COMEX: Micro Gold (
MGC1!
), Copper (
HG1!
), Aluminum (
ALI1!
)
2023 is coming to an end. What are some of the biggest headlines of the year?
• China’s ending of Zero-Covid gave hope to global economic recovery and an increase in commodities demand, but it was short-lived;
• U.S. regional bank crisis triggered a flight to safety;
• U.S. debt ceiling crisis escalated but was resolved at the eleventh hour;
• The runaway inflation was contained as the Federal Reserve hiked interest rates eleven times;
• House Speaker Kevin McCarthy was ousted in a history making vote;
• The Israel-Hamas conflict broke out in October, and geopolitical risk intensified as shipping routes in the Red Sea were under attack by the Houthi militia;
• U.S. reins in Cryptos with public trials and huge fines rendered to two large Exchanges;
• Fed cut became the new market narrative, which pushes equities to record high.
These events have significant impacts on commodities. Today, I will give a high-level review of metal commodities’ performance in 2023, and what lies ahead in 2024. Energy and Agricultural commodities will be covered in my subsequent writings.
A Good Year for Precious Metals
As of December 27th, Gold futures are up 13.2% year-to-date to $2,091 per troy ounce. The benchmark precious metal reclaims its status as the preferred safe-haven asset.
• The collapses of three regional banks in March posted a potential systemic risk in the US banking system. Gold gained 13% within a month as investors bought bullion and dumped dollar-denominated assets.
• Gold pulled back by 7% following the resolution of the debt ceiling crisis in early June, and the US government avoided a default of sovereignty debt.
• Since the Gaza War broke out, gold gained 9% as the geopolitical crisis escalated.
• Gold rises as the Fed cut narrative takes hold and investors are increasingly bullish. On December 3rd, spot gold reached an all-time high of $2,146.
2024 Outlook for Gold:
Lowering interest rates is bullish for gold, as the opportunity cost to hold the non-yielding bullion would be lower, comparing to interest bearing instruments. With two ongoing regional wars, geopolitical tension is expected to remain high in the new year. This is also positive for safe-haven assets like gold.
The December 19th CFTC Commitments of Traders report (COT) shows that “Managed Money” has 155,697 long positions and 47,421 short positions. The 108K net long positions indicate that speculative traders are very bullish on gold.
Trade Ideas:
Buying gold in the dip may be a good strategy in 2024. For example, a pullback could happen if the Fed issues a hawkish statement, or monthly inflation rate rebounds, or a cease-fire achieved in either the Middle East or Ukraine.
The February contract (MGCG4) of COMEX Micro Gold Futures is quoted at 2091.6 on Wednesday. Each contract has a notional value of 10 troy ounces, or $20,916 at current price. To buy 1 contract, investors are required to deposit $830 in initial margin.
Hypothetically, if gold futures bounds back to its all-time high $ 2,146, a long position would gain 54 points and $540 per contract (= 54 x $10). This would represent a theoretical return of 65% (= 540/830) excluding transaction fees. On the other hand, if gold price pulls back, the long position would lose $10 for each $1 of gold price decline per ounce.
Copper Under Pressure by Gloomy Economic Outlook
As of December 27th, copper futures are up 4.9% year-to-date to $3.98 per pound. The expected change in the balance of supply and demand drives copper price trend.
• In November 2022, China ended a 3-year-long Zero-Covid policy. It gave hope to global economic recovery and an increase in commodities demand. Copper rose from $3.60 to $4.20, up 16% within two months.
• China’s economic recovery lost steam after just one quarter. Copper prices have been trending down most of the year and touched a 52-week low of $3.55 in October.
• Recent data shows the U.S. economy to be resilient, employment market strong and inflation trending down. Adding in the aggressive rate cut expectations, copper rebounded 12% to $3.98.
2024 Outlook for Copper:
Below is the projected balance of supply and demand for copper, according to data from International Copper Study Group (ICSG).
• 2024: supply 27.8 million tons (mt), demand 27.5mt; excess supply is 300,000 tons.
• 2025: supply 28.6mt, demand 28.4mt; excess supply is 170,000 tons.
