Copper is a primary industrial metal and a leading indicator of global economic health, while Gold is the exact opposite, recognized as a traditional safe-haven asset and a store of value during economic recessions.
Vaccine euphoria has been the biggest driver for commodities in the final quarter of 2020, as the market expects that an effective vaccine could stimulate a global economic rebound next year.
Since the vaccine announcements last month, the commodity market has seen an investment rotation, with investors moving away from the safety of Gold and Silver and jumping into riskier metals such as Copper, Iron Ore, and Aluminium which could benefit from the recovery of the industrial activity.
The price of Copper climbed to the highest level since March 2013, touching 3.50 dollars per pound and getting support from the recovered industrial demand from China and supply disruptions from South America.
After touching a record high of 2.075 dollars per ounce on August 07, Gold has retreated by more than 10% on risk appetite and outflows from Gold ETFs. However, Gold holds the support level of 1.800 dollars per ounce, getting support from the lower US dollar and the risk for higher inflation from the massive fiscal and monetary policies.
Copper, aluminium, and other industrial metals have enjoyed impressive run-ups in the second half of 2020, driven by the expectations for a full global economic recovery in 2021, the “green” investments, and supply disruptions in South America. Copper is widely considered as the bellwether (leading indicator) of the global economy as its demand depends on global growth.
It is anticipated that an effective coronavirus vaccine together with a mass vaccination in the first half of 2021, could help bring an end to the pandemic and reopen the global economy, boosting the demand and consumption of industrial metals.
The rally has fuelled from the strong industrial demand from China and South Korea, the massive infrastructure spending from the global governments, the cheap liquidity in the money market, the potential for more US stimulus, the optimism over coronavirus vaccines, and the weaker US dollar.
The price of Copper has seen a tremendous rally during the last weeks, climbing to the highest level since March 2013, touching 3.50 per pound. The red metal has risen almost 25% this year and 60% from March lows, on pace for its best year since 2017. The prices of aluminium and iron ore have also recovered from their lows in April.
The US dollar which is the de facto global currency accepted for trade throughout the world has slipped to 2-year lows against most currencies, making the dollar-denominated metals such as base metals more attractive to buyers with foreign currencies.
The first lockdown measures applied in March-May to stop the spread of the virus had hit massively the manufacturing and construction activity around the world, sending the demand and the prices of the base metals to multi-year lows.
Strong demand from China:
Primary industrial metals such as Copper and Aluminium have seen their demand recovering at record levels during the second half of 2020, especially from China, which has historically been the world’s biggest commodity consumer (by 50% of the global demand). China was the first country that exited from the Covid-19 crisis, with its economic growth rates rebounding to pre-pandemic levels.
The base metals benefited from the unprecedented infrastructure stimulus from the Chinese government, allowing the strong restart of the activity of some local industries such as the construction, manufacturing, automotive, and solar-green energy sector.
The use of copper and aluminium in automobile and construction sectors has taken off in the last decade, thanks to their good conduct of electricity, recyclability, and lightweight. The demand for base metals is expected to skyrocket until 2050 amid the greater use of electric vehicles, wind turbines, solar panelling, and expansion of renewable energy capacity to cut carbon emissions.
There are some potential headwinds in the global market which could damage the recent euphoria in the metal market. The renewed trade tensions between China and the USA, which are the largest economies of the world, together with the no-deal Brexit and the concerns over the record-high Covid-19 infections, could harm the demand for industrial metals.
Crude oil has lost more than 10% in October, sending WTI and Brent oil prices to a four-month low on growing concerns that the second wave of the pandemic will prompt renewed global lockdowns which will damage the demand and consumption for auto and aviation fuels.
Energy prices dipped to their lowest since June on Thursday, with WTI crude falling to $35 per barrel while the international benchmark Brent crude dropped to $36.50 per barrel. On Wednesday, the EIA inventory report showed a greater-than-expected inventory build of 4.3 mil barrels compared to estimates of 1.5 mil barrels, adding more pressure to the falling oil prices.
Another negative catalyst for oil prices was the rise of the US dollar to fresh monthly highs, making the dollar-denominated crude oil more expensive for holders of other currencies.
Monthly oil losses as coronavirus concerns weigh:
Oil suffers a second straight month of declines and it is on track for the biggest monthly slide since March as the global COVID-19 cases rose by a single-day record of 500.000 on Thursday and hospitalizations broke higher again. US new cases topped at 90.000 yesterday, setting a daily record, with New York, New Jersey, and the Midwest states becoming the epicenters of the pandemic.
