Driven by the AI boom, tech stocks seem to have attracted all the attention of US stock investors. Recently, however, the commodity market is playing a “game to make money.”

Since the beginning of the year, there has been a considerable increase in globally priced commodity prices. Since the beginning of the year, the price of gold has increased by 16%, the price of oil by about 23%, and the price of copper by about 9%.

Recently, they have all broken through some key positions. For example, copper has broken through 9,000 US dollars/ton, Brent oil has broken through 90 US dollars/barrel, and gold has reached a record high. This is also the reason why the recent rise in commodity prices has attracted market attention.

Affected by the escalation of the situation in the Middle East over the weekend and the introduction of a new ban on Russian metals in Europe and the US, spot gold opened sharply higher today and is approaching an all-time high. Futures for silver, copper, and crude oil have all risen.

Gold, silver, copper, crude oil, etc. are rising one after another. What is the logic behind the rise? What are the investment opportunities in the Hong Kong and US stock markets?

What is the logic behind this round of commodity increases?

According to Tianfeng Securities Research Report, commodity attributes, financial attributes, plus monetary attributes unique to gold and silver — make up the pricing spectrum of commodities.

Currently, the three commodities that the market is most concerned about — crude oil, copper, and gold — have such different pricing factors.

The price of crude oil almost always comes from its commodity properties. The price of gold also mainly comes from its financial attributes. Although gold also has some industrial and consumer demand, its share of total demand for gold hardly fluctuates.

However, copper is between crude oil and gold, and pricing has both commercial and financial attributes. Although copper's financial properties are not comparable to gold, it is still far superior to non-ferrous metals such as aluminum, zinc, and nickel.

Next, let's analyze in detail the reasons behind each commodity's rise.

• Crude oil and copper

Crude oil is known as the “mother of inflation” because oil prices are highly correlated with US inflation expectations. When oil prices rise, US inflation expectations will follow.

Copper is known as the “mother of the cycle” because copper prices are highly related to the global manufacturing cycle. As the global manufacturing industry begins to replenish inventories, demand for core commodities such as automobiles, electronics, home appliances, and real estate chains will often drive up copper prices.

Therefore, crude oil is mainly related to US consumer demand, and copper is mainly related to the US manufacturing cycle. These two commodities respectively represent US inflation and cycle.

Copper and oil prices have recently broken through key positions, mainly because the US economy and inflation have not only exceeded market expectations, but also created new expectations of economic overheating and re-inflation.

Meanwhile, the US manufacturing cycle began a new boom cycle in the 3rd quarter of last year. The US manufacturing PMI has bottomed out and rebounded since the middle of last year, and the US ISM manufacturing PMI returned above 50 in March.

Furthermore, in addition to the recovery in the US manufacturing PMI, many data also show that the US economy is undergoing a strong recovery. For example, new jobs continue to recover, and wages have stabilized at 4% year over year.

However, Tianfeng Securities also pointed out that this year should not be a year where oil prices continue to be high. The bank said that with crude oil slightly overproduction, US crude oil inventories have gradually rebounded since the fourth quarter of last year. Strong consumer demand in the US will drive oil prices to rise slightly this year, but without the continued influence of supply factors, it will not support high oil prices throughout the year.

However, the factors fueling the recent rise in oil prices are mainly on the supply side — some geopolitical events have escalated.

The first is Russia and Ukraine. Russia is the world's largest producer of crude oil, ranking third in the world in terms of production in 2023, with a daily production volume of more than 10 million barrels. Recently, Russia and Ukraine attacked each other's energy infrastructure, leading to an increase in supply risks.

The second is Palestine and Israel. The Mander Strait, which has received much attention in the Israeli-Palestinian conflict, is the entrance to the Red Sea and the throat of oil and gas shipping between Europe and Asia. If there is a problem with this line, the impact on the oil cloth is greater than WTI.

Last year, the Houthis attack deliberately circumvented oil tankers, but now Israel's attacks on Syria and Iran and possible retaliation have caused a sudden rise in concerns about the energy supply crisis caused by the conflict between Palestine and Israel.

Generally speaking, this year is not a big year for oil prices. 780 US dollars is a normal central level of oil prices, but this year's oil prices are also easily stimulated by uncontrollable geopolitical events, releasing huge volatility in the short term.

When it comes to copper, it's a product with a story, and there are stories to tell on both the demand side and the supply side.