As an industrial commodity, copper supply tends to be relatively stable and easy to forecast. However, its demand could vary substantially as business cycle rotates from boom to bust.
The March contract (HGH4) of COMEX Copper Futures is quoted at $3.954 per pound on Wednesday. Each contract has a notional value of 25,000 pounds, or $98,850 at current price. To buy 1 contract, investors are required to deposit $4,500 in initial margin.
The recent COT report shows that Managed Money has 60,873 long positions and 45,806 short positions. The net long positions are small, not a good signal on trader intention.
While investors expect a soft landing for the US economy, whether the global economy could avoid a recession remains to be seen. Geopolitical tensions add to the uncertainty. I would wait for more data on copper demand before forming a trading strategy.
Aluminum Taking a Hit as Demand Weakened
As of December 27th, aluminum futures are up 0.4% year-to-date to $2,335 per ton. Like copper, the balance of supply and demand drives aluminum price trend.
• China’s ending of Zero-Covid pushed aluminum prices up $400 within a month.
• Aluminum prices have since declined and touched a 52-week low of $2,072 in August.
• With good economic data and rate cut expectations, aluminum rebounded 13%.
2024 Outlook for Aluminum:
The forecasted balance of supply and demand for aluminum by SMM:
• 2023: supply 49.9mt, demand 50.0mt, supply shortage is 93,000 tons.
• 2024: supply 51.1mt, demand 51.1mt, supply shortage is 50,000 tons.
Current forecast estimates that aluminum is near supply and demand balance in 2024.
The March contract (ALIH4) of COMEX Aluminum Futures is quoted at $2,375.5 per ton on Wednesday. Each contract has a notional value of 25 tons, or $59,387.5 at current price. To buy 1 contract, investors are required to deposit $2,000 in initial margin.
The recent COT report shows that Managed Money has 451 longs and 1,201 shorts. The net short positions indicate that speculative traders are bearish on aluminum. I would wait for more data on aluminum demand before forming a trading strategy.
To sum up, I am bullish on gold with an outlook for lower interest rates and heightened geopolitical risks. For copper and aluminum, demand outlook is uncertain depending on whether a global economic recession could be avoided.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
MGC1!
), Copper (
HG1!
), Aluminum (
ALI1!
) 2023 is coming to an end. What are some of the biggest headlines of the year?
• China’s ending of Zero-Covid gave hope to global economic recovery and an increase in commodities demand, but it was short-lived;
• U.S. regional bank crisis triggered a flight to safety;
• U.S. debt ceiling crisis escalated but was resolved at the eleventh hour;
• The runaway inflation was contained as the Federal Reserve hiked interest rates eleven times;
• House Speaker Kevin McCarthy was ousted in a history making vote;
• The Israel-Hamas conflict broke out in October, and geopolitical risk intensified as shipping routes in the Red Sea were under attack by the Houthi militia;
• U.S. reins in Cryptos with public trials and huge fines rendered to two large Exchanges;
• Fed cut became the new market narrative, which pushes equities to record high.
These events have significant impacts on commodities. Today, I will give a high-level review of metal commodities’ performance in 2023, and what lies ahead in 2024. Energy and Agricultural commodities will be covered in my subsequent writings.
A Good Year for Precious Metals
As of December 27th, Gold futures are up 13.2% year-to-date to $2,091 per troy ounce. The benchmark precious metal reclaims its status as the preferred safe-haven asset.
• The collapses of three regional banks in March posted a potential systemic risk in the US banking system. Gold gained 13% within a month as investors bought bullion and dumped dollar-denominated assets.
• Gold pulled back by 7% following the resolution of the debt ceiling crisis in early June, and the US government avoided a default of sovereignty debt.
• Since the Gaza War broke out, gold gained 9% as the geopolitical crisis escalated.
• Gold rises as the Fed cut narrative takes hold and investors are increasingly bullish. On December 3rd, spot gold reached an all-time high of $2,146.
2024 Outlook for Gold:
Lowering interest rates is bullish for gold, as the opportunity cost to hold the non-yielding bullion would be lower, comparing to interest bearing instruments. With two ongoing regional wars, geopolitical tension is expected to remain high in the new year. This is also positive for safe-haven assets like gold.
