Prices & Review

Overview (August 2020)

The economic recovery continues to make headway despite the Covid-19 pandemic spreading at an ever-faster pace with 23.5 million confirmed cases and 810,000 deaths reported as of August 25, up from 16.7 million confirmed cases of the virus and 661,000 deaths a month earlier. As the virus spreads from cities to more rural areas, the chances of it causing more disrup-tions to mines and transport networks looks set to in-crease, as such while demand appears to be recovering, supply may well face continued disruptions. As a result, while we think metal prices have run ahead of the cur-rent fundamentals, especially from a demand point of view, the markets may well be preparing for the combi-nation of continuing demand recovery and further sup-ply disruptions. Indeed, it seems that China has been very much in that frame of mind with the country stockpiling material in recent months. Besides, the weight of money that is being made available to busi-nesses, investors and households, is also likely to be inflating metal prices as investors look to stockpile metal, or buy forward, in anticipation that demand will be even stronger going forward as more infrastructure projects start to move from the planning stage to the construction stage. Stock markets are also moving from strength to strength for three reasons, firstly because again the weight of money in the system needs to find a home, secondly as investors look forward to a return to a more normal situation once a vaccine has been found and thirdly as US markets are still waiting for Congress to agree on the next phase of the US pandemic rescue fund. While we can see there is room for a better out-look for metal demand, given stimulus spending, there is a danger that company earnings are slow to recover and equity prices may have climbed too far too soon. Demand for safe-havens also appears to have slowed, US ten-year treasury yields have climbed back to 0.70 percent and a base now seems in place in the 0.5-0.6 percent area, and gold's rally has halted for now with prices correcting lower. The US dollar is also trending lower, which could also be a sign of less demand for a safe-haven, but it could also be happening as investors vote with their feet, not liking what they see in the US given its weak Covid-19 response, it's handling of inter-national relations, especially with China in these diffi-cult global times, and with the US presidential election just three months away. While it is good that confi-dence is returning and ever-rising equity markets will be fuelling that confidence, there is a significant risk that markets have become overconfident. If we do see a broad-based correction, we would expect it to be short-lived for the metals, as many consumers will have not been in the position to restock when prices initially rebounded, so maybe keen not to miss another oppor-tunity.