Commodities performance during 2020 second quarter
The first asset we think about when it comes to protecting our wealth, in a situation where the economy has entered a recession and the central banks are flooding the markets with liquidity, is usually gold.
The second quarter has seen a strong performance by commodities.
Since the market shock in February and March triggered by two black swan events – the Covid-19 and oil crises – the asset has rebounded vigorously.
Below we compare the performance of the main commodities, the reasons for the price increases and their possible future behaviour.
Excellent performance by copper
Of all commodities, copper is the most cyclical asset in terms of economic activity. The higher the expectations for growth in economic activity, the higher its price will be.
In March it fell to its lowest level since 2016, when the future was trading close to USD 200. By the end of the second quarter, the price had rebounded to USD 290, a recovery of more than 40% in a very short period of time. An improvement in economic activity and the closure of several mines in Chile and Peru (the main producers) due to the coronavirus outbreak have led to this sharp rise in the metal.
Gold and silver performance
The price of gold is the main beneficiary of the drop in real rates – now close to zero in the US – and investors’ appetite for the asset.
The price of gold has reached all-time highs, but during the course of this year silver has performed better
Due to its industrial use, silver is the most volatile precious metal. It has performed well this year to date, yielding a profitability of more than 30%.
Crude oil is at more stable levels, close to USD 40 per barrel.
Lack of demand and lack of storage capacity led to negative prices for oil, something that never been seen before. The cut in production by the main producers and the end of the lockdown in some economies have trigged a recovery in the price, which is currently trading at more stable levels.
What are the reasons for these price increases?
There are two main reasons for these increases across the board:
• The FED cutting rates to close to zero and an increase in inflation expectations. Real rates are at their lowest levels of recent years and investors are therefore seeking profitability from other types of assets, such as commodities.
• The recent weakness of the USD. Commodities are priced in USD so a weakness in the currency strengthens the asset.
Is this situation likely to continue in the short term?
In our opinion, real rates are highly unlikely to continue falling. As we saw earlier, commodities have benefited from falling yields on US government bonds. The 5-year US bond has a yield of close to 0, so there is hardly any capacity to absorb another drop.
The only growth potential would be in an increase in inflation, but we believe that long-term inflation largely stems from demographics. As we have seen, the stimulus packages implemented in the economy during the last 12 years (30 years in the case of Japan) have not generated inflation.
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