Amid growing expectations of interest rate cuts by the Federal Reserve, the market is paying close attention to its impact on commodity prices.
Considering macro-environmental factors, Pu Zulin, chief macro analyst at Zhengxin Futures, stated that historically, industrial commodities tend to follow a downward trend each time the Federal Reserve begins a rate-cutting cycle. The logic behind this is that when the U.S. or global economy enters a downturn, the Fed often passively adopts countercyclical rate cuts to stabilize the economy. Against the backdrop of an economic downturn, weak demand becomes a key driver of declining commodity prices.
However, supply-side factors have rarely been thoroughly analyzed in previous discussions of this phenomenon. Pu Zulin noted that, in reality, the performance of commodity prices varies depending on the nature of the U.S. or global economic downturn. If the economic downturn is caused by shrinking demand, commodity prices typically fall sharply. Conversely, if the economy is merely experiencing a normal correction within an upward cycle, supply-side factors have a more significant impact on commodity prices.
"The current global macro-environment shares similarities with the 1970s to 1980s," Pu Zulin said. During that period, each time the Fed initiated rate cuts, the economy反而 showed signs of overheating. With supply constraints, commodity prices rose instead of falling, ultimately forcing the Fed to re-enter a rate-hiking cycle after brief cuts.
From the perspective of how the Fed’s interest rate path transmits to commodity prices, different commodities exhibit significant variations in their responses to interest rate changes due to their inherent characteristics. Taking leading commodity varieties as examples, Jiang Xianhui explained that gold is highly sensitive to real interest rates. When real interest rates rise, meaning nominal rates increase faster than inflation expectations, it significantly negatively impacts gold. This is because the opportunity cost of holding gold increases, and the U.S. dollar typically strengthens, reducing gold’s relative attractiveness. Conversely, when real interest rates fall, the cost of holding gold decreases, highlighting its value preservation and safe-haven attributes, which is significantly positive for gold.
Copper is often regarded as an "economic barometer" and is highly sensitive to global economic growth expectations. Rate hikes typically suppress economic activity, weakening downstream demand in key sectors such as construction, manufacturing, and electrical equipment, thereby negatively impacting copper prices. The opposite occurs during rate cuts. Additionally, copper’s strong financial attributes make it sensitive to the U.S. dollar’s movements.
Crude oil is also quite sensitive to interest rates, but its transmission mechanism is more complex. On one hand, an economic slowdown leads to weaker crude oil demand. On the other hand, during a Fed rate-cutting cycle, lower interest rates and a weaker U.S. dollar provide support for oil prices. At the same time, crude oil supply is subject to significant disruptions, with factors such as OPEC+ policies and geopolitical situations being dominant influences on supply.
In comparison, agricultural products are the least directly sensitive to interest rates. Jiang Xianhui noted that agricultural prices are primarily driven by supply-side factors (e.g., weather, policies), while the impact of interest rates is indirectly reflected through channels such as biofuel demand and production costs.
