Gold rallies as safe haven buying emerges

China optimism continued to boost sentiment across commodity markets, aided by a weaker USD. This helped shrug off concerns of broader weaker economic growth amid central bank tightening.

Safe haven assets were in strong demand amid growing recessionary fears. This helped boost sentiment in the precious metals sector. Thirty-year Treasuries dropped more than 10bp to a three-month low while yields on the 10-year was also lower. Combined with weakness in the USD, gold received strong support. The precious metal rallied more than 1% to trade just below USD1,800/oz. Sentiment was supported by strong physical buying. China joined the long list of other countries who have been strong buyers of bullion. The PBoC added 32t to its holdings in November, the first increase in more than three years. This brings it total gold reserves to 1,980t. The gains in gold helped dragged the rest of the sector higher. Silver gained more than 2% while platinum pushed back above USD1,000/oz.

Base metals rose as optimism over China’s reopening gained traction. Beijing announced wide-ranging relaxations to President Xi Jinping’s contentious zero-COVID restrictions, including for the first-time home quarantine. The State Council also said people should not have to show proof of a negative test before entering most public places. Copper led the sector higher amid hopes the new measures would boost domestic demand. This comes amid signs of restocking by consumers ahead of the easing restrictions. China’s commodity imports were stronger than expected in November. Refined copper purchases rose by 5.8% y/y to 540kt, the highest for this year, Higher processing charges have supported concentrate imports, which rose 10% y/y. Aluminum fell despite growing concerns of further disruptions to European output. Industry group European Aluminium warned that the price of natural gas is the biggest worry for producers. This followed reports that Europe and the US are considering new tariffs on Chinese steel and aluminium.

Iron ore edged higher amid signs of rising demand. China’s imports of the steel making raw material rose 4% m/m to 98.8mt in November. Sentiment was also supported by supply side issues. Vale reported lower than expected iron ore exports and has abandoned its plans to get production back to level prior to the 2019 dam disaster. This year’s output will be around 310mt; However, it lowered its 2023 guidance from 325mt to the same as this year.

The selloff in crude oil markets continued amid a weakening economic backdrop and low liquidity across markets. Despite European sanctions on Russian oil beginning this week, the market has refocused on the economic backdrop amid tighter monetary policies from central banks. The relatively high price cap also eased concerns of additional supply disruptions to Russian crude oil. Recent softness in the physical markets has also weighed on futures. Distillate inventories in the US rose by more than 6mbbl last week, according to Energy Information Administration data. Gasoline inventories were also higher by 5.3mbbl, indicating weaker demand.

European gas extended recent gains as colder-than-average weather started to descend on the region. This coincides with maintenance at facilities in Norway, which is now the most important source of natural gas for Europe. The prospect of China returning to the market also weighed on sentiment. China’s imports of gas rose 35% m/m in November. This also boosted sentiment in the North Asian LNG market. Spot prices gained more than 1.5% and are now up nearly 30% over the past three weeks.