Daily Close | Forex, Metals, Oil, Agriculture November 02, 2020



A big drop in demand due to the pandemic left the world’s largest cocoa producer, Ivory Coast, struggling to sell 500,000 tons of cocoa beans from its interim harvest. After a bearish situation surrounding prices over the summer, recent supply issues and a pickup in demand benefitted corn, soybeans, and wheat. In corn, the drop in output in China and lower supplies from the EU is expected to keep global supplies tight. Open bolls were reported in both regions and Cotton fiber was discolored or else blown out of the bolls due to the rain and winds.
USDA said that net Upland Cotton export sales were 288,700 bales this year and 900 bales next year. Within the softs space, cotton and sugar rose during the month while coffee and cocoa fell. The discolored Cotton is getting a chance to recover now as it has turned dry and the fiber can be naturally bleached by the Sun. Besides, corn crop in five provinces were destroyed by the fall army worm attack.
China banned imports of timber, barley, copper, lobster, sugar among other items. General Comments: Cotton closed lower on trading tied to the higher US Dollar and the return of the Coronavirus outbreak to the US and Europe. Hurricane Delta moved through the Delta and Southeast a couple of weeks ago and did some damage to Cotton. The S&P GSCI Cocoa moved the most, falling 9.9% on the month.


Most investors are aware of the general correlation between changes in the dollar and changes in gold: as the dollar falls, gold tends to strengthen. However, there’s an interesting trend in the data in that changes in the dollar actually have predictive value for calling future changes in the price of gold. On the upside, when gold has rallied following similar drops in the dollar, it has done so by around 20-30%. Over the last 3 months, we have seen the dollar exhibit a decent degree of weakness.
Gold is likely to rally based on the dollar and S&P 500 correlations. The Euro fell -0.6%, while the EM FX index dropped -0.3% as the dollar index rose +0.2% in its smallest monthly move since April. Meanwhile, investors scurry up to the safe-haven US dollar ahead of Tuesday’s election, exerting additional downward pressure on the USD-denominated oil. As the coronavirus spread, the dollar witnessed strong gains as global investors shifted capital to the United States and in particular Treasuries.
Over the past few months, we’ve seen an interesting pattern of volatility in the dollar index. Most analysts expect a new round of US stimulus and thereby dollar weakness to lift metal prices in 2021. In terms of FX movements, the big move was in Asian currencies as the Chinese Renminbi strengthened +1.5% against the US dollar, while the Japanese Yen rose +0.8%. For example, when the dollar is weakening, dollar-priced commodities generally increase in value.
This gain in the dollar was somewhat rapidly reversed with the currency flipping into year-over-year losses by August. The US dollar traded higher against euro, Japanese Yen and other major currencies.


Gold is likely going to rally and history suggests that based on current expectations for the commodity, GDX will likely outperform a return in gold itself. Meanwhile, the median, which smooths out any outliers came in at 1.76 million ounces of gold at 2.20 grams per tonne gold. (Source: Yamana Gold Company Presentation) The senior gold producers are in a difficult position relative to their mid-tier and intermediate producer peers. In August, the Perth Mint of Australia reported sales of gold coins and gold bars of 67,462 ounces.
Some obvious plays are in the gold, silver mining/GSM segment as prices of gold and silver are correlated with the expansion of the monetary base.
There are periods when GDX sees less than a perfect correlation with gold changes, but for the most part the stock reflects changes in gold. GDX is holding 53 different gold miners and is highly correlated to changes in gold under most circumstances. Specifically, it follows the NYSE Arca Gold Miners Index which is a methodology designed to track large gold miners. The company adds ounces in a top jurisdiction, adds a project with industry-leading costs, and adds nearly million ounces of gold reserves at a cost of barely $50.00/oz.
In other words: gold demand is running 346% higher this year than last year. Put simply, this data shows that GDX is a good holding if you believe that gold is going to rise in the next year but not dramatically so. In other words, if we see the next year unfold in line with historic averages, then GDX will likely be a better investment than gold itself. For example, each of these studies suggest that gold is going to rally by anywhere from 8-14% (assuming the historic average return of course).
Here’s more: the last time the U.S. Mint sold higher than 678,000 ounces of gold in American Eagle coins was back in 2016. I believe that gold prices are likely headed higher which has historically benefited GDX’s shares. Given the current expected return for gold, GDX will likely be the stronger holding due to its tendency to outperform in similar environments.
Year-to-date, in the first eight months of 2020, the Perth Mint has sold 516,829 ounces of gold in coins and bars. In the entire year of 2019, the U.S. Mint sold just 152,000 ounce of gold in American Eagle coins. Year-to-date, until around mid-October 2020, the U.S. Mint sold 678,000 ounces of gold in American Eagle coins. Historically speaking, when we’ve seen gold rally by even just the average of 8-13%, GDX has actually outperformed this figure.


