Since the arrival of the Coronavirus, the markets have begun to become infected with uncertainty, fear and voltality, which has left little room that has not experienced its effects. Many companies are seeing their viability compromised. Some of them talk that they could be nationalized to avoid bankruptcies, and others related to raw materials are running no less luck.
Even before the epidemic became a pandemic, and even before it existed at all, the commodities market was already experiencing a rather unique moment . This was especially true for precious metals, and some key components for manufacturing, such as palladium, used in catalytic converters for cars, capacitors, and electronic devices. However, the potential tensions between the US and China had already driven up the prices of the well-known safe-haven asset and its "homogeneous" counterparts, gold and silver. But where might we really be headed?
Gold is consolidating, but does not back down in its climb
The last time gold traded around $1.700 an ounce was in late 2012. Since then, the market recovery and investor confidence continued to push it back to around $1.000 an ounce by the end of 2015. Brexit, along with some structural problems in the eurozone and certain events that unfolded in the following years, caused it to reach a value of approximately $1.300 in the following years.
On the other hand, tensions between the two superpowers, the US and China, began to cause a gradual increase in its value. In 2019, gold broke through that barrier and managed to rise by about $200 an ounce, placing the precious metal around $1.500. And when it seemed that an agreement was about to be reached, and the markets "appeared" to be calming down, the Coronavirus pushed the price of gold above $1.700 an ounce. Moreover, it experienced high volatility, as did many other sectors. This Tuesday, we saw the price of gold nearly reach $1.800 an ounce, while this Friday it was trading almost $100 lower.
Where is this leading us? The 2008 crisis led to gold continuing to rise in the following years. However, this shouldn't be extrapolated to the Coronavirus, as that crisis was a financial system crisis. This crisis, however, is a health crisis, and it has impacted numerous sectors due to quarantines, lockdowns, and trade restrictions affecting various production chains. On the other hand, it is true that banks have started "printing" money, which, once in circulation, "should" increase the price of assets. Given this, the fact that the Coronavirus crisis is far from over, and that governments are still figuring out how to gradually resume economic activity, we should see a revaluation of the metal.
Oil sinks in price and is on the verge of collapse
If anything has been in the red, it's the oil sector. While oil production in Iraq was already reaching record highs in August, Saudi Arabia and Russia reached an agreement a few days ago in an attempt to stem the price decline . Specifically, after an emergency meeting with OPEC, they agreed to cut their production by 20 million barrels per day. This agreement triggered record-breaking single-day increases in oil prices, which rose by more than 40%.
However, the Coronavirus pandemic is exacerbating the already low oil consumption, and storage capacity is almost exhausted. Tanks, pipelines, and underground caverns are reaching their limits. The International Energy Agency (IEA) published a report this week indicating that many areas have reached their storage capacity limits. The report also notes that the pandemic has caused a 25% drop in oil demand, falling from approximately 100 million barrels per day to 75 million.
If storage capacity limits are reached across the board, oil pumping would have to stop. Such a collapse could drive the price of a barrel to even lower levels than anyone expected. This widespread concern has spilled over into the markets, where Brent crude closed at $28 per barrel and WTI crude closed at $18 this Friday, April 17th.
All oil companies have been affected. Repsol, Royal Dutch Shell, Exxon Mobile, Total… If the market recovers, the pandemic is subsiding, and the cuts in its production take effect, it could be interesting to occupy positions. Although today there are still hard times ahead, and eventual falls in the prices of black gold and listed companies, it would not be strange to see them.
Commodities related to food staples
Not everything in the commodities market has been down. In the food sector, for example, one of the commodities that saw the biggest price increase in March was orange juice. One of the reasons for this was precisely its vitamin C content; the viral pandemic boosted its consumption as people became aware of its many beneficial properties for the body.
Similar to the consumption of orange juice, coffee consumption has also seen a surge. Demand has increased due to the quarantine and the effects of the coronavirus on people. In this case, the price increase was approximately 15%.
Flour and wheat have also seen increased demand as essential goods, raising their prices by around 12% and 8%, respectively. And while it might be a stretch to say this, the increased consumption of raw materials like these could be driven by episodes of anxiety that lead many people to overeat. However, this assertion could be somewhat inaccurate, as some other commodities have been severely impacted. Corn, for example, saw its price decline in March, falling by nearly 20%. Other examples of price drops in basic goods include sugar, cocoa, and lumber.