Commodity cages that matter

This analysis is by Bloomberg Intelligence Senior Commodity Strategist Mike McGlone. It appeared first on the Bloomberg Terminal.

Bouncing crude oil has usurped gold at the top of the commodity radar nearing the end of 1H, but may accelerate price-elasticity forces. Downward estimate revisions for global crude demand and upward for supply could gain fuel from the price spike. Enduring production disruptions appear as unlikely as $100 a barrel WTI crude vs. gravitation toward US break-even costs closer to $50. For crude and economically sensitive copper to remain buoyant, US stock market capitalization might need to persist above 2x GDP.

Record-setting gold appears to be detecting the limits of elevated equities and $100,000 Bitcoin. If risk assets stay lofty, the metal may fall toward $3,000 an ounce. However, it’s the potential to rise above $3,500 that we find disconcerting — a slight beta pullback may be all it takes.

Gold vs. everything else

Gold’s $3,500 resistance, WTI oil’s $80: Which is more enduring?

Whether WTI crude oil can stay above $80 a barrel after bottoming around $55 in April is a key commodity question for 2H. Our bias is it’s a crude bear market, and the bounce may provide producers better levels to hedge. Higher prices would add headwinds to a global economy facing tariffs. Gold appears on track to breach $3,500 an ounce resistance, especially if US stocks decline.

Commodities may have bottomed vs. US stocks

If the dollar keeps falling in 2H, gold is poised to continue leading broad commodity gains. However, it’s the ebbing-tide risks of US stocks dropping for a recession that didn’t come in 2023 that are fueling the metal as the world contends with unprecedented US tariffs. Up about 10% in 2025 to June 20, the Bloomberg Commodity Spot Total Return Index has been underpinned by a similar fall in the Bloomberg Dollar Spot Index. What’s different may be the increasing strain on the US stock-market cap to keep rising above 2x GDP, to avoid a typical pattern of deflation following inflation.

It’s happening in China, as evidenced by the government 10- year yield at about 1.64%. What stops Beijing from following a path similar to Japan since 1990 may get some clarity in 2H. Much could depend on copper’s resilience, highlighting risks.

Advantage vs. stocks: Commodities led by gold

Ending 2024 at about a 25-year low vs. the S&P 500 (SPX) is a relative-value advantage for the Bloomberg Commodity Spot Index (BCOM). Will the BCOM, up about 10% this year to June 20 vs. 2% for SPX, continue outperforming beta in 2H? A mounting burden on US stocks to keep going up may elevate risks of an ebbing tide. Record-setting gold could be front-running a bit of SPX reversion. The graphic shows the close connection between the BCOM and SPX vs. the metal until recently. SPX/gold has returned to its enduring pivot since 1960, a level that shifted to resistance in 2015.

The ratio most don’t want to keep rising has reached a good ceiling and may need to drop, or else. Our view is that risks are leaning toward beta falling in 2H, with deflationary implications that gold’s about 30% gain in 2025 may be foreshadowing.

All may be fine, except for gold, if US stocks rise in 2H

A central question for 2H is whether gold will maintain its leading position in 2025 performance. The rock beating stocks is typically not a good macroeconomic path. A weakening dollar is underpinning the precious metal and copper, but it’s the US stock market that might matter most. If consensus for about a 10% 2025 gain in beta proves correct, it could buttress the dollar, inflation, bond yields and Federal Reserve hawkishness, which may pressure gold toward $3,000 an ounce.

It’s the potential for a roughly 10% 2025 decline in the S&P 500 — a minor retracement after its 100% gain since 2019 — that record-setting gold may be anticipating. Bitcoin, a riskasset leading indicator, and economically sensitive copper could be nails to beta’s hammer in 2H, foreboding an undue burden on the S&P 500 to keep going up.

How sustainable? Weak dollar, strong commodities

All major Bloomberg Commodity Index sectors posted gains in 1H to June 20, reflecting both a weakening dollar and a rebound in broad commodities from multidecade lows vs. the US stock market at the end of 2024. However, declines for industrial metals and the grains on a one-year basis — and gold leading the gainers — could reflect deflationary forces in a global economy facing US tariffs. Pumped up toward the end of 1H due to supply-disruption fears in the Middle East, the energy sector appears at elevated risk of declining, on the back of crude oil resuming its downward path since the 2022 high of around $130 a barrel.

Grains may require a Corn Belt drought to reverse a lowprice- cure track, but it’s industrial metals that might matter most in 2H. If copper can’t hold 1H gains, the deflationary dominoes could tumble.

Terminal subscribers can access full version of this report via BI <GO>.