Precious metals are likely to peak next year, LME transactions slowed but remain arbitrage opportunities

SHANGHAI, Sep 4 (SMM) – Prices of precious metals are expected to usher in another peak in 2021 in the midst of the downturn and COVID-19. On the other hand, arbitrage opportunities remain as transactions from London Metal Exchange (LME) slowed in view of the pandemic uncertaintity.

“The global economy sharply declined in the first half of the year amid COVID-19, and gold, as a safe-haven asset, is greatly favoured. In addition, it is expected that it will be difficult for the global economy to return to the levels before COVID-19 this year,” said Zhu Yi, Global Head of Metals & Mining, Bloomberg Intelligence at a webinar organised by Shanghai Metals Market (SMM) earlier this week.

The commodities webinar saw a strong lineup with Industry experts from SMM, LME, Bloomberg and Engelhart Commodities Trading Partners (ECTP). Chaired by Ye Jianhua, Director, Big Data department of SMM, the speakers shared their insights on the current macro front and the flexible strategies adopted by the stock exchanges in dealing with the pandemic situation.

Affected by the pandemic, the supply and demand of gold tumbled during the first half of the year, and the fundamentals did not support the surge of gold. Capital remains as the dominant factor in gold prices without major changes in supply and demand in the second half of the year, according to Zhu .

“Gold prices are expected to reach a new peak in 2021, based on factors such as crisis, currency, cash, confidence and consumption”. Zhu is making her forecast supported by the situation in 2011 where gold prices rose sharply amid the abovementioned factors.

Risks and opportunities coexist at futures exchange

On the futures front, the volume of transactions at LME increased significantly in the first quarter of 2020 compared with the same period of last year, especially in March. This was mainly due to the large fluctuations in the commodity market after the control of COVID-19 in China. Trading volume slowed down significantly after the second quarter, but there were still some arbitrage opportunities, according to Liu Yang, Senior Vice President and Head of China of LME.

LME has also adopted new changes to its mode of trading as COVID-19 disrupted trades worldwide. LME adopted the electronic trading platform for price discovery in March, when London was under lockdown, breaking the trading practice over the past 140 years. LME also intends to switch to electronic warehouse receipts before the end of the year to improve operational efficiency and reduce operational risks.

“LME's warehouse acts as a reservoir of global metals to ensure effective operation of its storage facilities. LME has more than 500 warehouses across 34 regions worldwide, so the value of goods will not become negative because of the shortage of inventories. Currently, there are around 2 million mt of metals inventories, compared with the 6-7 million mt of metals inventories in the financial crisis of 2009 and 2010,” Liu said.

In addition, LME is actively paying attention to warehouse space, and can be granted more warehouse capacity according to needs. LME has increased its inventory area by about 250,000 square meters in the past six months, mainly distributed in South Korea, Malaysia, Singapore, as well as the Netherlands and Detroit in the United States.

Flexible adjustment of investment strategies and seize the opportunities from the megatrends

Investors are also advised to keep an eye on the balanced trend of fundamentals. “China relies heavily on overseas raw materials. However, there is a voice of de-globalization in the global market. From a long-term perspective, this is a prolonged process with the possibility of trade frictions, but an inflection point will not happen soon, and the trading activity of internal and external crossover will continue,” according to Frank Liu, Director of Big Data department of SMM.

Liu addes that on the macro side, the impact of the pandemic on all metals is homogeneous but each metal has a different impact on the microscopic side. Hence, “it is necessary to analyze the pricing trend of each metal in depth.”

Investors should also seize the opportunities from the megatrends, eliminating the interference of fundamentals and short-term rebound of metals and have a deep understanding of trading logic of precious metals, said Wang Xiaohong, Director of Metals and Mining Research of ECTP, who thinks that “2020 is a rare year of megatrends, and the financial attributes and fundamentals of metals have been perfectly combined.

“Monetary policies have a great influence on the trading strategy of commodities, so the US dollar and precious metals should be taken as guidance. Before the big turn of the monetary policy, the macro front should be given more weight, and the fundamentals should be moderately reduced.”

QR code for the webinar recap: