'It's a war on two fronts' for commodities as short positions grow in copper, silver, gold - Pepperstone
(Kitco News) Recession calls are triggering a major slide in the commodities sector, with short positions quickly growing in copper, oil, gold, and silver, according to Pepperstone's head of research Chris Weston.
The European Union seems the most at risk of a recession as the European Central Bank is forced to tighten to get inflation under control amid quite bleak growth prospects. However, a recession is more of a global problem, Weston warned in a note Wednesday.
"Europe may command the closest attention, but this is a global problem. In a world of rising interest rates and central banks hellbent on putting the inflation genie back in the bottle, we've seen clear evidence of demand destruction – commodities have been the default expression of this thematic and right now there is just no visibility on growth or what changes the trend – even though the market lives in the future, it feels like this gets worse before it turns around," Weston wrote.
So far, the main takeaway from this has been the U.S. dollar index rallying to 20-year highs as it dominates other currencies, including the euro, the pound, and commodity currencies such as the Austrian dollar.
"The USD reigns supreme, not just from a relative growth perspective but from an attractiveness as an investment destination. Right now, aside from the USD, only the JPY looks like a compelling long in G10 FX," Weston said.
Recession calls mixed with a high U .S. dollar have meant negative price action for commodities.
"Commodities face a war on two fronts – demand destruction and king USD and this is causing some intense bear trends in commodities, and it wouldn't be a stretch to think the systematic trend-following crowd would already be running hefty short positions in copper, silver, gold, U.S. gasoline and AG's like wheat and soybeans," said Weston. "Commodities are the default expression of recession risk – crude and gold get the flow from clients but for those who like momentum and trend this is the space to pay attention to."
Short sellers are something to watch going forward in commodities. For gold, it could mean a drop to $1,750 an ounce, Weston added. At the time of writing, August Comex gold futures already tumbled to $1,736.90, down 1.53% on the day.
"If the USD remains bid, perhaps look at gold exposures in AUD or EUR (XAUAUD or XAUEUR) and there may be scope for a topside range breakout. However, even then, I will want to wait for a move to take place and let the market reveal itself," he said.
Weston noted that crude oil remains the elephant in the room as prices fall below $100.
"Headlines that one U.S. bank is projecting that Brent crude could head to $65/bbl in a recession may have impacted, but it's the demand side of the supply/demand equation which is being examined," he said. "The world could use a weaker crude price, although from a risk perspective it's better if it's driven by additional supply and not falling demand – the issue with supply is that OPEC is struggling to meet current quotas as it is so additional supply seems a tall order."