While gold has seen an impressive 43% return in the past year, signs from the US and other parts of the world suggest a shift to non-ferrous metals. With US
bond yields bottoming out and central banks adjusting policies, non-ferrous metals may outperform gold in the near term.
US yields and commodity performance
A key driver of commodity movements is US monetary policy. Current market pricing reflects the expected overnight rate one-year forward at 2.9%, down from 4.8%. This downward shift – already priced into the market along with the current growth inflation mix – signals US bond yields, particularly the 10-year and longer Treasury yields, may have bottomed out.The correlation between US bond yields and commodity prices is well-documented. Gold reacts quickly to interest rate expectations, while industrial metals like copper are more linked to real-time demand-supply fundamentals. This difference arises from gold being a safe investment during financial uncertainty, while copper responds directly to changes in the global economy. In essence, gold prices are driven by investor sentiment, whereas copper prices reflect actual industrial demand.
A historical review reveals a recurring pattern between gold and copper during interest rate cycles. When US 10-year yields decline, gold tends to outperform due to expectations of slowing growth. Conversely, when yields rise with economic expansion, copper, being more sensitive to immediate economic activity, outperforms.
Key periods of gold’s outperformance occurred from October 2000 to June 2003, June 2006 to December 2008, February 2011 to August 2012, June 2014 to June 2016, October 2018 to March 2020, and October 2023 to September 2024. Conversely, copper outperformed gold during rising yields from June 2003 to June 2006, December 2008 to December 2009, August 2012 to December 2013, June 2016 to March 2018, and March 2020 to March 2022.
Given this, with US yields likely at their cyclical low, we believe non-ferrous metals are well-poised to outperform gold in the short-to-medium run. Moreover, speculative positioning in gold is near historical extremes, a cautionary signal, while neutral positioning in copper indicates greater room for upward movement.
China’s role
Emerging markets, particularly China, play a key role in driving global commodity demand. With the Fed pausing its tightening, emerging markets can recalibrate their monetary policies. China has enacted stimulus measures, including RRR (reserve requirement ratio) cuts and fiscal policies, to boost domestic demand. Additionally, its focus on energy transition and sustainability is expected to spur demand for non-ferrous metals through investments in green technologies and infrastructure projects like power grid enhancements.
Impact of inflation, US political shift
While we expect non-ferrous metals to perform well, gold faces risks from potential shifts in US political leadership. If Republicans return to the White House, their economic policies could drive inflation higher, impacting gold. Here’s how:
n Tariff Increases: Broad tariffs, especially on Chinese imports, could lead to higher inflation due to limited domestic production capacity.
n Wage Pressures: Stricter immigration policies could reduce the labour supply, driving up wages and increasing inflation.
n Expansionary Fiscal Policy: Extending tax cuts and eliminating certain taxes could worsen the fiscal deficit, raise borrowing costs, and push US Treasury yields higher, which would pressure gold prices downward.
Non-ferrous metals: A preferred asset class
To summarise, while gold has delivered extraordinary returns recently, we believe the forward-looking outlook is more favourable for non-ferrous metals like copper, silver, and aluminium. With US bond yields likely bottoming and emerging market stimulus, these metals are poised for outperformance.
As a natural corollary to this argument, investors should exercise caution with gold due to its stretched positioning and macroeconomic risks like inflation and fiscal policy, which suggest a potential downside. Non-ferrous metals, in contrast, offer a stronger risk-reward profile in the evolving global economy.
(The author is the CIO-fixed income with ICICI Prudential Mutual Fund)