The December 19th CFTC Commitments of Traders report (COT) shows that “Managed Money” has 155,697 long positions and 47,421 short positions. The 108K net long positions indicate that speculative traders are very bullish on gold.
Trade Ideas:
Buying gold in the dip may be a good strategy in 2024. For example, a pullback could happen if the Fed issues a hawkish statement, or monthly inflation rate rebounds, or a cease-fire achieved in either the Middle East or Ukraine.
The February contract (MGCG4) of COMEX Micro Gold Futures is quoted at 2091.6 on Wednesday. Each contract has a notional value of 10 troy ounces, or $20,916 at current price. To buy 1 contract, investors are required to deposit $830 in initial margin.
Hypothetically, if gold futures bounds back to its all-time high $ 2,146, a long position would gain 54 points and $540 per contract (= 54 x $10). This would represent a theoretical return of 65% (= 540/830) excluding transaction fees. On the other hand, if gold price pulls back, the long position would lose $10 for each $1 of gold price decline per ounce.
Copper Under Pressure by Gloomy Economic Outlook
As of December 27th, copper futures are up 4.9% year-to-date to $3.98 per pound. The expected change in the balance of supply and demand drives copper price trend.
• In November 2022, China ended a 3-year-long Zero-Covid policy. It gave hope to global economic recovery and an increase in commodities demand. Copper rose from $3.60 to $4.20, up 16% within two months.
• China’s economic recovery lost steam after just one quarter. Copper prices have been trending down most of the year and touched a 52-week low of $3.55 in October.
• Recent data shows the U.S. economy to be resilient, employment market strong and inflation trending down. Adding in the aggressive rate cut expectations, copper rebounded 12% to $3.98.
2024 Outlook for Copper:
Below is the projected balance of supply and demand for copper, according to data from International Copper Study Group (ICSG).
• 2024: supply 27.8 million tons (mt), demand 27.5mt; excess supply is 300,000 tons.
• 2025: supply 28.6mt, demand 28.4mt; excess supply is 170,000 tons.
As an industrial commodity, copper supply tends to be relatively stable and easy to forecast. However, its demand could vary substantially as business cycle rotates from boom to bust.
The March contract (HGH4) of COMEX Copper Futures is quoted at $3.954 per pound on Wednesday. Each contract has a notional value of 25,000 pounds, or $98,850 at current price. To buy 1 contract, investors are required to deposit $4,500 in initial margin.
The recent COT report shows that Managed Money has 60,873 long positions and 45,806 short positions. The net long positions are small, not a good signal on trader intention.
While investors expect a soft landing for the US economy, whether the global economy could avoid a recession remains to be seen. Geopolitical tensions add to the uncertainty. I would wait for more data on copper demand before forming a trading strategy.
Aluminum Taking a Hit as Demand Weakened
As of December 27th, aluminum futures are up 0.4% year-to-date to $2,335 per ton. Like copper, the balance of supply and demand drives aluminum price trend.
• China’s ending of Zero-Covid pushed aluminum prices up $400 within a month.
• Aluminum prices have since declined and touched a 52-week low of $2,072 in August.
• With good economic data and rate cut expectations, aluminum rebounded 13%.
2024 Outlook for Aluminum:
The forecasted balance of supply and demand for aluminum by SMM:
• 2023: supply 49.9mt, demand 50.0mt, supply shortage is 93,000 tons.
• 2024: supply 51.1mt, demand 51.1mt, supply shortage is 50,000 tons.
Current forecast estimates that aluminum is near supply and demand balance in 2024.
The March contract (ALIH4) of COMEX Aluminum Futures is quoted at $2,375.5 per ton on Wednesday. Each contract has a notional value of 25 tons, or $59,387.5 at current price. To buy 1 contract, investors are required to deposit $2,000 in initial margin.
The recent COT report shows that Managed Money has 451 longs and 1,201 shorts. The net short positions indicate that speculative traders are bearish on aluminum. I would wait for more data on aluminum demand before forming a trading strategy.
To sum up, I am bullish on gold with an outlook for lower interest rates and heightened geopolitical risks. For copper and aluminum, demand outlook is uncertain depending on whether a global economic recession could be avoided.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