On the demand side, the long-term story of copper is the transformation of old and new energy systems. Because to reduce the share of non-fossil energy consumption, it is necessary to increase the proportion of energy converted into electricity once. Whether it is generating, transmitting, or using electricity, or electric vehicles replacing fuel vehicles, copper can tell a long-term story on the demand side, so there is a saying “copper is the oil of the new era.”

On the supply side, the long-term story of copper is that the grade of fine copper ore continues to decline. Over the past decade, copper grades in a few major producing countries have declined by an average of about 25%. As the grade decreases, so does the corresponding operating cost.

Starting in the second half of 2024, copper supply and demand may begin to be tight again. At this point, it is “story time” for copper again. Although China accounts for half of the world's copper consumption, due to the high concentration of the supply chain, the pricing power for copper is still dominated by overseas, and it has certain financial attributes.

Due to financial attributes, the price ratio between copper and gold has a relatively fixed fluctuation range. Once the price of gold rises significantly, the copper price will follow even if it is not driven by liquidity. After the recent rise in gold prices, the price ratio of copper to gold has reached a low level in three and a half years, and the financial pricing of copper has begun to take effect.

• gold

According to the Tianfeng Securities Research Report, gold is both simple and complex.

The simplicity of gold is that the underlying logic is very clear — since February 24, 2022, gold will no longer be an equivalent substitute for the dollar.

Therefore, there are always people who ask, if the Federal Reserve does not cut interest rates and the US dollar strengthens, why is gold still rising? Because gold and the US dollar are no longer equivalent substitutes, the real interest rate on US bonds is no longer an opportunity cost of holding gold. What determines the price of gold now is monetary attributes, that is, the long-term pricing logic of gold plays a major role, replacing the medium-term pricing logic that was effective in the past — financial attributes.

The complexity of gold is that strategies are highly homogenized — as a result, historically, gold's rise often achieved most of its gains in a few moments, and then did not rise or fall most of the time.

Simply put, when gold is bad to choose.

On the one hand, gold is very efficient at pricing geopolitical events; it often basically completes the pricing of safe-haven properties within a day or two. On the other hand, the rapid rise in gold often occurs when it is unnoticed and the level of congestion is low, while when the level of attention is high, it is often very uncost-effective due to overcrowding.

This characteristic determines that if you want to buy gold when no one is paying attention or attention, when gold is paying a lot of attention, you need to treat it carefully.

What are the investment opportunities in the Hong Kong and US stock markets?

• Energy stocks

According to David Rosenberg (David Rosenberg), a top US economist and president of Rosenberg Research, energy stocks should get more attention because the energy industry started the year with impressive results. The S&P 500 Energy Index has returned 16.3% this year so far, and investors have yet to notice.

Looking at the US stock market, energy stocks have performed very well this year.$Marathon Crude Oil (MPC.US) $A cumulative increase of more than 40%,$Valero Energy (VLO.US) $Up more than 34%,$Phillips 66 (PSX.US) $,$Canadian Natural Resources (CNQ.US) $,$Pioneer Natural Resources (PXD.US) $,$ExxonMobil (XOM.US) $Both increased by more than 20%,$Energy Transfer (ET.US) $,$ConocoPhillips (COP.US) $,$EOG Energy (EOG.US) $It rose more than 13%.

Judging from the Hong Kong stock market, the “three barrels of oil” performed well.$China Petroleum Corp. (00857.HK) $,$CNOOC (00883.HK) $Both increased by more than 45%,$Sinopec Corp. (00386.HK) $It rose more than 13%.

Some analysts expect the sector to rise by up to 20% from current levels. Energy stocks are expected to rise further this year for three reasons:

1. Strong fundamentals

LPL Financial pointed out in a report that the energy industry's March performance revisions surpassed all sectors of the S&P 500 index, which is a timely reminder for investors as the first quarter earnings season is about to begin. Rosenberg said that the recent rise in oil prices may mean an improvement in the performance of refiners and an increase in sales of exploration and production companies.

2. Technical aspects

The energy stock rally is breaking through the key resistance level of the high of 2023-2022, and Buchbinder and Hesson said that bullish momentum and widespread buying pressure confirm this break.

3. Macro situation

The LPL said the conflict between Russia and Ukraine shows no sign of ending as the Middle East conflict escalates, and this geopolitical uncertainty combined with OPEC+ production cuts will continue to drive up oil demand and prices.

