At the beginning of summer, the prices of some raw materials began to show signs that the experts interpreted with the augury of a Recession. At the beginning of July, the price of aluminum had plummeted 13% in the accumulated figure for the year, that of copper 17% and that of steel bars 18%, in a clear indication that demand was beginning to suffer.
The copper It is usually used as a health indicator of the global economic situation, since it is used for many industrial processes: for housing construction, as a component of certain products for industrial use, etc. The demand for copper usually goes hand in hand with an increase in economic growth and vice versa. Otherwise they behave gold and oilwhich, in addition, are impacted this 2022 by the conflict in Ukraine and by the movements of the United States Federal Reserve.
What do copper, gold and oil tell us about the recession?
Goldman Sachs considers that it is precisely time to make a portfolio with raw materials. “Our economists consider that the risk of a recession outside Europe in the next 12 months it is relatively low,” analysts including Sabine Schels, Jeffrey Currie and Damien Courvalin wrote in a note. “With oil a commodity of last resort in an era of severe energy shortages, we believe the pullback across the oil complex provides an attractive entry point for long-term investment.”
Commodities hit a record high in June when Russia’s invasion of Ukraine disrupted production and tangled supply chains, then eased as recession concerns flared and central banks, including the Federal Reserve, tightened policy to contain inflation. Last week, Fed Chairman Jerome Powell signaled more interest rate hikes this semester, and global stocks hit a one-month low on Monday.
And it is that for Goldman Sachs, recession fears are exaggerated in the short term and, therefore, encourages investors to invest in raw materials because they can recover from a deep energy crisis. But the truth is that the market for raw materials is broad and there are some that work very differently from each other.
Copper is the most industrial raw material of the three. After the strong increases experienced in the reopening after the pandemic, prices have fallen back to 2020 levels, explains Antonio Castelo, from iBroker. “Maybe he can have some rebounding ability, but unless things change, it would be without a lot of consistency.”
This week, the red metal is coming under pressure again on data coming out of China. Chinese factory activity contracted for the second straight month in August as COVID-19 infections, the worst heat wave in decades and an embattled real estate sector weighed on output, suggesting the economy is struggling. to keep the momentum going.
“We don’t see a big momentum in terms of China boosting demand for metals. We expect the Chinese government to work toward stabilization, we don’t expect a big stimulus,” Julius Baer analyst Carsten Menke said. “For real estate, it’s about avoiding a crash. On the infrastructure side, there is an awareness that it will be difficult to move the needle because the base is already very large,” he added.
Gold, less and less “active safe haven”
In the case of gold, this metal has historically been considered a refuge asset, the one in which investors decided to put their savings when the market situation turned bad. “Perhaps due to the strength of the dollar, perhaps due to the appearance of other types of assets”, explains Antonio Castelo, gold is moving within a lateral range and is unable to break upwards. “I think it’s not going to give any big surprise.”
Gold is also impacted for the actions of the Federal Reserve. Traders are increasingly convinced that the Fed will raise interest rates by 75 basis points next month, despite slightly improving inflation data. “The Fed’s message has finally gotten through, and unless there is another significant improvement in August or there are any signs of slack in the labor market, it may now have to deliver,” said Craig Erlam, an analyst at senior market, UK and EMEA, OANDA. Fears of a more aggressive Fed have investors taking refuge in the dollar and leaving the yellow metal aside, which seems to be stuck around $1,700.
It is expected that gold falls to $1,600 by the end of the yearas Federal Reserve Chairman Jerome Powell’s determination to reduce inflation through tighter monetary policy will translate into higher real rates in the United States and a stronger dollar, said Giovanni Staunovo, UBS analyst.
Inflation has hit multi-decade highs in many parts of the world, forcing central banks to tighten monetary policy. Gold is highly sensitive to rising rates in the US, which increases the opportunity cost of holding non-interest bearing bullion. “The Fed does not intend to do significant easing in the short term,” said Ilya Spivak, currency strategist at DailyFX. “Their focus is on inflation.”
For oil, the scene is more complicated
When it seemed impossible for the price to exceed 100 dollars again, the conflict broke out in Ukraine, which led crude oil to reach a maximum not seen since 2008, at 147 dollars. Since then, its price has been moderating, but it is still around 100 dollars a barrel and is moving at the speed of news, also affected by the movements of OPEC+ and, specifically, of Saudi Arabia.
The oil it has catalysts that pull it back and forth: Scarcity drives the price up, but recession fears drive it down. And between those factors is moving. “Although an entry into recession of the global economy may negatively affect its price, it does not seem that on the supply side there will be a problem to maintain or even reduce crude oil production” and thus maintain prices in the environment for Brent, points out Antonio Castelo. The expert does not expect the price to drop below 80 dollars. But it is a raw material that does not move at the same rate as those that are properly industrial.
Recession fears also affect him. “The latest signs of faltering growth are the contraction of Chinese factory activity in August and the slower-than-expected expansion of the country’s services sector,” said Tamas Varga, an analyst at PVM Oil Associates.
Therefore, especially the fall in copper prices, which is usually an indicator of the state of the economy, such as the progressive declines we have seen for oil, which are taking place despite Saudi Arabia’s attempts to keep prices , indicate that fears of a global recession materializing are high.
That gold is not acting as a refuge in such a situation is explained by fears of more aggressive rate hikes by the Federal Reserve to contain inflation, something that, in turn, will harm economic growth, being another factor pointing to recession.