TD Securities’ Global Head of Commodity Strategy Bart Melek says geopolitics has become the dominant force across energy and metals, with the Strait of Hormuz closure triggering oil, LNG, and fertiliser price spikes and leaving markets significantly oversold.
While Melek stands firm on a future US$5,300-plus ($7,594) gold price, he also notes the impact of geopolitical shocks across aluminium and copper, prompting stockpiling and keeping prices elevated despite softer demand.
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Can you start with an introduction to yourself and your work at TD Securities?
I continue to be the Global Head of Commodity Strategy for TD Securities. We now work very closely with TD Cowan, our equity research group, meaning we are focused on providing a comprehensive macro strategy, political strategy, and fundamental research on the equity side.
We cover the vast majority of the names in the United States, so, increasingly, in addition to my job with the various trading desks and investment banking, I work with equity clients who tend to be generalists. So, I seem to have evolved a little bit since we’ve spoken last.
We cover gold, silver, platinum, and palladium in the precious metal space. Soon we will be trading rhodium, and on the base metals side, it’s the standard LME metals, copper, zinc, nickel, and, of course, aluminium.
We also look at LNG globally — the impacts of geopolitics that have been impacting the oil and gas market recently. We try to incorporate geopolitical events in other markets, monetary policy, fiscal policy, risk appetite, and all other factors like flows, track CTA’s algorithms on a daily basis. And then we try to come up with a view on the prices for gold, silver, copper, etc.
Geopolitics is definitely impacting the market significantly, and with the war in Iran, we’ve seen significant impacts on the energy space, fertilisers, etc. Have these impacts been as expected?
I think for the most part, initially, things have unfolded as many of us in the analytics community expected. When the Strait of Hormuz was closed due to the conflict, we saw a very sharp rise in crude oil prices. We’ve seen Brent Crude at over US$120. We’ve seen things like urea and LNG, all surging.
Of course, some 20% of the flow of energy fuels go directly from the Strait of Hormuz — we estimate between 15–17 million barrels per day on average. For a while, that was fully interrupted, which led to very large deficits in these energy markets.
For consumers, we also saw the resulting price increase. Now, I think that energy markets broadly are oversold, with technical indicators like RSI and others reversing to some degree, noting that this market has been oversold.
We’ve seen very large short positions, and that is at a time where we still expect upwards of half a billion barrels of inventory draws into October and November.
The world hasn’t returned to normality. There are still deficits. One key factor has been China. China has reduced its import of oil and has probably been the largest catalyst allowing for prices to drop sharply, even before there has been any actual improvement in the supply-demand fundamentals. In fact, we think those will continue to erode, and China has played a huge role.
But we don’t believe that is sustainable over the longer term. China will not be in a position where they can reduce imports by 40%, as it is not a major producer of hydrocarbons. They are major users. They’ve been draining their inventories, making some substitutions away from crude oil feed to coal-based and other feeds.
But we don’t believe that’s sustainable, and ultimately, we see the market reaching inventory levels so low that it will create some discomfort or lead to certain areas just not having supply.
We don’t have to wait for prices to move higher because of these constraints and limitations. What we’re seeing now is, apparently, that this ceasefire is off, though the Middle East is never as it seems. It might seem peaceful today, but tomorrow may bring a lot of tensions and a decrease in risk appetite and risk premiums on energy.
And for the most part, we do think that there is quite a bit of short covering to happen, particularly on the part of managed money. So we do expect higher oil prices. We’re not talking about US$150, 180 on a sustainable basis, but spikes around US$80/90/100. We’re probably very close to that now, but that will depend on how this peace process unfolds.
We really don’t have a great idea of what exactly is going to happen at this point. This is just a lot of rhetorical talk from the President of the United States. We are in no position to call it better than anyone else in the world. But we look at flows, we look at markets, and we talk to people to get it.
Ultimately, we do expect prices to move above where they were, and that would mean inflationary expectations will probably continue to be with us and quite elevated.
Inflation in the United States is running at 3.5%, with personal consumption expenditure (PCE) inflation also running significantly above the Federal Reserve’s 2% target.
The market is not talking about rate cuts, not even talking about keeping these rates at the 3.75% upper boundary. We’re now talking about potentially seeing higher rates as early as September 2026.
Inflation is going to be a concern for the foreseeable future, with probably the front end of the curve reflecting that on the yield side.
There’s a clear implication here for gold. Higher rates mean the cost of carry is elevated and likely to rise further, especially at the front end of the curve.
As that cost increases, investors become less willing to hold long positions, and we’re already seeing signs of that. ETF holdings are falling, driven in part by generalist funds that typically gain exposure through vehicles like publicly traded ETFs.
Appetite has faded noticeably, with many investors selling and locking in profits rather than adding exposure.
At the same time, institutional buyers and central banks have slowed their purchases. The consistent message is that they still see a strong long-term case for gold. The underlying belief is that gold’s future remains compelling, even if near-term positioning is softening.
I’m looking at US$5,350 in about a year from now, maybe even higher. But for now, I think the risk is we’re going to go to support levels on the lower end, around US$3,900.
