ECONOMIC VOLATILITY BRINGS SHINE BACK TO GOLD

Gold finally broke out this summer from the USD 1,100- to USD 1,350-per-ounce rate in which it had spent most of the past 3.5 years, following the US Federal Reserve’s move to pause its tightening cycle.

Gold is up 17% in the first nine months of the year, its best performance since 2010. Gold equities have outperformed gold significantly this year, rising 41%, but still lagging the 2016 increase of 51%.

Indeed, the yellow metal is emerging as a hedge against negative interest rates. The level of negatively yielding debt has surged massively over the past years and now totals USD 15 trillion.

In addition to macroeconomic uncertainty including global economic slowdown, trade tensions and geopolitical risks, central banks are likely to maintain easier monetary policy for longer, which is positive for gold. The value of gold is preserved against negative interest rates and its supply is highly constrained, compared to central banks' ability to quickly adopt dovish monetary policies.

“The gloomier economic prospects and expectation of continuing lowrates are favouring gold prices,” according to S&P Global Ratings. “We're moving our price assumptions up to USD 1,400 per ounce in 2020 and 2021.”

S&P Global Ratings is revising its forecast for other commodities, too.

“We're lowering copper price assumptions to USD 6,000/tonne in 2020 from USD 6,500/tonne due to diminishing global trade flows and expected slower economic growth,” the ratings agency said.

“For the same reasons, along with additional low-cost production coming into the market soon, we're revising down our zinc price assumptions to USD 2,300/tonne in 2020. Finally, we're raising our nickel price assumptions to USD 15,000/tonne in 2020, because Indonesia's export ban has caused prices to soar lately.”

Much of the demand for metals will be driven by Asian economies, notably China, which is slowing down.

The World Bank noted that growth in the East Asia and Pacific region is projected to slow from 6.3% in 2018 to 5.9% in 2019 and 2020 – the first time since the 1997-1998 Asian financial crisis when growth in the region has dropped below 6%.

“In China, growth is expected to decelerate from 6.6% in 2018 to 6.2% in 2019, predicated on a deceleration in global trade, stable commodity prices, supportive global financial conditions, and the ability of authorities to calibrate supportive monetary and fiscal policies to address external challenges and other headwinds,” the World Bank underscored in its latest forecast on the global economy.

However, the Chinese government will launch stimulus packages to boost the economy, and ensure healthy demand for steel, copper, iron ore and other industrial metals.

“Our Chinese economist expects that infrastructure stimulus will double from CNY 2 trillion to CNY 4 trillion, helping to fill the gap of lost exports and related supply chain disruptions from the trade war,” according to investment bank ING Bank NV. “This ties in with China Railway Corporations’ target for 2019, as it plans to put a total of 6,800 kilometres of new track into service – 45% higher than in 2018. This can also be seen in the total fix assets investment in the railway sector, which grew by 14.1% YoY in H1,” according to the National Statistics Bureau.

Crude oil prices are dependent on demand from emerging economies such as Asia. The Organization of the Petroleum Exporting Countries (OPEC), said it had revised world oil demand growth for the rest of 2019 to marginally down by 0.04 million barrel per day (bpd) due to lower demand in OECD Americas and Asia Pacific.

“In 2020, world oil demand is forecast to grow by 1.08 million bpd, in line with last month’s projections,” OPEC said in its October report. “OECD countries are anticipated to add 0.07 million bpd to global oil requirements in 2020, while non-OECD countries are projected to be the largest contributor to world oil demand growth by adding an estimated 1.01 million bpd, both unchanged from last month’s projections. As a result, total world oil demand is anticipated to average 99.8 million bpd in 2019 and 100.88 million bpd in 2020.”

In late August, Ma’aden, Saudi Arabia’s largest metals and mining company, said it had completed its first international acquisition through the 85% share purchase of Meridian, the Mauritius-based fertiliser distribution group for USD 140 million.

“The acquisition is an important milestone for Ma’aden as the company executes its strategy to build global distribution channels for fertiliser products,” the company said. “This will strengthen Ma’aden’s position as one of the world's largest producers and exporters of phosphate fertilisers and increase its contribution to global food security in key agricultural areas worldwide.”