2020 was a phenomenal year for commodities. Growth-related commodities like oil and industrial whose fortunes are tied directly to economic output, have rebounded nicely since March 2020 when a coordinated effort from global central banks introduced markets to stimulus packages of historic proportions.
Economic instability as a result of COVID-19 has reverted interest back into commodities markets, but which commodity, is the main question? Several studies suggest that industrial metals and the agriculture sectors are all set to benefit over the course of 2021, due in large part to the uptick in growth forecasts – just this month the US Federal Reserve stated that the US economy was heading for its strongest growth in 40 years – and this sentiment is true for emerging markets as well.
The OECD has India’s growth at 12.6 per cent for 2021 (fastest in the world) with China at 8.1 per cent growth rate.
The OECD has India’s growth at 12.6 per cent for 2021 (fastest in the world) with China at 8.1 per cent growth rate.
Has gold lost its status as a safe haven?
Back in August 2020, gold printed an all-time high of $2,074, a gain of more than 40 per cent from the 2020 low in March. A depreciating US dollar, and a low interest rate environment made the precious metal particularly more appealing over the course of 2020.
Fast forward to 2021, and it’s a different story. With 10 year treasury yields recovering nicely (at the time of writing well ensconced above 1.6 per cent) coupled with the ever growing allure of the crypto space, and we have the precious metal back in the $1,700 range.
And to the detriment of gold bulls, I believe this is only the start. Gold has traditionally been seen as a hedge against inflation. The past 50 years shows that gold outperforms during inflation shocks.
In the late 70’s and early 80’s when oil prices surged, gold appreciated 4x in value. And when inflation rebounded gain in the late 80’s (from 1 per cent in late 1986 to more than 6 per cent by the end of 1990), the precious metal still trending higher, albeit at a slower rate.
Moving to 2021, and with central banks hawkish towards upward pricing pressure, interest in gold seems to remain anaemic. I believe this is a sign in the shift of gold as a tool to hedge against inflation.
So what about oil?
As for the energy segment, consumption dropped 10 per cent in 2020, leading to an OPEC+ group announcement of a 9.7 mb/d oil production cut in April 2020. Moving to 2021, the production cuts are clearly having their desired effects on crude prices and with the global vaccination drive in full swing; coupled with the re-opening of economies, this can only further benefit oil prices in the short term.
However, this all depends on how economies will deal with the so-called third wave. Bullish overtures have toned down since Europe plunged into a third lockdown earlier this month.
These are the views and opinions of Gaurav Kashyap and not of EGM Futures. Gaurav Kashyap, Head of Futures at EGM Futures DMCC, a subsidiary of Equiti Group
