European Natural Resources Fund: Gold performance in 2024 will outperform U.S. stocks; next year's trend depends on whether emerging market demand can be sustained

According to the Zhitong Finance APP, Li Gangfeng, a special analyst for the European Natural Resources Fund Commodity Discovery, stated that the price of gold in US dollars rose by 25.5% in 2024, setting a historical high 40 times (with a peak of $2,790), marking the best annual performance in the past 14 years, and also outperforming US stocks last year. It is expected that in 2025, there will be a struggle between Trump and the Federal Reserve, which may bring volatility to the dollar, theoretically benefiting gold prices.

As of last Tuesday, the net long positions in US futures for gold, silver, and copper have all declined. Except for gold and silver, other metals like platinum, palladium, and copper have shifted from net long to net short.

The net long positions in US gold futures fell by 1% week-on-week; meanwhile, the net short positions dropped by 5%, resulting in the fund's holdings decreasing from a net long of 573 tons to 567 tons, the lowest level in the past 26 weeks, and marking the 64th consecutive week of net long positions (previously there were 46 consecutive weeks of net long). This is also 62% of the historical peak of 908 tons in September 2019. As of December 31, the price of gold in US dollars has accumulated a rise of 27.1% this year (previous week +27.4%), while the fund's net long positions have accumulated a rise of 9.7% during the same period (previous week +11.1%).

Silver, which has a high correlation with gold prices, has always shown stronger volatility than its wealthy cousin. The net long positions in US silver futures fell by 4% week-on-week; the net short positions increased by 11%, resulting in the fund's holdings dropping from a net long of 3,202 tons to 2,616 tons, the lowest level in the past 44 weeks, and marking the 43rd consecutive week of net long positions, which is 17% of its peak period. As of December 31, the price of silver in US dollars has accumulated a rise of 21.5% this year, with the silver fund's net long positions accumulating +2.8% (previous week +7.3%) and net short positions accumulating a rise of 6.2% (previous week -4.6%).

The net long positions in US platinum futures fell by 17% week-on-week; however, the net short positions increased by 10%, resulting in a shift from a net long of 3 tons back to a net short of 14 tons. Historically, the net short positions in US platinum futures have been maintained for the longest period of 31 weeks (from April 2018 to October 2018).

The net short positions in US palladium futures have dropped back to 35 tons, the lowest level in the past 16 weeks. Li Gangfeng believes that even though the bull market for palladium has ended, if palladium continues to maintain a significant net short position, it may still be difficult for other precious metals to completely reverse their trends. The holdings in the palladium fund have been in a net short position for 107 consecutive weeks, marking the longest net short period in history.

The net long positions in US futures gold have increased by 35% since the beginning of the year (accumulated increase of 101% in 2023)

The net long positions in US futures silver have decreased by 1.2% since the beginning of the year (accumulated decrease of 44% in 2023)

The fund's net position in U.S. futures platinum has dropped 152% year-to-date (a cumulative decline of 7% in 2023).

The fund's net position in U.S. futures copper has dropped 132% year-to-date (a cumulative decline of 0.3% in 2023).

Basically, it can be clearly seen from the above charts that despite the rise in global inflation over the past few years, the prices of various metals have all experienced varying degrees of decline. The main reason is that the futures market lacks funds to go long and drive the leverage effect. If someone had a crystal ball years ago and knew that global inflation would surge this year, along with wars and various uncertainties, and went long on precious metals in the futures market, they would likely have lost money. The most ironic thing is that since the pandemic spread globally in 2020, the net long position in precious metals in the U.S. futures market has continuously declined, reflecting that funds are intentionally preventing precious metals from rising.

The CFTC's weekly report on U.S. copper has been available since 2007. Since copper was in a bear market from 2008 to 2016, it is not surprising that the historical net position of U.S. copper has mostly been at net short levels. However, starting in 2020, due to the global pandemic affecting supply and mining operations, coupled with market expectations of strong demand for copper from electric vehicles, copper prices rose and even reached new historical highs. But currently, the global investment philosophy is that the world is entering an economic recession, leading to reduced demand for commodities.

The net long position in copper funds has seen a sharp decline, and it is possible that the stimulus economic policies launched in China in the first quarter of 2025 may provide support for copper prices, but it is expected that by the second half of the year, U.S. copper will show a net short position from funds.

If you ask ten industry experts, I believe nine of them would be optimistic about the prospects for copper, but Li Gangfeng is that tenth one. 2024 may be the last good year for copper, and starting next year, there may be a more significant decline—because current copper prices are no longer cheap for China's midstream manufacturers and downstream demand, and they will continuously seek cheaper alternatives (such as aluminum). Unless India, the U.S., the Middle East, or Africa undergo a large-scale infrastructure revolution, copper prices may primarily follow a downward trend in the coming years.

Li Gangfeng updated the short-term direction of gold prices, which has important implications for gold mining stock indicators. Last week, the ratio of U.S. dollar gold prices to North American gold mining stocks saw a decline:

As of Friday (the 3rd), the gold price/North American gold mining stock ratio was 18.66X, down 1.1% from 18.87X on the 27th. It has accumulated a rise of 16.5% in 2024. The cumulative increase for the entire year of 2023 was 13.2% (2022: +6.4%), indicating that mining stocks have underperformed physical gold for at least three consecutive years.

In fact, since 2009/2010, the performance of mining stocks has consistently lagged behind the commodities themselves, and in recent years, even oil and natural gas production companies have shown similar trends. Li Gangfeng believes one reason for this is the growing emphasis in the investment community on environmental, social responsibility, and corporate governance (ESG). For example, in 2021, Blackrock committed to the UK Parliament to no longer invest in coal and oil production companies, and they are certainly not the only fund company that has pledged to invest only in companies and industries that place greater importance on ESG.