With COVID-19 cases surging across Europe, France and Germany announced new nationwide lockdowns to curb the spread. France will require people to stay at home for all but essential activities from October 30th, while Germany will shut bars, restaurants, and theatres from November 02 until the end of the month.
Oversupplied Market adds pressure on oil prices:
As lockdowns begin to bite on energy demand concerns across the US and Europe, the near-term supply outlook starts to deteriorate. Libya has started picking up oil production after the end of the deadly civil war last week. Libyan production is expected to reach 1 million barrels per day in November, almost double from levels earlier in October.
OPEC and its allies including Russia, plan on reducing production cuts on January 01 2021, from a current 7.7 million barrels per day (bpd) to about 5.7 million bpd. However, Saudi Arabia, the de facto leader of OPEC, and Russia are in favor of maintaining the group’s output reduction of about 7.7 million bpd currently into 2021 amid the perspectives for pandemic-related lower fuel demand and higher supply from Libya and US shale producers. OPEC+ is scheduled to hold a virtual policy meeting over Nov. 30 and Dec. 1 to discuss the current developments and decide for the production cuts.
US Elections and Petroleum industry:
Energy traders have started focusing on potential risks in the coming US election on November 03. In the case of a Biden administration, it will cause problems in the growing US Shale oil industry as Biden expressed many times to ban the Fracking drilling method which produces air and water pollution. Also, he will promote his “Green energy program” with more than $2 billion worth of investments in renewable energy technologies.
The precious metals started the new trading week with further losses as investors are losing their appetite for safe-haven assets amid the positive vaccine developments and the growing optimism for a quick vaccine-led global economic recovery in 2021. The appetite for riskier assets increased last week over news for a smooth White House transition which is decreasing the political uncertainty.
Gold dropped 0.50% to $1.775/oz on Monday, while Silver lost more than 2.50% to $22/oz while heading for a fourth monthly drop in a row since July. Both precious metals are posting their biggest monthly declines since November 2016, with Gold losing 6% so far and Silver following with 15% losses.
Investors are moving away from safe-haven assets and heading into risk-on assets such as stocks and crude oil that propelled the major US indices such as the industrial Dow Jones and the S&P 500 to hit fresh record highs above 36.000 and 3.600 levels, respectively.
Gold prices lost 5% last week, the most since the week of March 13, breaking below the key support level of $1.800/oz. Gold has lost nearly 15% or $300/oz from its August record high of $2.077/oz, while Silver has lost 25% or $8/oz from its August record high of $30/oz.
Gold has lost almost 10% since the first vaccine announcement from Moderna, while its near-term outlook is becoming bearish, especially if the price fall below $1.700/oz in the next weeks.
The yellow metal has lost its shine during the Q4 2020 despite the US dollar weakness, the pandemic-related stimulus plans which increase the inflation rates, and the outbreak of the second wave of the pandemic in the North Hemisphere (USA-EE).
The rotation away from the traditional safe-haven assets such as Gold, Silver, Treasuries, US dollar, Japanese Yen, and Swiss Franc was based on one fundamental catalyst: the drug-makers Moderna, Pfizer, and AstraZeneca announced in early November that their Covid-19 vaccine candidates had a surprising efficacy level up to 95% in their trials, sparking hopes for a strong global economic recovery in 2021.
In addition, the U.S. health authorities are to hold an emergency meeting tomorrow Tuesday to recommend that the Food and Drug Administration allow healthcare professionals and people in long-term care facilities to be the first two groups to get a coronavirus vaccine developed by the Pfizer Inc. and their German partner BioNTech, which is awaiting approval.
The precious metals and especially Gold, are considered the ideal hedge assets against inflation which is likely to increase from monetary and fiscal stimulus plans. Gold gained more than $600/oz in 2020 amid the strong monetary policies from the Federal Reserve and other global Central Banks to support the local economies from the pandemic. All Central Banks reduced their interest rates near zero, increased the liquidity in the market with cheap money, benefiting the non-yielding Gold and Silver.
However, investors are cautious about the outlook of bullions (gold-silver), as they believe that a vaccine-led economic rebound would allow Fed and other Central Banks to slow down or even halt their easing monetary policies-bond purchasing programs.