Rosenberg agreed this would be another driving force for energy stocks to rise, but he warned that falling aggregate demand linked to economic growth would pose the greatest risk to the sector.

However, it is worth noting that the latest report from Goldman Sachs's primary brokerage department indicates that despite the steady rise in oil prices, hedge funds are still shorting energy stocks on an unprecedented scale, and it seems that they are praying that the market will reverse before bursting out.

According to Goldman Sachs data, hedge funds sold US energy stocks for the third week in a row last week. The latter experienced a net sell-off in the past 6 weeks and 5 weeks. Last week's sell-off was almost entirely driven by bears.

• Copper stocks

Against the backdrop of global copper supply shortages, a possible decline in copper production from Chinese smelters, and an increase in copper demand driven by artificial intelligence, copper prices may also have room to rise in the future. As the world gradually removes carbon emissions, the energy transition, including electric vehicles and renewable energy technologies, is also expected to drive a surge in copper consumption over the next few years.

Morgan Stanley also believes that with the rapid development of AI technology, copper demand will increase significantly, and AI data centers will become a new growth point for copper demand. Copper prices are expected to rise to 10,500 US dollars/ton by the fourth quarter of 2024. From 2024 to 2027, global AI data center electricity demand will grow at a compound annual growth rate of 18%.

Previously, Futu News compiled Hong Kong and US copper stocks and related ETFs for bulls to refer to: US stocks include$McMoRan Copper Gold (FCX.US) $,$Southern Copper (SCCO.US) $,$TECK.US (TECK.US) $,$BHP Billiton (BHP.US) $,$Rio Tinto (RIO.US) $,$GLNCY.US (GLNCY.US) $etc.; Hong Kong stocks include$Zijin Mining (02899.HK) $,$Jiangxi Copper Co., Ltd. (00358.HK) $etc.

Furthermore,$Copper ETF-Global X (COPX.US) $,$SPDR S&P Metals and Minerals ETF (XME.US) $,$ISHARES COPPER AND METALS MINING ETF (ICOP.US) $,$US Copper Index Fund (CPER.US) $,$iShares MSCI Global Metals and Mining (PICK.US) $Related ETFs are also worth investors' attention.

• Gold stocks

Since this year, as spot gold (yellow line) has continued to rise, the world's largest gold mining company (blue line) has not kept up with the upward trend.

The divergence between gold mining stock prices and gold prices breaks the traditional rule that gold miner stocks should be superior to gold itself. Analysts believe that this divergence may be related to the rising costs of miners due to inflation.

Despite this, as the price of gold remains high for a long period of time, the possibility that analysts will raise their earnings expectations for gold companies is also increasing. Furthermore, if inflationary pressure eases and the outlook for cost control improves, gold mining stocks are expected to rebound.

Rosenberg Research said that as the price of gold is expected to rise (moving towards $3000 is not impossible)... we don't think this type of stock should be overlooked — it provides a good risk/reward scheme.

Previously, Futu News compiled Hong Kong and US gold stocks and gold ETFs for bulls to refer to: including the world's largest gold mining companies$Newman Mining (NEM.US) $, the world's largest gold producer$Barrick Gold (GOLD.US) $, an established Canadian gold mining company$Eagle Mining (AEM.US) $and South African gold mining giants$Kaneda (GFI.US) $etc.; Hong Kong stocks include$Zijin Mining (02899.HK) $,$Zhaojin Mining (01818.HK) $.

Additionally, US stock gold ETFs$SPDR Gold ETF (GLD.US) $,$Gold Mining ETF-VanEck (GDX.US) $,$Small-Scale Gold Mining ETF-VanEck (GDXJ.US) $,$iShares MSCI Global Gold Mining ETF (RING.US) $,$Sprott Physical Gold Trust (PHYS.US) $,$Gold Trust ETF-iShares (IAU.US) $and Hong Kong stock gold ETF$SPDR Gold ETF (02840.HK) $,$Value Gold (03081.HK) $,$Hang Seng RMB Gold ETF (83168.HK) $It's also worth watching.

However, Tianfeng Securities also said that there is a problem with commodity stocks. Whether it is gold or copper, a company usually produces not only one type of mineral, but the diversification of revenue sources also makes the trend of gold stocks and copper stocks not as simple as commodity prices.

Some sources for this article“Tianfeng Macro Song Xuetao: Price Signals for Commodities”

Editor/Somer