Who will dominate the ups and downs of commodities in the fourth quarter? Waiting quietly for the Fed rate cut to "land"

Since the beginning of this year, the global commodity market has been in a state of turmoil. The S&P GSCI index saw a surge of up to 12% in early April, but quickly plummeted afterwards. As of September 13th, it has fallen by nearly 1% year-to-date.

Amidst the roller-coaster market for commodities, gold has undoubtedly emerged as the biggest winner. Boosted by central bank buying, geopolitical tensions, and expectations of Fed rate cuts, the price of gold has continuously hit new historical highs. However, due to subdued global demand prospects, WTI crude oil once fell below $65, iron ore below $90, the "Copper Doctor" has dropped over 15% from its peak in May, and agricultural products such as corn and soybeans have continued to explore new lows in four years.

With less than four months left in 2024, where will commodities go from here? Can gold continue to lead the way? Will the big losers like crude oil and iron ore be able to turn the tide?

Gold Price Surges, Retail Investors Flock to CME Micro Gold Futures, Citi Bullish to $3000

Last Friday, the European Central Bank cut interest rates for the second time this year, and the Fed's rate cut this week seems imminent. Once again, the price of gold hit a new high, briefly surpassing $2580 per ounce.

As gold prices continue to soar, retail investors have flocked to the Chicago Mercantile Exchange (CME) micro gold futures contracts. As of September 11th, the daily average trading volume has reached 99,527 contracts, far exceeding the peak levels during the pandemic in 2020.

With retail investors pouring in, the CME micro gold electronic contracts have risen by nearly 26% since the beginning of the year.

CME is the largest derivatives exchange in the United States, and its micro gold futures contracts are mainly aimed at retail investors, providing entry opportunities for investors with less financial strength. Compared to standard gold futures contracts, CME micro gold futures contracts are one-tenth the size, with lower capital requirements, margin requirements, and trading costs, while providing the same level of flexibility and security.

Looking ahead, a previous report by Goldman Sachs indicated that due to the impact of the U.S. debt crisis, Fed rate cuts, and increased hedging demand, the price of gold is expected to rise to $2700 per ounce by early next year, a 5% increase from last Friday's closing price. Citigroup is even more optimistic, stating that based on historical experience, whether it's Trump or Harris elected as U.S. president, the price of gold is expected to surpass the $3000 mark by the end of this year.

"Endless Decline" of Crude Oil, Is There Room for Rebound This Year?

In the global commodity market this year, the bulls in the oil market are undoubtedly a group of "disappointed individuals".

Last week, both OPEC and the U.S. Energy Information Administration (EIA) lowered their forecasts for global oil demand growth in 2024, leading to a sharp decline in international oil prices. WTI crude oil once fell below $65, hitting a new low in a year and a half.

On the supply side, the latest data shows a slight increase in OPEC production in July compared to the previous month, causing market concerns. Jim Burkhard, Vice President of Commodity Research at S&P Global, recently stated at the Asia Pacific Petroleum Conference (APPEC) that OPEC+ and its allies are expected to start increasing oil production in 2025, marking the first time in several years.

Goldman Sachs, Morgan Stanley, Citigroup, and HSBC all agree that there will be a severe oversupply of crude oil next year, with oil prices potentially falling to the $60 level. Despite the long-term downside risks, in Goldman Sachs' view, the sharp drop in oil prices presents excellent short-term entry opportunities for investors.

Goldman Sachs analyst Yulia Zhestkova Grigsby found that compared to the extremely pessimistic futures market, the spot market is under pressure due to production declines and demand recovery. The divergence between the futures and spot markets indicates that as investors gradually return to rationality, the average Brent oil price in the fourth quarter is expected to rebound to over $77 per barrel, up more than 12% from this month's low point.

Facing future uncertainties, crude oil investors can hedge against downside risks in crude oil futures by focusing on the CME Group's Micro WTI Crude Oil Futures contract, while also guarding against recent upside risks. Similar to micro gold futures contracts, CME Group's Micro WTI Crude Oil Futures are one-tenth the size of standard contracts, providing the same flexibility and security with lower margins and trading costs.

Improved bearish sentiment, corn approaching bottom, soybeans also seeing a turnaround?

The United States is expected to have an unprecedented corn harvest season. In late August, the price of CBOT corn futures under the CME Group fell to below $4 per bushel, close to the low point at the beginning of 2020.

Soybeans and wheat are also under pressure and declining due to the prospects of a bountiful corn market. The price of CBOT soybean futures fell below 1000 cents per bushel, the lowest level since mid-2020.

However, considering the continuous price decline, Adam Davis, Chief Investment Officer at Farrer Capital, believes that the corn price may have reached its bottom, with most negative factors already priced in. The latest data from the Commodity Futures Trading Commission (CFTC) shows that investors are significantly reducing their net short positions in U.S. soybeans, corn, and wheat contracts, easing the bearish sentiment in the market.

According to the World Meteorological Organization, global weather patterns are expected to transition from El Niño to La Niña by the end of this year, potentially leading to more extreme climate disasters. Similarly, the U.S. Department of Agriculture recently reported that the proportion of soybean crops affected by drought in the United States has increased by 7 percentage points to 26%, with drought causing Brazil to delay the planting season for new soybean crops, driving a four-week rebound in Chicago soybean futures Chicago soybean futures is one of the most actively traded agricultural futures globally, with an average daily trading volume of over 200,000 contracts and a peak open interest close to 900,000, providing traders with high liquidity and flexibility. Moreover, all trades are conducted in a centrally cleared market regulated by the CFTC, reducing counterparty credit risk.

What's Next for Iron Ore?

Weak Asian demand has dragged down iron ore, making it one of the worst-performing commodities this year, with a decline of over 30% since the beginning of the year.

Amid continued market weakness, several investment banks believe that the "fundamental outlook for iron ore remains bleak."

Goldman Sachs commodity trader Mark Ma previously stated that in the coming weeks, iron ore may see a 5% short-covering rebound, but in the long term, iron ore will still be in a state of structural oversupply unless mining companies reduce production, the market will not be able to rebalance.

Bear Market Nearing its End, Commodities Ready for a Bull Market?

Despite significant market volatility this year, global commodities are still at historical highs, with the expectation of a Fed rate cut landing, commodity prices are bound to be supported by a weaker US dollar.

A recent HSBC research report pointed out that the global commodity market entered a bear market cycle in mid-July. Referring to historical experience, bear market cycles typically last at least 3 months, so this round may have already passed about half, and preliminary signs of the transition from a bear market to a bull market in commodities are emerging.

Bank of America went as far as boldly predicting a sudden surge in structural inflation in the US, indicating that "the commodity bull market is just beginning." The institution believes that from now until 2030, commodities are one of the important areas investors should pay attention to.

Jared Woodard and other Bank of America strategists emphasized in their latest report that as the suppression of inflation by technological disruption gradually weakens and the trend towards deglobalization continues to strengthen, the US may soon return to the inflation trend before 2000, with an annual increase rate of 5%.

Furthermore, Bank of America pointed out that US tariffs, debt crisis, fiscal deficits, artificial intelligence, and net-zero policies will all exacerbate inflationary pressures, and by then the annualized return rate of commodities may reach 11%.