Industrial and energy metal commodity prices have started lagging as the chances of recession in the developed world looms large, while gold has traded at near-record highs on the back of its resilience as a safe haven asset.
Schroders South Africa country head Kondi Nkosi said this week commodities typically get weighed down during recessions, with the worst-performing sectors being energy and industrial metals as they are most sensitive to changes in economic growth.
In contrast, gold tended to shine during recession as investors sought its safe-haven status. Monetary policy loosening and lower real interest rates also supported gold prices during economic downturns, although this was offset to an extent by a stronger US dollar during recessions.
According to online publication FXempire, monetary policy failure globally, re-accelerating inflation and recession risk were now the three biggest macro themes driving commodity markets.
“Worse than expected manufacturing and online service data underscored potential economic damage from the collapse of several banks from Silicon Valley Bank to Signature Bank, as well as the implosion of Credit Suisse,” the publication reported.
On the inflationary front, there was evidence that price pressures were re-accelerating and a ‘second wave’ of inflation could be on the way – especially after the surprise decision by Opec+ to slash oil production by more than 1 million barrels per day.
Anchor Capital’s analysts said in response to Business Report questions that iron ore prices were not expected to rise materially from current levels of around $127 (R2337) per ton because growth in China was expected to rely less on infrastructure and property spending than it historically has.
There was also speculation that China wished to reduce steel production this year by 2.5% to reduce inflation.
Certain base metals such as copper, however, were expected to have strong demand growth over time as the world transitions to a less carbon-intensive economy.
Over the medium to long term, additional demand from end-uses like electric vehicles were expected to lead to tightness in the copper market.
“That is partially why many diversified miners such as Anglo American, BHP, South32 and Glencore are all working to increase copper exposure through either M&A or projects,” Anchor Capital said.
Last week, gold prices came close to all-time record highs reached in August 2020, while silver traded above $25 an ounce.
Gold has risen from around $1 800 per ounce at the beginning of March to above $2 000 last week, a gain of over 12%, in the past month alone. Yesterday it was trading at $2 043.40 per ounce.
Gold prices have risen for a second straight quarter in a row – up over 28% from the November lows of $1 600 an ounce.
Leading global bank Goldman Sachs has also predicted a commodities :supercycle driven by China and the capital flight from energy markets and investment this month after concerns triggered by the banking sector.
“As losses mounted, it spilled into commodities,” mining.com reported, citing Jeff Currie, global head of commodities for Goldman Sachs on Tuesday.
Nkosi said that with the US expected to go into recession later this year, growth in China was likely to rebound strongly due to the lifting of zero-Covid policy restrictions.
“The recovery in China is expected to be skewed towards services, which may be more supportive of the energy sector and offset some of the potential drag from an US recession. The recession playbook for commodities could be different this time around,” he said,.
BUSINESS REPORT