Key points:

1.       The commodities sector shows a second weekly gain, supported by the prospect of lower funding costs as the Federal Reserve embarks on its long-awaited rate-cutting cycle
2.       All sectors except grains are showing a positive performance—not least softs, led by the biggest weekly sugar gain in 16 years
3.       The energy sector is staging a recovery from an early September slump, supported by wrong-footed short sellers
4.       Gold, and especially silver, have more upside, while copper demand shows signs of recovering

The commodities sector is on track for a second consecutive weekly gain, bouncing back strongly after an energy-driven slump in early September. The Bloomberg Commodity Total Return Index, which tracks 24 major commodity futures, has surged to a two-month high, up 2% for the week and 3.2% year-to-date. Nearly all sectors, except grains, are performing positively, with the soft commodities sector leading the charge. Raw sugar is experiencing its largest weekly gain in 16 years due to fires and extreme heat damaging crops in Brazil, the top producer. This has also driven Robusta coffee to record highs and Arabica to a 13-year peak.

The energy sector has also rebounded from its September slump, with Brent crude's brief dip below $70 proving short-lived. The market has determined that such low prices, combined with hedge funds holding a weak outlook on higher crude and fuel prices, would only be justified by a recession—a risk diminished by this week’s significant US rate cut. In contrast, wheat prices are struggling under harvest pressures and competitively priced Black Sea exports. Meanwhile, EU gas prices continue their month-long decline, bolstered by growing confidence that the region will have sufficient winter supplies due to weak demand and near-capacity stockpiles.
 

The Fed’s decision is benefiting commodities

The Federal Reserve kicked off its highly anticipated rate cut cycle with a significant move, surprising markets by cutting rates by 50 basis points. Additionally, the Fed signaled another 50 basis point cut later this year, followed by a total of 100 basis points of reductions in the coming year. During the press conference, Fed Chair Jerome Powell expressed optimism about the economy despite signs of a weakening labor market. He emphasized that the substantial rate cut was made from a position of strength, aiming to support the U.S. economy and guide it toward a soft landing—controlling inflation without causing a recession.

This "Goldilocks" scenario, marked by the Fed’s proactive measures, sparked positive reactions across asset classes, particularly in commodities that depend on growth and demand. Both the energy and industrial metals sectors saw rallies, while lower borrowing costs boosted demand for gold among asset managers via ETFs, pushing the precious metal to a new record high above USD 2,600—a year-to-date increase of over 25%. Silver, benefiting from a combination of rising gold prices, strong industrial metals, and a weaker dollar, outpaced gold with a nearly 30% year-to-date gain.
 

The commodities prices have also been bolstered by a weakening U.S. dollar, as the Bloomberg Dollar Index fell in seven of the past eight weeks. Of 13 major currencies, only the Mexican peso showed a loss, while gains were led by the Japanese yen, Scandinavian currencies, and the Australian and New Zealand dollars. Major currencies like the euro and Chinese yuan also appreciated by around 3%, with the yuan reaching a 16-month high. This dollar weakness has made imports cheaper, further supporting the strength in commodities.
 

Continued Upside for Gold and Silver

Gold's record-breaking rally shows no signs of slowing, now reinforced by the Fed’s rate cuts. Historically, such cutting cycles have fueled strong gains for gold in the months that follow. Spot gold surpassed USD 2,600, reflecting a year-to-date increase of over 25%. This surge means that a standard 400-troy-ounce gold bar, commonly traded globally and held by central banks, now costs over USD 1 million, up from USD 725,000 in October last year.

Gold’s climb of more than USD 800 since then, with only minor corrections, highlights strong momentum driven by FOMO (fear of missing out). Despite being a non-yielding asset, gold’s appeal continues to grow amid a world of fiscal uncertainty, geopolitical tensions, and central bank “de-dollarization” efforts. Combined with the Fed’s rate cuts, which reduce the opportunity cost of holding commodities, gold’s rise reflects its continued role as a safe-haven asset.

While gold price has garnered much attention, silver has delivered even greater returns in 2024. As both a precious and industrial metal, silver's price is influenced by gold, industrial metals, and the U.S. dollar. After hitting a decade-high of USD 32.50 in May, silver experienced a sharp correction alongside industrial metals due to concerns over Chinese demand. Between May and August, the gold-to-silver ratio widened from 73 to 90 ounces of silver per ounce of gold.

However, a continued rally in gold, alongside a recovering industrial metals market and a weaker dollar, has pushed the ratio back below 84, with silver again outperforming gold. Investors wary of record-high gold prices may find better value in silver, which remains well below its 2011 record of USD 50. To attract more buyers, silver needs to break above its May high of USD 32.50. Currently, momentum funds hold relatively small speculative long positions in silver, near the five-year average, compared to gold’s much larger net long position of 227,000, which is double its five-year average.