Pay attention to gold and commodities, not equity rally - Saxo Bank
(Kitco News) - Investors should be paying more attention to commodity markets as lower prices are flashing warning signals of a significant disruption to the global economy, according to one market strategist.
In a report published Friday, Ole Hansen, head of commodity strategy at Saxo Bank, said that equity investors are underpricing the risk the coronavirus will have on the global economy. Last week all three U.S. equity markets hit record highs even as fears of a worldwide slowdown dominated market sentiment.
“The stock market has recovered strongly as investors have become increasingly immune to the apparent risks. Instead, focusing on the support coming from low inflation, low interest rates and central banks, led by the U.S. Federal Reserve, continuing to pump liquidity into the market,” he said.
In comparison to equity markets, commodity markets are struggling as the virus is expected to significantly weaken demand from China. “The world is facing the biggest demand shock since the 2008-09 global financial crisis,” he said.
The oil market has been hit particularly hard by shifting growth expectations. Hansen said that reports are circulating that because of the coronavirus, Chinese oil demand could drop by 3 million barrels per day. Hansen added that in the last five weeks, Brent crude oil prices have dropped 25%, falling to a one-year low.
However, the one commodity that continues to shine, another indication of lurking fears in the market place, is gold.
“Investors have, despite the lack of price performance, continued to accumulate gold through exchange-traded funds backed by bullion. Total holdings have, during the past three weeks, risen by 65 tons to 2585 tons,” said Hansen.
Hansen’s comments come as gold prices are holding critical initial support around $1,550 an ounce. April gold futures last traded at $1,577.50 an ounce, up 0.25% on the day.
Although Hansen remains bullish on gold prices, he added that the market needs a little bit more to get it back to its recent highs at $1,600.“At this stage, there is no point in chasing the market higher until stock markets and yields turn lower again,” he said.