an uncertain operating environment, imminent Fed rate cuts, unprecedented central bank demand for gold, bullion-backed ETFs expanding, the risk of inflationary US policies after the elections from shocks including tariffs and rising debt apprehensions.

Bulk commodities

Iron ore prices are reclaiming a foothold north of USD100/MT for the first time in two weeks with tentative signs that China’s steel output may have found a floor following an acute slowdown in demand (spot steel rebar prices in China are now up for the first time since June). Yet, the optimism remains fragile with the world’s largest miner, BHP group, stating that China’s property sector remains “weak”.

Agriculture

Grains – corn, soybeans and wheat – are under pressure as ample supplies from major growers (Australia, Argentina and Russia) ahead of the winter season, weigh on the market. Additional consolidation may be instore in the absence a major technical breakout that may offer traders to recalibrate their positions.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.