Except Bullion, All Commodities To Take A COVID-19 Hit

The stock markets across the globe have fallen in the range of 25-30 per cent as outbreak of COVID-19 has had a significant impact on world economies. The immediate trend would be weak for commodities with one exception, bullions. We make an attempt to analyse in the following lines what impact COVID-19 will have on other important commodities like crude oil, other precious metals and non-ferrous metals.

Global commodity market witnessed severe selling pressure on Monday, in line with the equities, amid fears that the rising COVID-19 cases may severely impact the global economy.Brent oil prices crashed nearly 10 per cent during the day, while precious metals pack also nosedived, with platinum falling more than 25 per cent to hit a 17.5-year low. Investors dumped hard assets in favour of cash after a US rate cut failed to stem a COVID-19-led selloff.

An emergency rate cut by the US Federal Reserve also failed to calm global financial markets while a price war raged on between the top oil producers. The Fed slashed interest rates on Sunday night (March 15) in its second emergency cut this month and said it would expand its balance sheet by at least $700 billion in the coming weeks in a bid to ease tension in financial markets.
Gold broke its psychological $1,500 per ounce level. The commodity traded 4.50 per cent down at $1,459 per troy ounce at around 5.20 pm (IST). Silver traded nearly 18 per cent down at $12 per ounce. In the domestic market, gold jumped Rs 455 to Rs 41,610 per 10 gram in Delhi amid rupee depreciation .Silver prices, however, dropped by Rs 1,283 to Rs 40,304 per kg from Rs 41,587.
Globally, the precious metals are caught up in a broader tumble in stock markets, as the COVID-19 continued to spread rapidly, with some investors obliged to sell assets to cover margin calls, analysts said. 

Will gold keep going up?

Only commodity which has given returns during such nervous times is the yellow metal. The investment demand has gone above the roof due to gold’s safe haven characteristic. 

Naveen Mathur, Director (Commodities & Currencies), Anand Rathi Shares & Stock Brokers said, “When it comes to gold, the yellow metal could wind up being different as the central banks around the world hold gold as part of their foreign exchange reserves. The Fed in a surprised move, has cut interest rate to zero on Sunday (15th March, 2020) ahead of its scheduled meet on 17th & 18th March, second time in a month. Historical lows in interest rates make gold attractive versus the dollar and all world currency instruments”. 

With markets falling at an extraordinary pace, the world's central banks and monetary authorities have little choice than to resort to easing. Hence there is still some shine left in the yellow metal in 2020, Mathur added.

Bhavesh Damania, Founder & Chief Care Taker, Wealthcare Investments says, gold is likely to take big leap of faith. Although since March 2020, the prices haven’t moved much between Rs 43,000 -42,000 per 10 gms range, in the domestic market. But it is most likely that Investors across the world will find shelter in gold as the hedge, on their portfolio. “In my view gold should easily travel to 46-48k range over next 5-6 months. Investors must remember that gold is quite volatile than equity, hence Investors will have to be watchful of the movements”, said Damania.

Praveen Singh, AVP, Fundamental Research – Commodities, Sharekhan by BNP Paribas is also bullish on gold because of its safe heaven property. He said, “Gold has held better than risk assets during the virus contagion period. Safe haven assets like gold, Japanese Yen and the US treasuries have rallied sharply during this time of distress for the global economy. However; unlike Yen and treasuries, gold hasn’t been able to maintain its gains, and currently, at a price of $1490/Oz, is trading lower than what it was before the surfacing of coronavirus. The US treasuries have done the best. Although gold rallied to $1700 but it gave back its gains.”

Gold, in a way, is suffering on two counts: Firstly, in this panic sell-off, some investors are dumping anything and everything. Secondly, some of the investors are selling gold to remain liquid as they have to cover losses they have made elsewhere. 

Also, many investors keep gold in their portfolio only up to a certain proportion of the whole portfolio, said Singh. So the shrinking value of their portfolio due to falling markets is forcing them to sell some of their gold holdings too. Nonetheless; looking at the overall scenario, we remain positive on gold and look for much higher prices. We look for price of $1700 and $1800 in medium term, he added.

According to the top agencies like the World Bank, OECD and the IMF, the Chinese economy may witness a historic slump due to virus shutdown. The People’s Bank of China, in support of the economy, provided banks more money to lend by cutting the amount of cash they must place in reserve at the central bank. COVID-19 made the economies stop from factories to spending. As the virus has extended to almost everywhere, global demand and supply chains have taken a hit including export - import. Hence base/industrial metals may not witness a reversal in trend. 

Energy commodities are no different from base metals. The WTI (Western Texas Intermediate) crude oil has fallen by approx 50 per cent from year to date as China’s demand diminished dramatically. WTI oil’s fall deepened further as widening global efforts to fight the spread of corona virus were set to trigger the most severe contraction in annual oil demand in industry. In fact both demand and supply shocks triggered at the same time. Giant producers are embarking on a deceptive price war after the disintegration of the OPEC+ alliance that’s unleashing a flood of supply on the market. 

Due to the corona contagion, the global demand for oil is getting severely affected. People are reluctant to travel, factories are curtailing production, and even local travelling is being avoided. Crude oil has already fallen quite sharply in a span of merely three weeks. 

Mathur said, “WTI is already down by 50 per cent year to date hence we don’t deny the possibility of rebound but OPEC holds the key hence it has to be monitored closely in coming months”. 

According to Damania, With COVID -19 spreading at fast pace, gold and crude are  likely to behave in completely opposite direction. For the next five to six months crude isn’t likely to gain much. Brent trading currently around $28-30 is likely to remain in the same range with upside of $40. “Crude currently has double trouble of demand side and supply side. Demand side reason being slowdown of economic activities, travel restrictions plus lockdowns and fear of COVID -19 spread. Supply side being no agreement on production cut between OPEC and Russia,” he said.

The US economy has been the only major economy that has been doing well; however with the US facing virus contagion, the world’s biggest economy is surely going to experience slowdown. It is to be noted that the peak demand season, i.e. driving season, for oil is still two months away. So, overall in this scenario, we suspect that Brent oil is headed further lower. It can drop to $25 or so in near-term before a sustainable recovery can take place. It is currently trading at $30/barrel, said Singh.

Which commodities will face a down cycle, and which ones are likely to go up, and why?

Going ahead, industrial metals may witness a phase of slowdown in demand due to virus fears. Central banks of China, UK, EU, Japan, Canada and US have started taking steps to tackle the dwindling economies but virus vaccination is critical for recovery. Hence base metals may stay under pressure for coming quarter. 

Copper being the bellwether metal is susceptible to fall further amid prolonged sell-off. Shanghai inventories of copper are rising sharply as the country faces sharp slowdown in its economic activities. Despite the major central bankers adapting extremely loose monetary policies, IMF and World Bank are offering monetary help to the virus infected nations, talks of co-ordination between major economies, we are seeing the risk assets are simply unable to find bottom as rallies are proving to be abortive. LME cash to 3-month spread of the metal is weak and doesn’t betray any signs of a tight supply. Singh said, “It is somewhat surprising that that as compared with declines in other metals, copper hasn’t suffered that much. So, it has further room to fall. Currently it is trading around $5300. We look for a dip below $5000 in near-term.”