European Natural Resources Fund: Global financial markets may experience significant volatility from March to May

According to the Zhitong Finance APP, Li Gangfeng, a special analyst for the European Natural Resources Fund Commodity Discovery, stated that the market's predictions for the Federal Reserve's interest rate cuts next year have changed, with expectations for a larger cut in 2025 compared to the previous week. The probability of the U.S. reducing rates to 3.75-4.25% by the end of 2025 has decreased from 66.6% to 64.2%, while the probability of a reduction to 3.5-3.75% has increased from 10.5% to 17.3%. In scenarios where the U.S. begins to cut spending in 2025, the U.S. stock market may experience a significant drop, the Federal Reserve's rate cuts may not meet expectations, and geopolitical risks may escalate, the rise/maintenance of the U.S. dollar at high levels is basically unquestionable. There may be significant fluctuations (declines) in the global financial market from March to May 2025, and it is recommended to gradually reduce risk assets during these months to maintain stability.

Data Source: CFTC/LSEG Workspace

*For comparison purposes, the metal equivalent of COMEX gold is divided by 10, and the metal equivalent of COMEX silver is divided by 100.

Currently, the reference for Nymex palladium is very low.

As of last Tuesday, the net long positions of U.S. futures metals gold, silver, and copper have all declined, while platinum has shifted from net short to net long.

The net long positions of U.S. gold futures funds fell by 8% week-on-week; at the same time, the short positions rose by 21%, resulting in the fund's holdings dropping from a net long of 634 tons to 573 tons, the lowest level in the past 25 weeks, and it is the 63rd consecutive week of net long positions (previously 46 consecutive weeks of net long), also 63% of the historical peak of 908 tons in September 2019. As of December 24, the dollar gold price has accumulated a rise of 27.4% this year (previous week +28.1%), while the fund's long positions have accumulated an increase of 11.1% during the same period (previous week +20.7%).

Silver, which has a high correlation with gold prices, has always been more volatile than its wealthy cousin. The net long positions of U.S. silver futures fell by 2% week-on-week; the fund's short positions rose by 3%, resulting in the fund's holdings dropping from a net long of 3,434 tons to 3,202 tons, the lowest level in the past 42 weeks, and it is the 42nd consecutive week of net long positions, also 21% of its peak period. As of December 24, the dollar silver price has accumulated a rise of 24.7% this year, with silver fund long positions accumulating +7.3% (previous week +9.7%), and short positions accumulating a decline of 4.6% (previous week -7.5%).

The net long positions of U.S. platinum funds rose by 7% week-on-week; however, the short positions slightly rebounded by 1%, resulting in a shift from a slight net short back to a net long of 3 tons last week. Historically, U.S. platinum funds maintained net short positions for the longest time of 31 weeks (from April 2018 to October 2018) The net short position of the U.S. Palladium Fund has fallen back to 32 tons, the lowest level in the past 15 weeks. The author believes that even though the bull market for palladium has ended, as long as palladium maintains a significant net short position, it may still be difficult for other precious metals to completely reverse their trends. The U.S. Palladium Fund has been in a net short position for 107 consecutive weeks, marking the longest net short position in history.

The net long position of the U.S. futures gold fund has increased by 36% year-to-date (up 101% cumulatively in 2023)

Data Source: CFTC/LSEG Workspace

The net long position of the U.S. futures silver fund has increased by 21% year-to-date (down 44% cumulatively in 2023)

Data Source: CFTC/LSEG Workspace

The net long position of the U.S. futures platinum fund has decreased by 87% (down 7% cumulatively in 2023)

Data Source: CFTC/LSEG Workspace

The net long position of the U.S. futures copper fund has decreased by 92% (down 0.3% cumulatively in 2023)

Data Source: CFTC/LSEG Workspace

Basically, from the above charts, it is clear that despite the rise in global inflation over the past few years, the prices of various metals have shown varying degrees of decline. The main reason is that the futures market lacks funds to go long and drive the leverage effect. If someone had a crystal ball years ago and knew that global inflation would surge this year, along with wars and various uncertainties, and went long on precious metals in the futures market, they would likely have lost money. The most ironic thing is that since the pandemic spread globally in 2020, the net long position of precious metals in the U.S. futures market has continuously declined, reflecting that funds are purposefully preventing precious metals from rising.

The CFTC weekly report on U.S. copper has been published since 2007. Since copper was in a bear market from 2008 to 2016, it is not surprising that most of the historical net positions in U.S. copper futures have been net short. However, since 2020, due to the impact of the global pandemic on the supply side and mining operations, coupled with market expectations of strong demand for copper from electric vehicles, copper prices have risen and even reached new historical highs However, the current global investment philosophy is that the world is entering a phase of economic recession, leading to reduced demand for commodities.

The net long position in copper funds has seen a sharp decline, and it cannot be ruled out that stimulus policies may be introduced in China in the first quarter of 2025 to support copper prices. However, it is expected that by the second half of the year, there will be a net short position in copper funds.

If you ask ten industry experts, nine of them would likely be optimistic about the prospects for copper, but I am that tenth one. 2024 may be the last good year for copper, and starting next year, there may be a more significant decline—because the current copper prices are no longer cheap for China's midstream manufacturers and downstream demand, which will continuously seek cheaper alternatives (such as aluminum). Unless India, the United States, the Middle East, or Africa undergo a large-scale infrastructure revolution, copper prices may primarily trend downward in the coming years.

