Last Updated on May 29, 2020
The coronavirus continues to spread throughout the globe, starting in China’s Wuhan province and making its way to Asia, Europe, and the United States. As of early March, the coronavirus has spread to more than 93K individuals. The global death rate for the virus is 3.2% which is much more than the regular flue. In the United States, there are multiple chains that have started in several locations.
An Amazon.com Inc. worker in Seattle tested positive for the novel coronavirus as concerns mounted over its spread in the U.S. The question for investors is how does the virus affect commodity trading? The answer is not completely straight forward because it affects different commodities differently.
How has the Dollar Fared?
One of the most compelling issues is how the coronavirus has affected the US dollar. Most of the commodities traded globally are quoted in US dollars. This includes precious metals, petroleum products, agricultural commodities as well as base metals and soft commodities.
The dollar was initially strong as the virus spread through China, but when it reached the US all bets were off. On March 3, the Federal Reserve announced a surprise interest rate cut of 50-basis points which put downward pressure on the dollar which has been reversing its upward bias.
The dollar index is down approximately 3% from its February highs. Going forward, the trajectory of the US dollar will depend on how other central banks respond, as well as on how aggressive the Fed really is prepared to cut.
The Fed Announces a Surprise Rate Cut
Federal Reserve cut interest rates by ½% to stem the decline in economic growth driven by the coronavirus. The Fed mark this rate cut as an emergency and had not cut rates inter-meeting since the financial crisis in 2008.
The market had priced in a cut, but the timing and the press conference through the markets off. The Fed essentially said that the Fed was cutting rates even though he did not seem to believe that the change in the Fed fund rates would help the markets with a biological event. The Fed was cutting rates to buoy investor confidence.
Fed Chair Jerome Powell said that in the weeks and months the Fed will use all the tools in its tool chest to combat the effects of the spread of the coronavirus.
How Has the Coronavirus Affect Gold?
The commodities that have performed the best in the wake of the spread of the coronavirus are precious metals. Gold has outperformed silver as investors look at gold as a safe-haven asset. Gold is also viewed as a currency.
When investors are looking for an alternative to the dollar, they will flock to gold as a haven. Gold also generally outperforms when the dollar is moving lower and US yields are moving lower. Gold prices reached a high of 1,691, up from 1,499 at the beginning of 2020.
How Has Petroleum and Natural Gas Performed?
Energy commodities have not performed well in the wake of the discovery of the coronavirus. While these commodities have been buoyed with the decline in the US dollar, the expected future demand for energy products has declined. Consumers have canceled cruise and flights, which have put a substantial dent in the volume of energy that will be needed soon.
In both Japan and Italy, the government has closed schools. This will further reduce the need for driving fuels. In addition, the volumes of liquid natural gas that is generally shipped from the United States to China have been curtailed given the lack of demand for manufacturing in China. Crude oil prices dropped form above $60 per barrel to begin 2020 to below $45 in early March.
Base Metals and Ag Have Underperformed
The lack of demand for construction has also put a damper on copper prices. The red metal has dropped more than 10% year to date, and this has also dragged on other base metals including aluminum, as well as zinc.
With the Chinese economy coming to a halt, it is unlikely that base metals will bounce without good economic news. In addition, it also appears that ag products will continue to underperform. The Phase One trade deal between the US and China will be postponed as China wrestles with purchases of grains. Corn and soybean prices are down approximately 5% year to date.
The upshot is that commodity prices have been mixed. Demand for a safe haven has increased and the dollar has pulled back helping to buoy gold. Energy commodities as well as based metal and ag, have underperformed and will likely need information showing that demand has been revived for prices to rebound.