The fundamentals of companies in the commodities sector are currently proving to be robust – despite the uncertain macroeconomic framework. Gold stocks performed particularly well compared to the broad equity markets, while mining and energy stocks lagged behind.
China is an important market for commodities
While global growth expectations are shrinking, GDP growth in the G7 countries is slowing. Manufacturing Purchasing Managers’ Indices have declined not only in the euro area but also in the United States. Although its Chinese counterpart tended to remain stable, it fell below 50 points in individual months – a clear indication of a downturn. A global recession within the next 18 months is unlikely to occur – not least due to supporting measures by the central banks.
Global positive growth is likely to continue – at a lower level than a year ago. While the US Federal Reserve and the European Central Bank (ECB) have announced further monetary easing, China, the most important market for commodities, is focusing on lowering the minimum reserve rate for banks. Tax cuts and infrastructure investments are also expected to fuel China’s economic growth and thus prevent the economy from landing hard.
Investors expect bright prospects for gold
The price of gold is expected to rise and gold stocks will react disproportionately to price changes in the precious metal. Gold prices had already risen by 19.7 percent by 2019. The FTSE Gold Mines Index, which comprises the ten largest mining companies worldwide by market capitalization, rose by 34 percent. The rise in the gold price is attributable to strong investment demand on the futures markets and for physically backed gold ETFs – but in particular to the decline in real interest rates.
While assets worth around USD 17 trillion are now yielding negative returns, the precious metal is not exposed to any default risks. Even bonds with negative yields risk that issuers will no longer be able to meet their payment obligations. It is precisely because dearly valued equities remain close to their all-time highs after the exceptionally protracted bull market that safe havens such as gold are likely to remain high with investors – ideally invested in both physical gold and gold equities.
Increased demand for the precious metal and central bank shopping tours are expected to drive the price higher over the next 18 months: In the first half of 2019, the central banks bought a total of 374 tonnes of gold – 14 percent more than in the previous year. This trend is likely to continue. On top of this, the Chinese and Indian jewellery industries could fuel demand for gold.