I have updated the indicators for gold mining stocks, which have important implications for the short-term direction of gold prices. Last week, the ratio of gold prices in USD to North American gold mining stocks increased:

Data Source: LSEG Workspace

As of Friday (the 27th), the gold price/North American gold mining stock ratio was 18.87X, up 0.2% from 18.83X on the 20th, returning to the level of March 2024. The ratio had previously reached a new high for the year of 19.22X (based on closing prices) 45 weeks ago. Currently, it has increased by 14.9% year-to-date. The cumulative increase for the entire year of 2023 was 13.2% (2022: +6.4%), with the highest ratio in 2023 being 17.95, and the lowest in January 2023 and 2022 being 13.99X and 11.24X, respectively.

In fact, since 2009/2010, the performance of mining stocks has consistently lagged behind the commodities themselves, and in recent years, even oil and natural gas production companies have shown similar trends. I believe one reason for this is the growing emphasis on environmental, social responsibility, and corporate governance (ESG) in the investment community. For example, in 2021, Blackrock committed to the UK Parliament not to invest in coal and oil production companies, and they are certainly not the only fund company that has pledged to invest only in companies and industries that place greater importance on ESG.

Now that Trump has been elected, theoretically, this is good news for mining companies, as the market believes Trump prioritizes engineering development over environmental protection (speculative attention can be paid to some projects in the U.S. that have not been developed for various reasons in the past, with the market anticipating a green light from policies). However, the problem is that the market also believes that the financial market will see a strong dollar and reduced consumption (due to increased tariffs), which is unfavorable for commodity prices. Moreover, in the context of a bullish outlook for U.S. stocks, the mining sector can continue to be overlooked. The future of copper prices will depend on whether the U.S. will push for large-scale infrastructure projects again.

I believe that tracking overseas gold mining stock prices is one of the more reliable forward-looking tools; if gold prices continue to rise but gold mining stocks experience a sharp decline, caution is warranted Gold-Silver Ratio

The gold-silver ratio is one of the indicators measuring market sentiment. Historically, the gold-silver ratio has operated at levels ranging from approximately 16 to 125 times:

Data Source: LSEG Workspace

Generally, the more panic in the market, the higher the gold-silver ratio. For example, in 2020, due to the global spread of COVID-19, the gold-silver ratio once surged past the historical high of 120 times.

Last Friday, the gold-silver ratio index was 89.2, up 0.5% week-on-week, and has increased 2.8% year-to-date. The cumulative increase for 2023 is 14.0%, with the highest and lowest points for 2023 being 91.08 and 75.93, respectively. In 2022, it fell by 3.1%.

It is important to note that both the ratio of the dollar gold price to North American gold mining stocks and the gold-silver ratio have clearly shown a trend of bottoming out and rebounding. The financial market has evidently entered a phase of economic recession.

The U.S. May Maintain Interest Rates in January

At the time of writing, the market believes that the probability of the Federal Reserve maintaining interest rates unchanged on January 29 has slightly decreased from 91.4% two weeks ago to 88.8% last Friday:

Image Source: CME Group

This is the futures market's prediction of the probability distribution of U.S. interest rates in December 2025:

Image Source: CME Group

As of last Friday, the market's prediction regarding the extent of interest rate cuts by the Federal Reserve next year has changed, with expectations for larger cuts in 2025 compared to the previous week. The probability of the U.S. reducing rates to 3.75-4.25% by the end of 2025 has decreased from 66.6% to 64.2%, while the probability of reducing to 3.5-3.75% has increased from 10.5% to 17.3%.

After long-term verification, the futures market's predictions regarding U.S. interest rate trends, especially long-term expectations, are generally incorrect. Therefore, I boldly predict that the number of interest rate cuts in the U.S. next year will exceed current market expectations, especially if a stock market crash occurs next year.

Concerns about the U.S. balance sheet and the dollar indicate that no matter who becomes president, the historical tide cannot be changed. During the previous presidency of Trump, national debt increased by $7.8 trillion, coupled with tax cuts and unrestricted other expenditures, leading him to set a historical record as the president with the third-largest increase in fiscal deficit during his term However, from an investment perspective, fundamentals are not important; what matters is what the market believes at this moment. If the market believes Trump will be elected, then the US dollar will rise, bond prices will fall, commodities will decline, and US stocks and digital currencies will rise.

Earlier, I predicted in this column that if Trump is elected, the market may give him a six-month honeymoon period, so the strength of US stocks and digital currencies may last until around the end of April next year; as for metals, unless geopolitical tensions rise again, it may have already passed its short to medium-term peak. According to historical statistics, the average return of gold prices in the first year of each US president's term is only slightly over 1%, making the first year often the worst-performing year of the four-year term.

The biggest test in the next 12 to 24 months will be if the US starts to cut interest rates, but inflationary pressures rise again—what will the Federal Reserve do?

In scenarios where the US begins to cut spending in 2025, US stocks may experience a significant decline, the Federal Reserve's interest rate cuts may be less than expected, and geopolitical risks may escalate, there is no doubt that the US dollar will rise or maintain high levels. In March to May 2025, the global financial market may experience significant volatility (decline), and it is advisable to gradually reduce risk assets during these months, holding onto profits and ensuring safety