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Commodities at risk of reversing massive gains with 'wild run' similar to 2008, gold price to take on $2k - Bloomberg Intelligence

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(Kitco News) The commodity market is at risk of a reversal that will be a volatile ride similar to 2008, according to Bloomberg Intelligence. In this scenario, gold looks like one of the best options, with the ability to breach $2,000 once markets identify the end of the Federal Reserve rate-hike cycle.

"Commodities are at increasing risk this year of a wild ride akin to 2008, a development that may shine on gold," Bloomberg Intelligence senior commodity strategist Mike McGlone said in his May outlook report. "Commodities climbed 50% in the past 10 years and the Producer Price Index is up 30%. Gains are likely to recede as the world faces a potential recession and the Fed tightens the reins … Rate hikes should coincide with peak inflation."

Crude oil, one of the commodities that saw massive gains on geopolitical uncertainty and supply concerns, could reverse its gains and drop from about $100 a barrel to $50. Crude oil's 2008 peak was around $145 a barrel.

"At about $100 a barrel at the end of April, crude oil is more likely to revert toward $50 a barrel than $150, we believe. The $50 is about the mean since the 2014 plunge and the U.S. cost of production, while $150 could entail global recession," McGlone pointed out.

Commodities like copper and other industrial metals are also at risk of similar reversions, especially if the stock market continues to sell-off.

When looking at natural gas, the report noted that the futures price a year from now is more than double the U.S. production cost, which is an excellent supply incentive.

"Structural limits on the amount that can exported (LNG) indicate the April bounce is more likely to revert akin to past price spikes," McGlone added. "The front future approaching $8 is the highest since 2008 and may need some form of supply shock to be sustained. The U.S. is known to have an ocean of natural gas supply and it may take years to boost LNG to levels necessary to offset production."

One of the conclusions is that price spikes in the commodity market can often lead to their own "demise," wrote McGlone. He explained: "Demand destruction typically results from higher prices, and supply elasticity brings on more production. It's typically a matter of time. The 1Q crude oil peak appears akin to the 1990 apex, which didn't return for about 14 years, and 2008 high, which remains the record."

In this outlook, the gold market looks solid. The precious metal can breach the critical psychological level of $2,000 an ounce once markets identify the end of the Fed's hiking cycle.

"Federal Reserve jawboning amid global GDP downgrades and a declining stock market isn't good for prices of copper and other industrial metals, and the endgame appears tilted favorably to gold. When fed funds futures start anticipating a rate-hike cycle end, the precious metal should breach $2,000- an-ounce resistance," McGlone stated.

The last time gold bottomed, which was in 2015, the move coincided with the markets anticipating the end of the rate-hike cycle. And this is what is likely to happen in 2022, according to the report.

"The precious metals' price outlook appears straightforward to us -- when the one-year-out fed funds future (FF13) bottoms, so should gold," McGlone said.

Gold's price base is now around $1,800, with key resistance at $2,000 an ounce. And it is just a matter of time before gold trades above that resistance target, the senior strategist noted.

"A top potential catalyst is a trough in Fed rate-hike expectations, which may not occur until the stock market declines further. The S&P 500 down about 10% in 2022 to April 28 appears to be insufficient," he said.

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The big unknown in the commodities space remains grain production. And that uncertainty should keep prices well supported going forward.

"Given production and yield uncertainties from the Russia-Ukraine war, the most supply-elastic commodities, grains, are poised to outperform," McGlone wrote. "Our analysis shows the old resistance threshold in corn at about $7 a bushel as initial support. Plentiful profits for farmers may mean a bump up in production as the Corn Belt fires up for a record crop."

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