Buoyed by gradual unwinding of lockdown restrictions and a steady revival in economic activity, commodity markets are on an upward trajectory. Is the ongoing price performance justified or is it a false dawn?

A marked rise in prices through June suggests that market participants are upbeat about their prospects, going forward. Crude oil, copper, aluminium, gold and silver — prices of all these have increased in the last four weeks as can be seen from the accompanying table:

Price Rise in Select Commodities*

CommodityJune 26May 26

Brent crude         41        36

Copper              5985    5327

Aluminium          1582    1495

Gold                   1752    1711

Silver                  17.69   17.10

(* Brent $ per barrel; Copper and Aluminium $ per ton; Gold and Silver $ per ounce)

Despite a renewed scare about the recurrence of the dreaded Covid-19 pandemic, there are now growing signs that the pace of global economic activity is picking up more strongly than expected earlier. This optimism presupposes that the virus will not return with a vengeance.

Two major factors have contributed to the commodity price performance. One is the extraordinary amount of stimulus support various governments and central bankers have injected into national economies. In some sense, money has never been cheaper than now and available aplenty. Too much liquidity is chasing commodities.

The second is the expectation of an activity rebound in China. Stimulus driven commodity consumption in the Asian major is accelerating, although short of the pre-Covid levels. It is well known that China is a major consumer of a wide range of industrial metals as well as energy products.

China accounts for almost half of global metals demand. Metals-intensive infrastructure spending is expected to rise sharply, bolstering the metals market as we go forward. Rising imports and falling inventory at exchanges also point to robust consumption demand for metals.

So, do all these suggest the global economy has troughed and is on way to a sharp recovery — as some suggest, a V shaped recovery? Doubts persist. Expectations of a sharp recovery are premised on the assumption that the pandemic will come under control soon.

It also assumes that the global value chains (GVCs) that were disrupted over the last four months will soon adjust to new realities and start functioning again normally. Global GDP is predicted to shrink in 2020 and global trade forecast to see a sharp downswing.

My sense is, it is likely to take several quarters — 4 to 6 — for the economies to stabilise and for GVCs to normalise. This is because countries are increasingly likely to be more inward looking than outward looking.

Although trade between the US and China has been going on after the Phase One agreement in mid-January, the risk of a renewal in trade friction is real. The situation is fraught with possibilities.

There is also the strange coincidence of gold and industrial metals rising simultaneously. Gold’s rise is attributed to economic uncertainties driving its safe haven status higher and ultra-loose monetary policy, while industrial metals are rising because of positive signs of growth.

In sum, currently, supply-demand fundamentals appear to be playing a secondary role, while non-fundamental factors reign. The global commodity market for energy and industrial metals has possibly overshot to the upside. A correction could be due.

At the same time, gold’s rally will peter out when there is more solid evidence of economic activities in a sustained way. This can happen towards the end of the year.

The writer is a policy commentator and commodities market specialist. Views are personal

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