The unprecedented COVID-19 pandemic has treated commodity markets very differently. Just as in global credit and equity markets, telecommunication companies and technology shares in the two respective asset classes outperformed those in more traditional sectors, the performance also differed across commodities.
As one would expect, commodities solely or partially reliant on global consumption, particularly, China’s economy, and the country’s substantial demand for raw materials, for its manufacturing industry, took a beating, as authorities imposed restrictions on movement to mitigate contagion. Others, typically considered as a safe haven, and thus serve as a protectionist measure against economic downturn prevailed.
Gold, supported by a long list of factors, namely; increase in geopolitical tensions, real rates tumbling, the dollar weakening, and government and central banks unleashing vast stimulus measures to try boost economies, has on a year-to-date basis registered substantial gains. After surpassing levels previously witnessed in 2011, amid the resurgence in COVID-19 cases, the precious metal reached an all-time high. Gold marched relentlessly higher as the pandemic continued to rip through the US and Europe, putting further doubts on economic recovery.
Consequent to the substantial fiscal and monetary stimulus measures employed to mitigate the economic blow caused by the pandemic, real yields, which strip out inflationary expectations plunged, some of which started paying investors a negative return, consequently increasing the demand for gold.
Following the recent surge over the past couple of days, gold traded south, as demand for riskier assets continued to increase on optimism surrounding potential treatments for COVID-19, and signs of progress in US-China trade negotiations after top officials from both sides reaffirmed their commitment to the Phase 1 trade deal.
In contrary to the gains experienced by the yellow precious metal in recent weeks, palladium; 2019’s star performer within the commodities segment, has in recent weeks traded flat, following a volatile period, as increased palladium loadings in vehicle catalytic converters to reduce harmful emissions for engines running on petroleum offset the auto industry’s largest contraction in decades.
Second to gold, iron ore has been the best-performing commodity in 2020, as subdued seaborne supply, owing to record rainfall and mining limitations brought about by the increase in COVID-19 cases and China’s government stimulus spurring infrastructure projects pushed prices above the $125 per tonne mark for the first time since February 2014.
The fact that China, which accounts for over 70 per cent of seaborne iron ore trade, was first to emerge from the COVID-19 related restrictions on movement, thus re-igniting its economy and proving to be the fastest to recover has provided firm support from a demand perspective. Portraying this support is the increase in China’s Iron ore imports. Notably, imports increased from 85.91 million tonnes in January to a record 112.65 in July – 25 per cent year-on-year increase.
From the energy segment, after plummeting to almost the lowest level in the past two decades, sending the global financial markets into a tailspin, crude oil has in recent weeks maintained its upward trend, supported by fresh COVID-19 optimism and as energy companies located at the Gulf of Mexico shut approximately 82 per cent of the area’s offshore crude oil output as storms closed in.
Disclaimer: This article was issued by Christopher Cutajar, credit analyst at Calamatta Cuschieri. For more information, visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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