‘It was the best of times; it was the worst of times’ said Sydney Carton in the opening lines of the Dickens classic. It is of course the very worst of times but for the two major commodities, Gold and Oil, Charles was spot on. Gold should be in its element here, a beneficiary of both the panic surrounding the pandemic and also the near zero interest rates which mean that there is no lost opportunity cost of holding an asset that pays no income. Gold has been one of the very few assets to make a positive return this year rising from US1530/oz at the beginning of January to US$1620/oz at the end of the quarter, a return enhanced by 7% to the sterling based investor due to the strength of the dollar in which gold is priced.
Oil is in a terrible place with the huge fall off in demand compounded by a dreadful punch up between Saudi Arabia and Russia who are pumping as much as they can to put each other and the US shale producers out of business. The oil price has fallen from US$68/bl to US$23/bl this year which is just astonishing. Even irrespective of Covid-19, the OPEC/Russia deal failure casts a very heavy shadow over the energy sector with the precedent that when the Saudis have flooded the market in the past the price hasn’t recovered for at least a year, and that was in more normal times. In these instances, half the companies in the energy sector went bankrupt.
Oil and Gold always feel like two extremes and perhaps the best ‘temperature’ of the commodity markets is given by ‘doctor’ copper, so called because of its reputation as being the best early predictor as to the future state of the global economy. The red metal has fallen by a quarter this year as one would expect but if copper starts to find a floor that would be a ‘canary in the coalmine’ bullish indicator for all risk assets, notably equities.