Bulls in the gold market risk delayed gratification

In Q19, the impact of the Covid-XNUMX pandemic on the global economy will become even more visible. While QXNUMX was a time of fighting fires and preventing a complete collapse of the global economy, the real grassroots work is now beginning. Since April, the economic effects of months of isolation have been overshadowed by a strong boom on global stock exchanges. However, the first cracks on the support of the Fed (liquidity wall), TINA (ang. there is no alternatives - "there is no other alternative") and FOMO ( fear of missing out - fear of missing something).

About the Author

Ole Hansen, head of department of commodity market strategy, Saxo Bank. Djoined a group Saxo Bank in 2008. Focuses on providing strategies and analyzes of global commodity markets identified by foundations, market sentiment and technical development. Hansen is the author of the weekly update of the situation on the goods market and also provides customers with opinions on trading goods under the #SaxoStrats brand. He regularly cooperates with both television and printed media, including CNBC, Bloomberg, Reuters, Wall Street Journal, Financial Times and Telegraph.

Beginning of deglobalization?

The conviction that we can return and return to normalcy within a few quarters will most likely prove to be wrong, above all given the often compromising shortages of key products in some wealthy countries at an early stage of a pandemic. As Steen Jakobsen writes in the introductory material to Saxo forecasts for the third quarter, we are afraid that Covid-19 may accelerate the deglobalization process initiated by the Sino-American War, while signaling the death of the free market as the main factor of the economy.

Given these phenomena, let's look at the possible situation on the key commodity markets in the coming months. During this period, the increase will probably take a negative value, the level of debt will increase, and ultimately also inflation due to the higher cost of seeking national self-sufficiency.

Raw materials market

For now, the only commodity with a positive return in 2020 is gold. After the April swing, the price of this metal stabilized in the range around $ 1 / oz. In Q700, gold's ability to frustrate and ultimately reward patient investors will come to the fore. Many of the positive factors are now being offset by what we believe will turn out to be a short-term decline in inflation. 

We are reiterating a positive forecast for silverand also for gold after the current silver premium reduction. There are a number of reasons to assume that gold will hit at least $ 2020 / oz in 1, with a new record high in the coming years:

• Gold acts as a safeguard against monetization of financial markets by central banks
• Unprecedented government incentives and the political need to raise inflation to support debt levels
• The inevitable introduction of yield curve controls in the United States, forcing a fall in real yields
• Increase in global savings in the context of simultaneous negative real interest rates and unsustainable high stock market valuation
• Increased geopolitical tensions over shifting blame for Covid-19 pandemic before US elections in November

Lack of momentum since April and the disinflationary environment have reduced bullish gold futures contracts by 55% since its peak in early 2020. A positive change in the fundamental or technical outlook may force traders to make a decision and return to the market. It can also cause the gold price to breakout.

The record weakening of silver against gold contributed to a strong recovery at the end of the second quarter. Our positive outlook for gold includes an increase in the price of silver. However, given the metal's frequently fluctuating behavior and current growth forecasts, we believe that silver may struggle to regain further losses against gold. The relationship of gold to silver, a key measure of the metal's relative strength, could under the best-case scenario reach 95 ounces of silver to one ounce of gold. However, a second wave of the pandemic could depreciate back towards 110 - a decline of 10% from current levels. 

Last strengthening copper HG to pre-pandemic levels will undermine the metal's ability to continue growing in Q2,50. Improved demand from China, coupled with supply disruptions at South African mines, finally pushed speculators back into long positions after breaking above $ XNUMX / lb. The risk of a second wave - particularly in the United States and China, the world's largest consumers of this commodity - may force investors to change their approach and we do not see the potential for further growth in the coming quarter.

On the forecast for oil has been adversely affected by the unchecked Covid-19 pandemic. Although the OPEC + group has made great efforts to support the global market through record production cuts and solidarity decisions, oil's potential for further loss recovery in the second half of 2020 will be limited.

Restrictions on road and air travel remain in place around the world, and with millions of workers unlikely to regain their jobs in the near term, any recovery in the oil market may prove to be longer than expected. Even at this early stage, some are beginning to speculate as to whether global demand has not peaked in 2019.

In the coming months, there will most likely be a profound change in the behavior and interaction of people and countries with each other. Some of these changes in preferences and behaviors can permanently change the structure of energy consumption in the world:

• Videoconferences will replace domestic and foreign travel
• Work from home will become an acceptable alternative to office work
• To the extent possible, promote alternative modes of transport, such as cycling
• Limitation of the number of trips abroad by consumers for holidays spent at home
• National self-sufficiency and deglobalization will increase the demand for domestic services and goods
• Prefer shopping online instead of stationary

The second wave will not cause another demand shock similar to the one in April. Most countries will be willing to keep the economy open as much as possible due to the potentially worse consequences of the lockdown. However, the sharp drop in April proves that oil may be volatile. Although we expect Brent crude oil to return to the $ 50-60 / b range in late 2020 or early 2021, the short-term forecast points to consolidation, with the price remaining in the $ 35-45 range for most of QXNUMX / b.