Now that Trump has been elected, theoretically, this is good news for mining companies, as the market believes Trump prioritizes engineering development over environmental protection (investors may want to pay attention to some projects in the U.S. that have previously been unable to develop for various reasons, as the market anticipates a possibility of policy green lights). However, the problem is that the market also believes that the financial market will see a strong dollar and reduced consumption (due to increased tariffs), which is unfavorable for commodity prices. Moreover, in the broader market outlook that is bullish on U.S. stocks, the mining sector can continue to be overlooked. Future copper prices will depend on whether the U.S. will push for large-scale infrastructure projects again.

Li Gangfeng believes that tracking overseas gold mining stock prices is a relatively reliable forward-looking tool; if gold prices continue to rise but gold mining stocks experience a sharp decline, caution is warranted.

Gold-Silver Ratio

The gold-silver ratio is one of the indicators measuring market sentiment. Historically, the gold-silver ratio has operated at levels of approximately 16-125 times:

Generally, the more panic in the market, the higher the gold-silver ratio will be. For example, in 2020, due to the global spread of COVID-19, the gold-silver ratio once surged past 120 times, reaching a historical high.

Last Friday, the gold-silver ratio index was 89.2, down 0.1% from the previous period, with a cumulative increase of 4.7% in 2024. The cumulative increase for 2023 was 14.0%, indicating that silver has underperformed gold for at least two consecutive years, reflecting the market's sustained high level of risk awareness.

It is important to note that both the dollar gold price/North American gold mining stock ratio and the gold-silver ratio have clearly shown a trend of bottoming out and rebounding. The financial market has evidently entered the economic recession trading phase.

The U.S. may maintain interest rates unchanged in January

At the time of writing, the market believes that the probability of the Federal Reserve maintaining interest rates unchanged on January 29 is at 88.8%, the same as last Friday:

This is the futures market's predicted probability distribution for U.S. interest rates in December 2025:

As of last Friday, the market estimates that the highest probability for the Federal Reserve to cut interest rates next year is 1-2 times.

After a long period of verification, the futures market's predictions for U.S. interest rate trends, especially the forward expectations, are generally wrong. Therefore, Li Gangfeng boldly predicts that the number of interest rate cuts in the U.S. next year will exceed current market expectations, especially if a stock market crash occurs next year.

It is expected that in 2025, there will be a struggle between Trump and the Federal Reserve, which may bring volatility to the U.S. dollar and theoretically benefit gold prices.

The gold price rose 25.5% in 2024, setting a historical high 40 times (with a peak of $2,790), marking the best annual performance in the past 14 years, and last year's returns also outperformed U.S. stocks.

The outstanding performance of gold prices in 2024 is mainly due to market concerns about geopolitical issues and, more importantly, the belief that the U.S. is entering a rate-cutting cycle. Not only is the opportunity cost of holding gold starting to decline, but the U.S. dollar has been fundamentally weak before Trump's election victory. Therefore, last year saw strong demand from global central banks and investors, especially India, which had robust demand for gold throughout the year, taking advantage of the weak gold prices after Trump's election; on the other hand, the Reserve Bank of India was also one of the central banks that bought the most gold globally last year: in the first 11 months, the Reserve Bank of India increased its gold holdings by 72.6 tons, far exceeding 16 tons in 2023 and 33 tons in 2022, while gold accounted for 10.2% of India's foreign exchange reserves, up from 7.8%.

Even U.S. allies have significantly increased their gold reserves, and Li Gangfeng cannot understand why some central banks that are not U.S. allies did not increase their gold purchases earlier. Theoretically, a country can nationalize the gold of domestic banks at any time, but this is not an operation that can reassure the market; rather, it is a last resort because it attacks its own people rather than others.

Additionally, recently, China's gold prices have started to recover to higher levels compared to international prices. In the context of a challenging global economy over the next four years, buying when gold prices are weak is a strategy worth considering.

Concerns about the U.S. balance sheet and the dollar mean that no matter who becomes president, the historical tide cannot be changed. During the last Trump presidency, national debt increased by $7.8 trillion, coupled with tax cuts and unrestricted other expenditures, leading him to set a historical record as the U.S. president with the third-largest increase in fiscal deficit during his term. **

However, from an investment perspective, fundamentals are not important; what matters is what the market believes at this moment. The market believes that if Trump is elected, the US dollar will rise, bond prices will fall, commodities will decline, and US stocks and digital currencies will rise.

Li Gangfeng predicted earlier this year in this column that if Trump is elected, the market may give him a six-month honeymoon period, so the strength of US stocks and digital currencies may be maintained until around the end of April next year; as for metals, unless geopolitical tensions rise again, it may have already passed its short to medium-term peak. According to historical statistics, the average return of gold in the first year of each US president's term is only a little over 1%, making the first year of the four-year term often the worst performing.

The biggest test in the next 12 to 24 months will be if the US begins to cut interest rates, but inflationary pressures rise again, what will the Federal Reserve do?

In the context of the US starting to cut spending in 2025, potential significant declines in US stocks, the Federal Reserve's interest rate cuts not meeting expectations, and rising geopolitical risks, there is no doubt that the US dollar will rise/maintain high levels.

From March to May 2025, the global financial market may experience significant volatility (decline), and it is recommended to gradually reduce risk assets during these months to preserve gains and ensure stability.