There are worries that the market may start pricing in more than one rate hike this year, and if so, then I think we could break that US$3,900 or even lower, so there’s a big risk there.
And that seems a bit weird because investors, particularly in the retail side, have always been told that inflation is good for gold. And while that is true, it’s never a one-variable world.
It’s not only inflation, but how monetary policy authorities respond to inflation that matters. Inflation on its own helps gold, but the reaction of central banks to inflation is typically the other necessary condition for higher gold prices.
I think the general view is that because we had such profound and fundamental negative supply shocks across energy, natural gas, fertiliser, etc., the fear is that this might feed into broader core inflation and might result in a stagflationary environment.
I think there’s a broad realisation within the US Federal Reserve and other central banks around the world that if you accommodate these pressures, you might have a problem where you get the worst of both worlds. You get inflation and a weak economy. And I think if you’re making a decision, you’d much rather just have a weak economy and no inflation, as opposed to both.
So, yes, inflation is good for gold. But when monetary policy makes interest rates really high, then gold tends to sell off. And we’ve seen that after former Chair of the US Federal Reserve Paul Volcker took over and really spiked rates. We’re hoping not to see anything like that. But I think temporarily that is going to happen to a degree.
But the good news is, we like gold longer-term. All the problems that got it to over US$5,200/5,300 early in the year are still there. US debt is still running at US$39 trillion ($55.9 trillion) and growing even faster than it did before. Wars apparently are expensive, so that’s another US$200 billion-plus for the Iran adventure.
The gold market looks at the impact of real interest rates and the geopolitical instability that it might cause. And also, if we do see risks in that region rise and these economies slow — they might have — they’re unlikely to buy gold.
So, we’ve seen gold, oil, and gas heavily impacted by geopolitics, while metals like silver, copper, etc., seem less so.
This year has been a little different in that geopolitical influence has very much leaked into aluminium, for example. So the Gulf region sees about 9.5% of global production, while the US imports about 18% of its supplies from the region.
For a while there, a lot of this was interrupted, and we were looking at deficits — as much as three million tonnes — and prices spiked to unprecedented highs at over US$3,700. That has abated with this peace process, and we don’t think that you’re going to get shutterings. In fact, we’re seeing speedier-than-expected reopenings of aluminium shelters in the area.
So, normally, we’re much more of a fundamental market in copper, aluminium, and nickel. But when this whole global order somewhat dissolves, everybody wants to acquire and stockpile.
Stockpiles are close to where they’re needed because we can no longer count on the free and easy flow of these commodities from where you have them to where you need them. So, there’s a big impulse now to acquire inventory, certainly in copper and aluminium.
In our opinion, the supply side is probably keeping prices a lot higher than they would have been otherwise, given that demand will likely continue to weaken. But again, for something like copper and other metals — anything with hydrometallurgical processing — sulphuric acid has been a problem because when you process sour crude, one of the byproducts is sulphuric acid.
While that has slowed down, I think the situation is being rectified. But prices of a lot of these inputs — from energy to sulphuric acid to other inputs — have been moving higher, with production costs also moving higher across the board.
Prices have held up very well, so there has been a speculative element. So it’s a little different this time, where you have speculative elements — geopolitics, tariff policy — all, I think, in the immediate term having an impact.
One metal I absolutely adore is copper in the longer run. Copper has fundamentally changed. Six months ago, I would have been talking about a 400,000-tonne deficit. Next year may bring a bit of a surplus, but despite that, prices are high. There’s a big impulse for the US to, at least, keep us thinking that the US Section 232 tariffs are going to attract more metal.
There was a lot of metal headed to the US, and that market continues to be quite well-fed. It might relax a bit as supply-demand conditions ease with weaker demand expectations, but prices are still good. And I think they’re going to get better as we move into 2028–2029.
Electrification is going to continue. After the recent Middle East developments, a spike in oil prices, and the general unreliability of these logistics lines, policymakers globally are going to maximise everything from nuclear power to solar and become less dependent on hydrocarbons.
There will always be a necessity for hydrocarbons, oil, petrochemicals, etc., but certain segments like transportation and power generation may see less of it over the longer-term.
Beyond copper, what are the other winners and losers, in your view?
I think platinum and palladium are under a lot of stress right now because people aren’t buying cars because the economy isn’t great.
The good news for platinum and palladium is that there wasn’t this massive shift into pure EVs like we expected after the passage of the US Inflation Reduction Act. What we did instead was shift into more efficient vehicles, but these were hybrids, which also have catalysts.
For platinum, we think that for the hydrogen economy, it’s going to be great. It is being used as a catalyst, and we continue to see problems in South Africa, where the supply side isn’t really generating a lot. So, yes, it’s under selling pressure currently. But in the end, we do think that it will improve, along with the economy, by the end of this year.
But that’s all predicated on this war ending. Then oil prices will stabilise, inflationary pressures will abate, and central banks will be comfortable in maybe reducing their signals to be more restrictive than in the case of the US.
We do believe that next year, we may see a tilt towards the US maximum-employment policy. But for that to happen, we’re going to have to see inflation stop going up — and even inflect lower — and start approaching the 2% target.
Write to Amy Rotman at Mining.com.au
Images: Mining.com.au
