Commodities for the US-China trade war: Gold for bears, copper for bulls

One of the most popular questions at mining conferences is what is your top metal and why are you bullish on it. The clear winner so far this year is gold. While gold is a perennial favourite at mining events, the near unanimous backing among industry insiders likely reflects two emerging dynamics. These are the limited prospects for significant new supply of the precious metal, and the view that the world economy is headed for turbulent times as the administration of US President Donald Trump ramps up its trade war with China and its disputes with major oil exporters Iran and Venezuela. At a session at this week’s 121 Mining Investment event in Singapore, three out of four panelists picked gold, while the fourth was more in favour of other precious metals such as palladium and silver.


Discussions among participants at the 121 Mining conference mirrored those at similar events earlier in the year in Hong Kong, Cape Town and Singapore. The mining industry is not only bullish on gold, but also seemingly prepared to put its money where its mouth is by backing junior miners in the sector. The problem with the bull case for gold is the evidence in the price charts is not quite so compelling. Spot gold ended at $1,296.41 an ounce on Wednesday, a mere 1% higher than where it was at the end of last year. The first-quarter rally that took it to a high of $1,346.73 an ounce on February 20 has largely spluttered out, and the yellow metal has mostly traded sideways since then. This is despite some positive drivers for gold being in evidence in the form of strong physical demand from top consumers India and China, and from central banks. Indian jewellery demand was 125.4 tonnes in the first quarter of 2019, up 5% from the same period a year earlier, according to data from the World Gold Council.

China’s demand was 184.1 tonnes, down 2% from the corresponding quarter in 2018, but it was the third straight quarter of higher demand. It may also be the case that China’s gold demand was accelerating towards the end of the first quarter, with net gold imports from Hong Kong, the main conduit into the mainland for the metal, rising 9.8% in March from February. The outlook for Chinese demand may also be boosted if China’s trade dispute with the United States continues, as retail investors are likely to fret about the probability of yuan depreciation and may seek to buy gold as a hedge. Indian demand may also continue to gain in the current quarter given a higher number of auspicious days for weddings, which has in the past led to increased gold purchases. Central bank net purchases in the first quarter reached 145.5 tonnes, up 68% from the same quarter a year ago.The rolling four-quarter central bank demand was 715.7 tonnes, a record high, the World Gold council said. The missing link, however, for a sustained gold rally is investor buying through exchange-traded funds (ETFs).

While there was a 68% gain in net ETF purchases in the first quarter to 40.3 tonnes from the same quarter last year, in recent weeks the trend has been weak. The biggest gold ETF, the SPDR Gold Trust, has seen substantial outflows since reaching a seven-month peak of 26.48mn ounces in late January. SPDR holdings were 23.68mn ounces as of May 14, a drop of 10.5% from the high so far this year, and down 6.5% from the end of last year. The reversal of ETF inflows since January suggests that many investors aren’t yet convinced that the various challenges facing the world economy will result in a global slowdown or a recession. The price action in London copper contracts is also instructive for gold, with the industrial metal shedding value since reaching a peak for the year on April 17, but still holding onto small gains for the year as a whole. Copper ended at $6,085 a tonne on Wednesday, down 7.9% from the April high, but still up nearly 2% from the end of 2018. The industrial metal is often viewed as a proxy for the prospects for global growth, especially in the manufacturing and construction sectors, and the signal being sent in recent weeks suggests mounting pessimism. Overall, the price movements for copper and gold suggest that investors aren’t broadly convinced by either the bullish or the bearish view of the world economy. Perhaps the best hedge would be to buy a mining company with a good copper-gold asset, given the two commodities are often found in the same geological formations.

Sources and photo-credits: Reuters. Gulf Times