With a single command from the Federal Reserve, mixed feelings in the commodity market

The Federal Reserve lowered the benchmark interest rate this week and is expected to further cut rates in the coming months. Analysts from Citigroup and HSBC took this opportunity to delve into the potential performance of commodities in the future.

In its fourth-quarter outlook report, Citigroup stated that the rate cut cycle in the United States and globally will "fully unfold" before the end of the year. With actual interest rates declining and concerns about economic growth intensifying, this will be "very favorable" for precious metals.

According to Citigroup's data, in the six months following the first rate cuts by the Federal Reserve in 1995, 2001, 2007, and 2019, the median annualized return for precious metals was 13%, and the average return over the past two rate cut cycles was 20% in the following 12 months.

When interest rates fall, commodities are generally expected to benefit as lower borrowing costs can stimulate the economy and increase demand, but the situation is not always that simple.

Citigroup's data shows that industrial metals including copper, aluminum, lithium, and energy seem to benefit less during rate cut cycles. Interest rates are not the only factor to consider.

In a report on September 15th, Citigroup also mentioned that the results of the U.S. election, any potential tariffs, and supply disruptions caused by geopolitical tensions could affect commodity prices.

Despite these uncertainties, Citigroup expressed a "very positive" outlook on silver and holds a "highly confident view" on the upward trend of silver. The bank's fundamental expectation is that by the end of this year, silver will rise by over 20%, with an increase of over 30% in the next 6 to 12 months. By then, the spot silver price is expected to be around $35 and $38 per ounce respectively.

Citigroup stated that silver will benefit from the Federal Reserve's rate cut cycle, and ETF and fund futures purchases are "likely to increase significantly" in the next six months. Analysts at the bank said, "Regardless of the direction of the Chinese economy, silver has unique and bullish reasons that may attract a large number of ETFs, funds, and Chinese retail investors."

They also pointed out strong demand for silver in China's energy transition efforts, such as for solar energy and electric vehicles.

According to Citigroup, the situation for gold is similar. Citigroup analysts wrote, "As the Federal Reserve begins to cut rates, the possibility of a U.S. economic recession remains high amid labor market turmoil. We know from experience that the performance of precious metals often outperforms other commodity sectors (especially energy), and ETF purchases are often stronger in a low real interest rate environment." Citigroup emphasized its "confident view" is bullish on gold rather than oil.

While gold prices have repeatedly hit historic highs this year, Citigroup predicts that from now on, this upward trend is "unlikely to be linear," but on average, gold prices should rise in the fourth quarter and by 2025. It forecasts that gold will reach $3000 in 2025.

Copper and Aluminum

In recent years, copper has been a beneficiary of energy transition efforts and the artificial intelligence boom. The demand for copper is widely regarded as an indicator of economic health, as this metal has extensive applications in construction and industry.

In a report on September 17th, HSBC studied the relationship between the past 30 years of Fed rate cuts and copper/aluminum prices. HSBC analysts stated, "We expect industrial metal prices to follow the development path of 2019, when rate cuts served as a mid-term adjustment measure in the cycle to prevent further economic slowdown.

They added that this means both metals may potentially remain in a "range-bound" state during this rate-cut cycle and rebound as demand picks up.

HSBC believes that if an economic recession occurs, the speed and magnitude of rate cuts may exceed expectations, and copper/aluminum prices could repeat the downturn seen during the dot-com bubble of 2000-2003. During that period, industrial metal prices experienced a "sharp decline" for a long time, and the bank stated that a similar situation may occur now, with prices potentially falling by about 20%.

However, HSBC did emphasize that other factors are at play, such as supply and demand dynamics. Nevertheless, in the current context, the bank stated that due to supply constraints, it favors aluminum more.

According to Citigroup's fundamental forecast, the average copper price for the remainder of this year is $9,000 per ton, citing the uncertainty of the U.S. election and weak manufacturing sentiment. This is a decrease from the current price of around $9,390.

In a bullish scenario, Citigroup expects the average copper price to be $12,500 per ton in 2025 and $15,000 in 2026. Citigroup stated that this scenario assumes a "soft landing" in the U.S. and Europe, as well as a rapid rate-cut cycle by the Fed driving a "strong and rapid" global manufacturing rebound.

Regarding aluminum, Citigroup stated it holds a "neutral" stance before the U.S. election. In its fundamental forecast, the trading price of aluminum in the fourth quarter of 2024 is expected to be between $2,300 and $2,500 per ton, with the current price of the metal around $2,473 falling within this range. Citigroup predicts that unless impacted by any tariff shocks, the price of aluminum will rise to an average of $2,750 per ton by 2025.

Energy

Citigroup forecasts that in 2025, oil prices will soften again, with Brent crude prices falling to around $60 per barrel. It is currently trading at around $74 per barrel. Even with OPEC+ maintaining production cuts, the bank expects a market surplus.

Citigroup stated that other factors should be considered, such as trade tariffs, a new round of sanctions on Iran, and demand from China. Based on the situation in 2019, trade tariffs reduced global oil demand growth by 200,000 barrels per day. However, Citigroup added that any significant stimulus measures from China could potentially increase oil demand by an additional 100,000 barrels per day The statement reads: "China's oil demand may unexpectedly rise, but the magnitude may be controlled as economic policies are unlikely to target energy-intensive industries."