Copper and gold diverge as risk appetite returns

Copper hits multi-month highs ahead of US-China deal, oil and gold lose safe-haven premium

After having moved in tandem for much of the end of 2019, the commodities markets have parted ways somewhat in January, with copper hitting multi-month highs, while an easing in geopolitical tensions has seen oil and gold surrender some of their safe-haven premium.

Copper prices have hit their highest in eight months this week, boosted by evidence of healthy demand from China, the world’s top importer, and as investor risk appetite keeps more cyclical assets underpinned.

The US and China are due to sign a so-called “phase one” agreement aimed at resolving their near-two year old trade war. Adding to the sense of optimism over the agreement, Washington on Tuesday reversed the “currency manipulator” label it had applied to China.

Treasury Secretary Steven Mnuchin said in a statement that Beijing had made efforts to refrain from deliberately devaluing its yuan currency. “China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability,” he said.

Since the start of September, the yuan has risen by nearly 5 per cent against the dollar, which makes China’s exports less competitive. Even with this gradual rise, the yuan is still 10 per cent weaker than it was when the trade dispute erupted in early May 2018.

Copper, which is used in anything from electronics, to construction, is highly sensitive to the ebb and flow of global growth and global trade. But its fate hinges ultimately on China, which uses more of the metal than any other country. Chinese import data on Tuesday showed imports of copper hit their highest since early 2016, pushing copper futures near $6,300 (€5,661, £4,848) a tonne for the first time since last April.

“A short-term trade truce has provided copper with a firm grounding,” Dutch bank ING said in a daily research note.

This same optimism hasn’t seeped into the oil market, which is still grappling with the aftermath of last week’s escalation in geopolitical tension between the United States and Iran. The assassination of a prominent Iranian general in Iraq by the US resulted in Tehran launching missiles at a US base in the country. After a volley of red-hot rhetoric, both sides backed off, leaving oil traders to focus once more on the prospects for crude demand growth.

The market considers the deal as good as signed, which would suggest that, barring any last-minute hitches, the event itself will have no material impact on the crude price. As always, the devil will be in the details.

“This is already mostly priced into the oil market, given the strong rally we saw in prices following the initial announcement from the US,” ING said. “In fact, risks are likely to the downside, if details of the trade deal disappoint markets.”

As things stand, other than a commitment by China to buy some $200bn worth of US goods and services a year in exchange for a softening in US tariffs, the details of the agreement are unclear. There is some hope among the oil community that it might involve a commitment by China to import more US crude.

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Without this geopolitical premium, oil is once again struggling to gain much traction above $65 a barrel. Supply is expected to surpass demand in the early part of 2020, even with a series of coordinated production cuts by some of the world’s largest exporters.

The International Energy Agency expects oil demand growth to reach 1.2 million barrels per day (bpd) this year, compared with 1.1 million last year. Supply growth from countries outside the Organization of the Petroleum Exporting Countries (OPEC) is expected to increase by 2.1 million bpd, effectively swamping the increase in consumption.

Against this backdrop, oil has given up its geopolitically-inspired gains that took the price to a four-month high above $70 a barrel just a week ago, and was last hovering around its lowest in a month, at $64.58 a barrel, up around 0.6 per cent on the day in late morning trading.

The investment banks certainly prefer copper to oil in 2020. Morgan Stanley said in its 2020 outlook, in the commodities market, a common theme was “too much of everything”, with copper as one of their top picks and oil seeing a “precarious balance”.

Bank of America-Merrill Lynch also believes copper and steel-making ingredient nickel will rally this year, while oil is likely to remain around $70, a few dollars away from current levels.

For its part, gold hit its highest level in nearly six years when the US and Iran appeared to be on the brink of war last week. But, with the easing in tensions, has come an easing in the gold price, which has since dropped around $70, or 5 percent, to around $1,545 an ounce, but still in sight of late December’s multi-year highs.

Gold and oil do not often move in tandem. Gold often benefits from periods of heightened investor risk-aversion and tends to weaken when perceived levels of risk decline. Oil usually rallies when risk-aversion abates, unless the risk is stemming from Middle Eastern geopolitics, for example.

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