Three big things you need to know:
- First, in our most recent analysis of global commodity investor flows, we have observed that total commodity investor AUM has started off the year on a weak note. Commodity-linked exchange traded products have continued to decline, led by gold, and commodity index AUM also weakened last month. This has set 2024 up for quite the balancing act, but we remain hopeful.
- Second, with gold playing such an outsized role in the weakness dominating commodity AUM, it may be surprising that gold prices have actually held up quite well this year. We have continued to call out gold’s price resilience, especially in the context of investors have remained on the sidelines. This compared to the gold-positive narrative of eventual rate cuts have left gold itself facing quite the balancing act.
- Third, a balancing act that has for the most part not played on in a commodity’s favor so far this year is US natural gas. It has touched lows recently amid weak weather-linked demand, buoyant supplies to date, and general bearish sentiment. We have described it as a commodity that has fallen a bit too far, seemingly waiting for a catalyst, but are recent headlines enough?
If you’d like to hear more, here’s another few minutes. Now, the details.
Starting with Theme #1: Global Commodity Investor flows across the products we track started off the year quite weak.
In our latest analysis we observed that total commodity investor AUM in January did fall, although to its credit, it was least weak example in the last six months, seeing just $13bln in net notional outflows from the space (which across the products we track had over $537bln in total AUM last month). In January, commodity-linked exchange traded product AUM continued its decline due to withdrawals from the ETP space as did commodity index AUM.
January’s decline in commodity investor AUM sets up 2024 for quite the balancing act in our view. This year is set to test whether otherwise resilient gold price prospects can lure investors back to the space, and whether commodities generally can attract inflows across the board. We are keeping a special eye on energy commodities which remain in a “show me the disruption” mode despite high geopolitical risks. Whatever the outcome, it seems prices and AUM are struggling in the near-term amid a complicated balancing act that to date has seen weakness in holdings prevail. We are however hopeful for 2024 AUM trends overall after a weak January.
For commodity index AUM specifically in January, mixed flows and prices amounted to an approximately $10bln net notional decline. In January this means that there were indeed net departures from the index space on an underlying basis, complicated by the underlying shifts seen due to the index rebalance. The small decline in AUM piled onto previous declines and left the total at $325bln in January, the lowest since December 2021.
When it comes to exchange traded products, ETP AUM also slipped, this time by 1.8% in January, falling to $233.5bln, the lowest since October. The backslide was shared across all categories, and while all sectors contributed, the continual contributions of precious metals, and gold in particular, to this downtrend is perhaps the most important factor to watch, bringing us to our next theme.
Moving on to Theme #2: Gold prices have been resilient in the face headwinds like investors sitting on the sidelines.
Gold itself is a great example of a balancing act. In a directional sense, the eventual rate cut narrative (of which the market is increasingly looking to June), is quite clearly gold positive. However, even in such a context, gold is not an asset without headwinds. Specifically, investors continue to remain on the sidelines which we think is a sore spot. Gold-backed exchange traded product flows, as we mentioned previously, have continued to see outflows, and even if they are largely holding up in dollar terms, the lack of new and significant allocations to gold exchange traded products by investors, namely in developed markets, is in our view a clear source of weakness. This ongoing grind lower in gold backed ETP AUM is one of the main factors that have continued to weigh on gold in our view, especially notable in the broader context of otherwise resilient prices.
While it has cut both ways at times, gold has also had to contend with re-pricing of Fed rate cuts on the back of data releases, Fed statements, and economic news. We have previously cited this as a key risk to gold prices as market expectations were set to be repeatedly recalibrated and not always in gold’s favor, especially when the market had been looking towards much earlier cuts. While this seems to be subsiding, until there’s more clarity this sort of data dependency could certainly continue and at times weigh on gold.
While the eventual path for gold prices is higher in our view, note that in our base case gold prices do grind higher this year through year end, much of the recent strength has been attributed not just to eventual rate cuts, but to strong official sector demand, for example from central banks, and demand in China. Indeed, it seems that central bank demand and Chinese consumers have played an important role in keeping prices elevated. Central bank demand is widely expected to remain strong this year and next, and other sovereign investment vehicles may be buying gold as well. In China specifically, we also see evidence of wide consumer demand, with premiums hitting highs of over $40/oz in our data, indicative of strong demand there among other market turbulence.
Overall, while gold may continue to be stuck in the near-term (as our Q1 price forecast is $2007 ounce) we do expect it to grind higher, with a Q4 forecast of $2082/oz.
Wrapping up with Theme #3: Perhaps the most difficult balancing act in the commodity space is that of US natural gas.
Prior to Wednesday’s strength, natural gas prices seemed lost and looking for a catalyst. Natural gas supplies have remained buoyant, up several % y/y in year-to-date terms, and with the exception of January, warmer than normal weather has dominated and the market had been losing hope with the chances of a last stand for winter demand seemingly melting away.
Having dropped squarely below the $2/MMBtu mark for the first time in years, gas got weaker than even we expected. In our eyes, natural gas remains in search of a catalyst. It’s not that there are no fundamental justifications for current prices reaching such low levels, there are plenty, but we do think the lows were at least a bit exaggerated to the downside. This aligns with our long-published view on the dislocation between prices and fundamentals that has grown in recent years.
We are cognizant that it will likely remain tough to find enough catalysts in the near term with recent production trends, current near-term weather forecasts, etc. So will we have to wait for the summer? If we do, at least both the current Jun-Jul-Aug and Jul-Aug-Sep three-month outlooks look to have a high probability of being warmer than normal. This coupled with the fact that injection season weather extremes have become gassier and gassier means we could see more record days and thus accumulate power demand beyond our forecasts.
In the nearer term, are recent headlines that some producers curtailing drilling activity enough to revive gas prices? That remains to be seen, but never the less we will need more material catalysts going forward in order to change gas’s near-term price prospects. We think there is hope, but it may be summer before a truly stronger footing is fully realized and prices grind towards our forecasted levels.
Beyond that, in terms of long-term themes, the market is indeed looking towards 2025 with substantial LNG export capacity additions set to come online before the end of next year. This is largely what producers and the market are gearing up towards. Even with the pause on new approvals, there is no change to our export forecast for this year and next as a result, and with projects currently under construction, peak export capacity is still set to reach about 25 Bcf/d before the end of 2028 regardless. Thus we remain of the view that the current pause on new approvals from the administration is more of a 2028-2030 story for underlying gas, however we do not expect the theme or the discussion to dissipate given the politics, policy, geopolitics, economics, and fundamentals at play.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.