At $40+ WTI oil, I’d expect Western Midstream’s distribution to remain stable with Occidental Petroleum’s (OXY) ability to keep production flat at those oil prices. This is a gloomy outlook for US oil production, but it’s a very bullish outlook for the global oil supply and demand balance going into 2021. In order to keep its debt under control, Western may contemplate reducing its distribution again if low oil prices persist. Although the duo beat their earnings estimates, revenues were weighed down by a slump in oil prices and the global collapse in demand due to COVID-19.
If WTI oil remains in the mid-to-high $30s (current strip for 2021), we may see some modest production declines from Occidental. August also was the month where we saw all US oil production return from shut-in, so this is expected to be peak capacity. Assuming a short-term bearish outlook for demand, oil prices will be pressured for the next few months. Sharply lower oil and natural gas price realizations, plus a decline in refined product margins, are mostly to blame.
Across the energy complex, the rising number of COVID-19 infections, a second wave of lockdowns, and travel restrictions presented a serious threat to oil demand.
But there’s a caveat to this number which is that if you include the infamous adjustment factor, US oil production came in at 11.247 mb/d. Fewer new wells entering production in this oil pricing environment should limit Western Midstream’s capex requirements, though. So with all that being said, US oil production back in March 2020 was actually closer to ~13.4 mb/d vs. the reported ~12.737 mb/d from EIA 914.
These supply loss figures will eventually shock the world and be reflected via much higher oil prices. In the past, low oil prices had been a supportive factor for airlines. On the flipside, crude oil exports from Malaysia, could take a hit as Australian buyers of its light sweet crude grades struggle to run their refining operations. August monthly US oil production came out today and it was well below our estimate. The same multiple plus some risk of at least a temporary distribution reduction makes its units worth around $7 to $8 at mid-to-high $30s WTI oil.
Oil represents or of the total production. Conversely, oil prices can also rally if a vaccine is approved and distributed. We’ve finally just concluded that it’s just unaccounted for oil production.

United States

After Citi cut the company’s rating to ‘Sell’ earlier this week, it’s safe to say that the Wall Street community doesn’t believe in the company’s recovery story anymore. Whilst the median target price is USD14.77 per share, UBS stock has further to run if nothing catastrophic happens in the near to medium term, I believe. The US cases of the virus reached 100,000 today, a new fresh world record, while Europe’s largest economies are struggling with new lockdowns.
It also could be a big winner should Biden win the election, especially if Biden chooses to ease tensions with China and walk back all of President Trump’s tariffs. Source: UBS – earnings presentation, page 2 The media release shows that the major source of income in the case of UBS is the global wealth management division. The company’s Nasdaq IPO was well received by institutions with two funds taking large new positions right from the start. If we take the three banks’ price-to-book ratios, we will also see that UBS is a better bargain in that respect as well.
While Biden’s victory and Democratic control on Senate are the most favourite outcome for markets, Trump’s victory and loss of Senate to Democrats could come as a shock. In the earnings release, it was also announced UBS would pay the second part of its dividends in November. Source We can see that the Fed’s balance sheet has increased dramatically over the past months, much more so than after the 2008 financial crisis.
Although it is a highly risky task to set price targets for stocks, I agree with many analysts who think UBS stock has further to run.
Siyata got a new beginning when it was uplisted to Nasdaq at the end of September and the stock price has been climbing. But if Trump has won them or looks like he probably will, we could have the very drawn out fight that everyone save the media dreads. The US is also concerned about food supplies, say global media reports. The bank’s leverage position was also quite strong, whilst UBS’s CET1 ratio totaled 13.5%. Lambert has pointed out that the anti-Trump contingent sees this election as existential, yet seems not to consider the idea that the other side might feel that way too.
The company increased its full-year guidance and announced capacity additions in the US and Brazil to meet increasing demand. Some uncertainty is also present due to the fact that Sergio Ermotti, the bank’s CEO, is leaving UBS on 30 October. On the other hand, if Mr. Trump wins, we will likely see a fiscal package pass soon after the election. In 2016, the polls predicted a win by Clinton but when a Trump victory became apparent, Dow futures dropped 750 points in late night trading.


Meanwhile, in fixed income, sovereign bonds rallied in Europe with the risk off tone and indications that the ECB would continue and possibly expand on its bond buying programme. The EU carbon price fell to a four-month low of Eur22.88/mt Oct. 28.