Commodity Markets in the Grip of Geopolitical Uncertainty: Investments in Dollar, Gold, and Silver Strengthen

Investors in global markets have increased investments in the US dollar as a safe haven for capital in uncertain times, expecting increased volatility leading up to the presidential elections on November 5 in the US. Geopolitics is currently the main force driving the markets, so we are waiting to see what will happen with the US elections and in which direction this will push the markets.

Gold and silver continue to rise to new heights. All this global chaos we are witnessing regarding geopolitics-economics does not provide any security, so many are rightly asking how long this situation can last? It seems that the markets now understand more that the US economy is doing well and that the FED will likely continue to be somewhat hawkish regarding maintaining higher rates for a longer time. This, of course, is not welcome for China as it further limits their ability to provide the stimulus their economy desperately needs.

In 1944, a full 80 years ago, a conference was held in Bretton Woods attended by 44 countries. The IMF and the World Bank were created. The introduction of a fixed exchange rate system that tied currencies to the US dollar, convertible to gold at $35 an ounce, made the US dollar the de facto world reserve currency, establishing US economic dominance. Today, we can freely say that this conference transformed the international economic order.

Today, members of the BRICS bloc want to create a similar precedent. In this context, the BRICS summit was held last week in Russia, where leaders from more than 20 different countries discussed economic and financial cooperation, facilitated by a new financial system that these leaders hope will replace the US dollar in trade. A new payment system based on the yuan was the main agenda item at the summit.

China believes that the US has reached a level of economic superiority due to the dollar becoming the primary global currency after World War II, and therefore wants to replace the dollar with the yuan. In fact, China announced a new contract for the construction of six container ships for Canadian shipowners with payment in yuan. It is important to note that the Crown Prince of Saudi Arabia, Mohammed bin Salman, was reportedly not present, but UN Secretary-General Antonio Guterres and Turkish President Erdogan were on the guest list.

In the context of the green transition, renewable energy sources, and related topics, it is always surprising how great the dependence of leading powers on non-renewable energy sources is. Thus, fossil fuels, including natural gas and coal, account for an average of 62.4 percent of total electricity production in the US from June to today. On the other hand, in the Chinese energy system dominated by coal, fossil fuels accounted for 60.5 percent of electricity production from June to today.

Record Number of Options Contracts

Volatility continues in global oil markets. After prices fell the week before, last week oil prices rose (roughly, we can say around four percent), recovering some of the losses. However, the start of the new week is not promising, as prices have fallen significantly after the Israeli attack on Iran avoided nuclear and oil targets. Thus, Brent crude futures prices at the beginning of the new week are trading below $72/bbl, while WTI crude futures prices are at $67/bbl. Oil traders have purchased a record number of options contracts, trying to protect themselves from price spikes due to potential supply disruptions in the Middle East.

Brent oil options surpassed four million contracts for the first time this week, equivalent to four billion barrels. The total number of positions held by traders has increased by more than 25 percent this month. The increase in activity reflects how traders are protecting themselves from the increased risk of disruptions in a region that accounts for about one-third of the world’s oil supply. Currently, everything revolves around the Middle East and the elections in the US; fluctuations will continue in the coming weeks until we get answers to some questions about Israel, the war, and the presidential elections in the US. Elections create uncertainty in many markets, and people are pulling back a bit, not willing to take on significant risk due to potential spikes, volatility, and uncertainty.

Additionally, traders are seeking more clarity regarding Chinese stimulus policy, although analysts do not expect such measures to provide a significant boost to oil demand. Goldman Sachs announced last week that it expects oil prices in 2025 to be at this year’s levels, between $70 and $85/bbl (Brent), and predicts that the impact of Chinese stimulus will be modest compared to larger drivers, such as oil supply in the Middle East. Analysts at Bank of America, on the other hand, expect an average price of Brent crude oil of $75/bbl next year. Looking back, we can say that when it comes to oil and the war in the Middle East, the moment to sell was when the first bombs started falling. We are witnessing the classic stock market story – ‘Buy the rumor, sell the facts.’ The same scenario occurred in January 1991 and March 2003, and it is very likely to happen again in October 2024.

European natural gas futures prices TTF fell below €42.5/MWh after reaching their highest level in over 10 months above €43/MWh last week, as it seemed that supply risks from tensions in the Middle East were contained after Israeli strikes avoided key oil and nuclear sites in Iran. Despite large stocks and storage filling in Europe at 95 percent, markets remain cautious due to recent supply disruptions in Norway and the US. Additionally, the mild weather forecast in Northwestern Europe for the next two weeks has contributed to the price drop, signaling reduced heating demand.

Decline in Wheat and Corn Prices

The end of the week marked a decline in futures prices for almost all agricultural commodities, especially on the European MATIF. On a weekly basis at the US CBOT, wheat fell 0.6 percent last week, while corn and soybean prices rose by 2.6 percent for corn and 1.8 percent for soybeans. In Europe, the decline in wheat and corn prices is significantly more pronounced, ranging from -€3.50 to -€5/t on a weekly basis on MATIF. Selling pressure intensified as the week progressed, culminating on Friday. Among the various causes of this price decline, the lack of export competitiveness of French wheat in recent weeks should be highlighted. The recent return of favorable rains has calmed wheat crops in the US and Russia. Conversely, the return of dry weather in France over the next 10 days will favor corn harvesting and wheat sowing.

The delay in corn harvesting and autumn sowing is significant so far. Corn harvesting is at 25 percent compared to an average of 69 percent for this period. Winter wheat sowing is at 21 percent compared to an average of 47 percent for this period, as well as winter barley sowing, which is at 38 percent compared to an average of 64 percent. Additionally, encouraging prospects for wheat in Argentina have been reported by the Rosario exchange, which predicts wheat production in the 2024-2025 period of 19.5 million tons and exports of 13.3 million tons. The US has reduced soybean sales to China by 28 percent since the beginning of the campaign, while increasing them in the EU by 24 percent. The ongoing polarization between NATO and BRICS is reducing the sale of American agricultural products to China and redirecting them to the EU. This phenomenon has been observed for months with Hi Pro wheat. This situation is likely to extend to corn and soybean meal, and it may already be happening.

Copper futures prices have slid to around $4.31/lbs, pressured by a stronger dollar and treasury yields as signs of resilience in the US economy have eased expectations for aggressive FED rate cuts. The possibility of Trump’s victory in the elections has also pushed the dollar and yields higher as his policies on tariffs, taxes, and government spending are considered inflationary. Meanwhile, investors are eagerly awaiting the National People’s Congress meeting scheduled for November 4 and 8 for potential announcements regarding debt and other fiscal measures. Data released over the weekend showed that industrial profits in China fell at the fastest pace since the pandemic in the first nine months of this year amid persistently weak demand, impacting the economic outlook for the world’s largest metal consumer.