In the Webinar “Macro Economic Overview and Commodity Derivatives Market Outlook for the Second Half of 2024,” Synergy Link Capital experts pointed out that any significant breach of these support levels could signal further declines and increased volatility in the commodity markets.

Dylan Chan, a senior analyst at Synergy Link Capital, noted that commodities are typically priced in US dollars (USD), creating an inverse relationship between the value of the USD and commodity prices. When the USD strengthens, commodities become more expensive in other currencies, potentially reducing demand, and vice versa.

However, an intriguing phenomenon has been observed since 2021. Synergy Link Capital noted a clear divergence from the usual inverse relationship. While the USD, represented by the inverted DXY index, has experienced significant fluctuations, commodity prices, as referenced by the S&P GSCI, have not followed the typical inverse pattern.

This divergence has recently narrowed but remains, indicating that other factors are influencing commodity prices beyond traditional currency exchange dynamics. These factors may include supply chain disruptions, geopolitical tensions, shifts in global demand, and changes in monetary policies of major economies.

Source: Synergy Link Capital

Regarding the strength of the US dollar, which has been noticeable since 2021, commodities—accounting for approximately 38% of the US Consumer Price Index (CPI)—have significantly contributed to inflation. As commodity prices surged, they played a substantial role in increasing the inflation rate.

In response, the Federal Reserve has implemented multiple interest rate hikes to control inflation. These central bank actions have led to a stronger US dollar, as observed from the DXY index. When the Fed raises interest rates, it typically makes the USD more attractive to investors seeking higher returns, thereby increasing the value of the USD.

Source: Synergy Link Capital

As the stronger USD makes commodities "cheaper" in other currencies, this means that when the USD strengthens, commodity prices priced in USD tend to decrease. This could ultimately lead to lower inflation in the US. However, this effect operates with a delay, as it takes time for lower commodity prices to filter through the supply chain and impact consumer prices.

Synergy Link Capital also highlights the importance of observing major commodity indices, such as the S&P Goldman Sachs Commodity Index (GSCI) or the Bloomberg Commodity Index (BCOM), to get a comprehensive view of commodity trends.

The significant price surge from early 2022 to mid-2022 was largely attributed to the Russia-Ukraine crisis and the delayed effects of supply shortages due to COVID-19. These factors led to substantial supply chain disruptions, pushing commodity prices to unprecedented highs.

However, since that peak, both commodity indices have undergone significant adjustments. The S&P GSCI has fallen more than 30% from its peak, and BCOM Futures have also decreased by approximately 30%, erasing the gains from the 2022 commodity price surge. This decline reflects the combined impact of improved supply chain conditions, adjustments in global demand, and tightening monetary policies by central banks worldwide.

Source: Synergy Link Capital

Currently, prices appear to have found support near multi-year levels. Both indices have traded close to these key levels over the past year, frequently attempting to breach them to lower levels but facing resistance.

According to Synergy Link Capital, several factors may have contributed to this trend. As global economies begin to recover and adapt to new conditions, improved supply chains have reduced pressure on commodity prices. Additionally, central bank actions to control inflation by raising interest rates play a role, as discussed previously regarding the USD-commodity price relationship.

In conclusion, while much of the 2022 commodity price surge has been reversed, current price levels seem to have found support. Monitoring these support levels is crucial, as any significant breach could signal further declines and increased volatility in the commodity markets.

According to Synergy Link Capital