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Commodities rally amid expected Chinese farm purchases, Fed inflation shift

Commodities tracked by the S&P GSCI index rose in August as all sub-indices but one advanced, with expected farm goods demand from China and the U.S. Federal Reserve's historic inflation shift boosting agriculture and metal futures.

The benchmark index rose 5.4% month over month in August, trimming its year-to-date losses to 17.9% from 22.1% at July-end.

Grains led the advance with an 8.4% monthly increase, after a slight dip in July, as China boosted purchases of American soybeans.

"Weather concerns, a weaker dollar, strong Chinese buying as well as the emerging inflation theme have all helped improve prospects for the [agriculture sector]," wrote Ole Hansen, head of commodity strategy at Saxo Bank, in an Aug. 31 note.

The Fed will now allow prices to temporarily rise above the 2% threshold to make up for any time they spent below that level, meaning interest rates will be kept lower for a longer period of time.

China will reportedly buy a record amount of U.S. soybeans this year as part of the phase one trade deal between the countries. Based on the U.S. Department of Agriculture's trade outlook published Aug. 26, American soybean exports are forecast up $4.2 billion to $20.4 billion between fiscal 2020 and 2021, reflecting expected strong demand from China and reduced competition from Brazil.

Meanwhile, livestock slipped 0.3% as an 8.0% rise in lean hogs offset a decline in live cattle and feeder cattle futures.

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Natural gas' surge returns it to YTD gains

Natural gas climbed 46.2% from July, bringing the energy commodity back to expansion territory year to date.

Gas futures saw a substantial price increase at the start of August on the back of declining production and strong demand from natural gas-fired power generation, the U.S. Energy Information Administration said in an Aug. 11 report.

The EIA expects natural gas consumption in the U.S. to average 82.4 billion cubic feet per day in 2020, down 3.0% from last year.

Brent crude oil increased 4.0% last month, paring its January-August decline to 31.4%.

Oil and gas companies were forced to shut down several refineries and facilities as Hurricane Laura barreled ashore just east of the Texas-Louisiana border in late August, leading to temporary supply disruptions.

Gold loses luster; silver shines

In stark contrast to its performance in July, gold observed a minor pullback in August, but analysts remain bullish on the yellow metal amid negative real rates and dollar weakness.

"The prevailing macro tailwinds will continue to suppress real rates via financial suppression, suggesting that capital will increasingly seek shelter in precious metals," according to a Sept. 1 note by analysts at TD Securities led by Bart Melek, head of commodity strategy.

The U.S. Federal Reserve's historic change to its inflation strategy opens the door for further U.S. dollar weakness, which supports gold, UBS strategists, led by Mark Haefele, chief investment officer global wealth management, wrote in an Aug. 28 note.

"We think gold will continue to be supported by ultra-easy monetary policy, a weak U.S. dollar, and policy uncertainty ahead of the U.S. election," according to the UBS report.

Gold exchange-traded fund inflows are expected to rebound sharply in September amid an accommodative Fed policy, according to a Sept. 1 note from Citi.

Silver soared 18.1% on the month as a rebound in commodity and investment demand helped support the metal's rally given its role in many industrial applications.

"The metal's clean positioning slate, rising demand and inventory constraints should maintain momentum to the upside," wrote TD Securities commodity strategist Daniel Ghali in an Aug. 17 note.

Silver is now the best-performing commodity among the 24 raw materials tracked by the S&P GSCI index, with nearly 60% growth since the start of 2020.

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