A recent report from China Securities Co., Ltd. highlights that the US Treasury's intervention in long-dated bonds this week has reignited investor enthusiasm for gold. Despite a hawkish tone in the Federal Reserve's meeting minutes, the Treasury's move to cap long-end yields has shifted market focus toward concerns over dollar credibility and US fiscal sustainability, propelling gold prices sharply higher and lifting gold equities in tandem.
This week's LME copper squeeze concluded as deliveries were made, yet the persistent backwardation structure underscores tight inventory levels, leaving copper with ample momentum to challenge record highs. Additionally, copper equities are trading at just over 10 times earnings based on a $10,000 copper price, offering compelling risk-reward for new positions.
Key takeaways from the report:
Industrial metals: Weekly price changes for LME copper, aluminum, lead, zinc, and tin were 0.1%, -0.1%, 0.3%, 1.6%, and 0.1%, respectively. Industrial metal prices are driven by both financial and commodity attributes. From a financial perspective, the Fed has begun its easing cycle; from a commodity standpoint, global inventories of copper and aluminum remain relatively low. With China's economic recovery underway and new energy sectors expanding, demand growth for these metals is poised to improve.
Dollar re-pricing fuels gold surge
(1) Gold: The re-pricing of dollar credit has driven gold to new highs. After the Treasury raised its buyback ceiling this week, long-end yields fell and the dollar weakened, lifting gold prices. The core driver is the market's reassessment of a deteriorating dollar credit profile. Although the Fed's minutes leaned hawkish, this bearish factor was overshadowed by fiscal-driven market restructuring. With the Treasury capping long-end yields, the downward pressure from real rates on gold has eased, and the market is now trading on worries about dollar credibility and US fiscal sustainability. Over the medium to long term, supported by high US debt levels, global reserve diversification, and sustained central bank buying, gold's role as a sovereign credit hedge continues to strengthen, underpinning a solid upward trend. In the near term, with long-end Treasury yields unlikely to rise, fading expectations of Fed hikes, and continued ETF inflows, the outlook for gold remains constructive. However, after the recent sharp gains, investors should be wary of profit-taking and elevated volatility. Going forward, Fed policy signals and the upcoming Jackson Hole symposium at month-end will be critical for near-term price direction.
(2) Copper: The failed squeeze does not undermine copper's strength. Early this week, the LME copper squeeze intensified, with cash copper commanding a premium of $436 per ton over three-month contracts. However, consecutive deliveries to LME warehouses signaled the end of the squeeze. The report emphasizes that this failure does not weaken the fundamental case for strong copper prices. On one hand, the Comex-LME spread remains at $200-300 per ton, reflecting market bets on potential US tariffs on copper announced in September. This spread continues to attract arbitrage flows shipping metal to the US, keeping non-US inventories low and spot supplies tight. Even after the squeeze failed, the LME cash-to-three-month premium remains above $60 per ton. The backwardation structure highlights severe inventory shortages, a configuration highly supportive of strong prices. With copper currently just shy of its all-time high of $14,527.50 per ton, the momentum to break through is substantial. Global copper mine supply growth has again fallen short of expectations this year, leaving refined copper in a structural deficit. Combined with localized tightness from US-bound shipments, copper prices are poised to remain firm. In contrast, copper equities continue to underprice the metal's strength, providing attractive entry points for new investors.
Risk warnings:
1. A sharp global economic downturn could trigger a cliff-like decline in consumption. The World Bank's latest Global Economic Prospects report upgraded 2026 global growth to 2.6% from 2.3%, but recent trends show slowing momentum. A deep global recession would severely impact demand for non-ferrous metals.
2. If US inflation spirals out of control, the Fed may tighten policy more aggressively than expected, and a strong dollar could pressure equity valuations. The Fed has already hiked rates substantially, but sticky service-sector inflation, particularly rents and wages, is impeding disinflation. Sustained aggressive tightening would be negative for dollar-denominated metals.
3. Domestic new energy consumption growth may miss expectations, while the property sector remains weak. Despite policy easing on the sales side, homebuyer sentiment remains subdued, and debt resolution for developers is progressing slowly. If sales fail to recover, downstream construction completions could face a slowdown risk, dampening demand for certain domestic non-ferrous metals.