Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 15
THE DRUMMER'S EAR | RHYTHMIC REASONING
2030. We suspect the oil growth rate will deteriorate but continue
to grow ~100-300 mbbl/d through 2030 under a $70+ WTI price
environment. Outside the U.S., we expect Canadian egress to
once again become a major focal point by 2030, while Brazil’s
project start-ups will likely slow markedly post-2030. Additionally,
we continue to expect supply from Norway and Kazakhstan to peak
in 2025.
GOLD OUTLOOK
The gold price is being driven by both economic and geopolitical
uncertainties and strong central bank buying. On the economic
front, key drivers include: uncertainties with respect to the
economic growth outlook (including the potential for a global
recession), Trump’s tariff impacts (including tariff levels and future
tariffs), concerns over global debt levels, interest rate cuts leading
to a lower US$. On the geopolitical front, key drivers include:
war between Russia/Ukraine, tensions in the Middle East, and
rising global tensions driven by Trump’s imposed tariffs. Currency
diversification outside the USD has resulted in strong central bank
buying of gold (we expect this to continue), with bullion now
representing ~22% of world foreign exchange reserves (historical
range is ~10%-60%).
We believe the fair value for gold is ~$2,600/oz (Scotiabank GBM
calculation, BNS)), with bullion currently trading at ~30% premium
to fair value. Historically, gold has traded at ~7% premium to
fair value (BNS calc.), however, in periods of extreme uncertainty
(Covid-19, the GFC), bullion traded at ~43% premium to fair value
(BNS calc). A 43% premium would imply ~$4,500/oz gold price or
~20% upside from current level; this could be driven by further
economic/geopolitical uncertainties (Trump imposing additional
tariffs, greater number of rate cuts), central banks increasing the
pace of gold purchases (target to move from current ~22% of gold
in foreign exchange reserves to 30%-40% levels, similar to levels
seen in the 1990s) and COMEX and ETF demand increasing for
gold. On the other hand, the downside scenario for the gold price
would be ~$2,750/oz (representing ~7% historical premium), or
~25% drop from current levels; this would require economic and
geopolitical uncertainties to subside (including resolution on tariffs
and some initiatives to deal with debt levels) and for central banks
to reduce buying or turn to selling of gold from their reserves. The
gold market is different versus two recent periods of significant
gold price moves (2009-2011, 2020), where the gold price traded
well above the average premium to BNS calculated fair value for
bullion. The main differences today include: (1) the global economic
and geopolitical landscape is even more uncertain (high debt levels,
concerns on economic growth, tariffs, global tensions, interest rate
cuts are expected), (2) central banks are adding a lot more gold
(currency diversifier) to their foreign exchange reserves (they were
sellers in the late 2000s and net buyers in 2020, albeit, at a lower
pace), (3) COMEX and ETFs were more active in previous cycles,
which helped drive the gold price to new highs, and (4) Bitcoin
and cryptocurrencies investments are more attractive today as
alternative investments to gold. We are currently forecasting a
gold price of $3,250/oz for 2025; however, the above factors are
resulting in the premium to fair value to be much higher than we
have been anticipating.
Fig. 2: Gold prices have increased despite elevated real rates
$4,000
12%
$3,000
6%
$2,000
0%
$1,000
-6%
$
1968
-12%
1982
Negative real interest rate periods
1996
2010
Gold price ($/oz) - LHS
2024
U.S. real interest rate - RHS
Source: Bloomberg Finance LP, Scotiabank GBM
COPPER OUTLOOK
While we remain cautious on the near-term outlook for copper
(Cu) demand given the uncertain macroeconomic backdrop, both
in China and in Ex-China markets, ongoing trade war de-escalation
efforts and surprisingly resilient consumption offer hope that a
painful global economic slowdown can be avoided (recent interest
rate cuts offer further support). Despite heightened demand risks
and elevated Middle East/Russia-Ukraine tensions, we continue to
see strong pricing support for Cu given relatively low inventories
and the impact of elevated supply side under-performance,
highlighted most recently by major operating disruptions at three
of the world’s largest Cu mines – the Grasberg Block Cave mine
in Indonesia, the El Teniente mine in Chile, and the Kamoa-Kakula
mine in the DRC (a combined 1.65Mt or 7.2% of global mine
supply in 2024). Overall, we continue to forecast a market in a
multi-year modest deficit position under a relatively unassuming
demand scenario, before transitioning to a large structural deficit
by 2029-2030 driven by a lack of supply growth.
We estimate that global consumption growth of only 1.0% is
sufficient to keep the market in balance this year, with a slightly
higher average growth CAGR (compound annual growth rate) of
+1.7% per annum required over the 2025-2027 period to maintain
balance (vs. 2023-2024 growth of +2.7% and +3.4%, respectively;
long-term growth of +2.9% per annum). We forecast relatively
modest average 2025-2030 demand growth of +2.0% per annum
(including only +1.2% per annum in China). We forecast improving
2025-2029 Cu prices of $4.35/lb, $4.50/lb, $4.50/lb, $4.75/lb,
and $5.00/lb, respectively. Our long-term incentive price is $4.50/
lb. Given already low inventories and a tight structural market,
we see the potential for markedly higher prices sooner than we
currently envision, particularly if trade war uncertainty further
dissipates, another supply side shock emerges, and/or the U.S.
dollar materially depreciates (which makes buying metals more
affordable for ex-USA markets).
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