| COMMODITIES TO EXTEND RALLY AS TRADE WAR EASES |
Commodity prices enjoyed a strong run last year, and there is a good chance the rally will continue as global trade tensions show signs of easing.
The S&P Global Commodity Index (GSCI) was up 17.6% in 2019 – its 10th strongest performance since 1990 and its best annual return since the height of the so-called commodity super cycle in 2007.
“Gold proved one of the most popular assets for investors in 2019. The S&P GSCI Gold posted its best performance since 2010, gaining 18.0%, driven by safe-haven buying powered by escalating geopolitical tensions, a protracted trade war, and quantitative easing by major central banks,” S&P said.
“As more government bonds across the globe displayed negative yields throughout 2019, gold remains well positioned as a safe-haven alternative for investors going into the new year.”
Indeed, gold’s rally mirrored the risks in the financial markets due to trade tensions and investors focused on finding safe havens after equity markets globally turned frothy and went into overvalued territory. Gold prices rose 18.3% to finish the year at USD 1,517.27 per ounce.
Another key reason is lower interest rates, which continue to be bullish for metal prices.
Gold will likely continue to be in favour as geopolitical tensions have risen. Central banks bought 156.2 tonnes to reserves in the third quarter, taking their purchases in the first nine months of 2019 to 547.5 tonnes on a net basis, 12% higher year on year, according to the World Gold Council.
“We see gold appreciating in 2020, albeit at a slower pace than in 2019, when it was up 18% in the year to October,” according to Swiss bank UBS Inc. “Muted economic growth and now lower interest rates reduce the opportunity cost of holding gold, which does not offer a yield. Political uncertainty could send safe-haven flows into gold. And since gold is priced in USD, a weaker dollar would in turn push gold prices higher.”
The World Bank expects gold prices to rise by 5.8% this year on the back of more expansionary monetary policies and robust physical demand for the yellow metal.
“The risks to the precious metals price outlook are on the upside and reflect heightened uncertainty and weak growth prospects of the global economy,” the World Bank said in its latest commodity outlook.
BASE METALS
Copper, often seen as a bellwether for the global economy, did not perform as well in 2019, rising 6.3% during the year.
Global industrial demand has been dampened by increased concerns of a global economic slowdown. Prices turned lower in May when the United States further hiked tariffs on Chinese exports, which elicited retaliation by China.
Manufacturing activity in China, which accounts for half of global copper consumption, experienced a slowdown as metal-intensive sectors remained weak (e.g. construction, electricity, and transport). Weak demand has more than offset recent production disruptions at major copper mines.
“Copper prices are projected to increase moderately by 2.3% in 2020 as the recent fiscal stimulus in China and new rules on local government capital financing take effect, thereby boosting infrastructure investment,” according to the World Bank.
Aluminium prices also rose a minor 1.17% during 2019, amid oversupply issues and subdued consumption.
“Beyond 2019, we forecast the market to be in surplus out to 2022,” according to research firm Wood Mackenzie. “The dynamic between the China and rest of the world balance is changing. We expect China to move into deficit on modest output growth while the world ex-China will swing to a surplus over the next three years. Further out the aluminium industry will face the twin challenges of climate change and how to deal with rising availability of scrap.”
Soft commodities are also looking up after a few years of tepid growth. The World Bank expects agricultural prices to stabilise in 2020 on reduced crop plantings, and weather impacted by climate change.
“A resolution of trade tensions presents an upside risk for some commodities, such as soybeans and corn, while lower energy prices could reduce fuel costs and fertiliser prices, reducing prices of energy intensive crops such as oilseeds,” the World Bank noted.
However, the bank warns that commodity prices may come under pressure if the US dollar continues to strengthen. The currency’s strength – up nearly 15% during the past 18 months (measured against a broad basket of currencies) – has already had a dampening effect on prices.
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