Given the continued market turmoil driven by the coronavirus pandemic and plunging oil prices, investors are seeking safe havens to ride out the storm.
As such, gold prices have recently reached 7-year highs, albeit prices have pulled back slightly on the ensuing liquidity squeeze. That said, we expect gold, as well as other metals, to creep higher on the back of increased volatility and uncertainty surrounding the coronavirus pandemic.
Gold fundamentals remain strong and any weakness in price could be seen as a buying opportunity. Major economies like the United States, China, Japan and Australia have announced plans to counter the virus outbreak with stimulus packages to support economic growth. Central banks (US, Canada, UK and Australia) lowered key interest rates by 0.5% with more cuts likely to follow.
These rate cuts should provide a boost for the demand of raw commodities. Under different circumstances a fall in oil prices is bullish for some Ironically, under different circumstances, a significant drop in oil prices is generally viewed as bullish for companies that use crude oil as a major input such as automakers, airlines and mining companies.
Under normal circumstances, these industries would rally under lower energy prices. However, the continued fear and uncertainty surrounding the coronavirus pandemic has a much larger effect and has already significantly impacted most industries.
That said, we see opportunity with major gold producers on the back of lower oil prices, which is generally a significant portion of its operating costs. This coupled with higher gold prices and fluctuating currencies should benefit gold producers in countries like Canada and Australia over the long-term.
Significant tailwinds for base metals on the horizon Copper and other base metals prices have rebounded slightly from multi-year lows. Moreover, with China expected to deliver a major stimulus package estimated to be 3.5 trillion yuan (US$505 billion) for this year alone in the form of infrastructure build, we expect base prices to also increase from multi-year lows. All eyes on China: stimulus package gives hope to metal prices All eyes remain on China as the country shifts its focus from containment to rebuilding its economy.
As China consumes approximately half of the world’s metal resources, a prolonged disruption from the coronavirus would have a significant impact on metal markets. With China now declaring that the virus has peaked, the country is eager to get its factories re-started after two months of being idle. Whilst panic selling of equities globally continues, we see opportunities in the precious metals as well as with industrial and base metals as economies, beginning with China, announce and execute stimulus packages to drive economic growth.
Source: TPI and Bloomberg. Note that past performance is not a reliable indicator of future performance.
