Prices, prices. The gold price moved above US$1,600 an ounce in the third week of February, as investors digested the potential risk of the coronavirus to global economic performance. So that means the bears were in the ascendant, right?
Wrong. In the US equity markets hit new highs and the oil price has now moved up off its 12 months lows. The copper price is also off 12 month lows, so it certainly seems that even if there’s still bearishness around in the commodities markets there is no outright panic.
Since the coronavirus struck there has been a tension between equity and commodity markets. The commodity markets, with more direct exposure to China, tended to price in negative news much earlier than equities markets, and this still appears to be the case.
Yes, equities dipped on the warning from Apple. But as President Trump has often pointed out in his usual grumpy fashion, Apple is particularly exposed to China in terms of its supply chains. Pro-Trump Republicans are now arguing that the vulnerability of companies like Apple to China has now been made painfully clear, and that some, if not all, of the manufacturing in the supply chain should be repatriated to the US.
This sentiment may not be good news for global economic growth, but it does serve to mitigate any negativity that may be rolling around inside the US.
What’s more, so far most analysts have been regarding the coronavirus as likely to have run its course as a major factor in the global economy by the end of the first quarter. The news that’s coming out of China has been contradictory at times, but the current picture seems to be that it’s beginning to be brought under control. Much of China is back at work, and overseas, in places like the UK, there is now more tangible experience of the virus. People have been dying around the world, but not many, and so far none in the US or the UK.
All of which means the original uncertainty around the coronavirus is now dissipating. Its effects are becoming more tangible, and that means economists can plug them into models and start talking about forecasts again with confidence.
But if that’s all true, why is the gold price still rising, and why have copper and oil not bounced back more than they have? The answer is that in spite of all this new knowledge and experience, the ultimate course that this disease will take remains unknown. Investors are hedging their bets, and in style. After all, why not take advantage of the positivity around the massive Chinese stimulus packages? Why not ride the strength in US equity markets? But why not too, stay awake to the fact that a new and previously-unknown virus is still killing people in the Far East?
In this context you get a market in which equities and gold are bought, but commodities are not. Or to put it another way, government stimulus to economic activity is welcome, but everyone now recognises that the world’s number one consumer of commodities, China, is likely to take a significant hit this year. And there’s always the outside possibility too that coronavirus won’t be brought under control, in which case all the equity gains will unwind, but those with a firm position in gold will be well insulated.
And the miners, the companies with the most exposure to China? Rio Tinto’s (LON:RIO) shares are higher than they were six months ago, while Glencore’s (LON:GLEN) are broadly flat. BHP (LON:BHP) is slightly down, but Freeport McMoRan (NYSE:FCX) is up by around 25%. Vale (NYSE:VALE) is up marginally, and so is Antofagasta (LON:ANTO). All these miners, however, are trading at lower than where they were a year ago. What this suggests is that although the coronavirus may be affecting day-to-day and even week-on-week prices, it hasn’t yet had a significant impact on longer-term trading patterns. This may change, but for now those that hold their nerve are likely to be rewarded, while those trading on the stimulus would do well to take profits while the going’s good.