Will Growth Drive A Strong January For Commodities Once Again?

December 27, 2013

Thin holiday markets have yielded a surprise strong performance by the metal sector, not least silver and platinum. The move came during a week where US stock indices extended their gains to new all-time highs and ten-year bond yields climbed back towards three percent. All of this indicates that the market is gearing up for a strong beginning to 2014 as optimism, especially about US growth, has been rising.

A word of caution before we proceed: Trading this time of year is very thin and market moves can quickly be undone once liquidity returns in early January. Established trends are normally also supported as traders seeks to protect and book as much profit as possible before once again starting from scratch on January the first. So without reading to much into it we can nevertheless try to draw some conclusions as to what will happen into early January.

In a repeat scenario from the previous three years, raised growth expectations could once again become one of the key drivers as 2014 begins. The table below shows the strong January performances among some of the key commodities during the past three years. All showed positive returns in all three years with platinum and RBOB Gasoline the strongest performers followed by industrial metals and Brent crude with silver also joining in. The energy sector was also supported by strong first quarter rallies driven by geopolitical worries in both 2012 and 2013 but overall growth expectations were raised leaving macro funds with a fairly easy decision to make. 

Silver has been the best performing commodity during this shortened week but overall remains at the bottom of the performance table having lost more than 34 percent in 2013. Platinum came second after it jumped the most in ten weeks on speculation that a global economic recovery would boost demand for the metal at a time of lower than expected production in South Africa, the world's largest producer. 

Even gold has managed to shrug of the taper announcement from the US Federal Reserve on December 18 and climbed back above USD 1,200/oz which if maintained into the early parts of January may trigger some rethinking about its near-term outlook. Note that the precious metal has managed to rally despite ten-year US bond yields rising to a 30-month high and stocks reaching a new record together with the continued reductions of holdings in Exchange Traded Products. As of December 26, some 70 tons had been pulled from gold backed ETPs according to Bloomberg, the biggest monthly reduction since July when the reduction was 74 tons.

Gold is currently down by more than 25 percent on the year but actually up by one percent over the past six months which gives an indication about how the selling was concentrated during the early part of the year. As we begin 2014 headwinds will still present themselves with investors being bearish bonds and bullish stocks on raised growth expectations and the continued normalisation of interest rates. December will show a fourth month in a row of negative returns momentum and trend following investors will not be changing their outlook or positioning unless we see a much stronger move to the upside. Traders will continue to favour selling into rallies until we see a potential break back above the December high at 1268/oz.

With growth expectations receiving some attention, silver may once again enjoy a better than expected January and on this basis the gold/silver ratio trade could receive some attention. As the chart above shows the recent outperformance of silver has brought the ratio down to 60.9 which is the cost of one ounce of gold measured in ounces of silver. This level corresponds with trend line support going back to April 2011 when it reached a low of 31.7 as the price of silver was pushing towards USD 50/oz. A break below support could trigger some additional relative buying interest for silver against gold…so it is something worth keeping an eye on over the coming days.


Courtesy SAXO BANK – Danish Investment Bank

Ole Hansen is a specialist in traded futures with particular focus on commodities. He has previously worked 15 years in London most recently for a Multiasset futures and foreign exchange hedge fund where he was in charge of the trade execution team.

1 cubic foot of silver weighs approx 655 pounds whereas 1 cubic foot of gold weighs more than half a ton.