Buy gold but be cautious around oil and copper, that’s the main takeaway from Deutsche Bank’s special commodities report entitled “commodities weathering the Brexit storm”.
Most commodity markets remain plagued by oversupply, but the gold market is set to see increased demand over the next 18 months. There are a number of political risk events set to unfold during this period, which are only set to add to the global economic uncertainty that’s been thrown up as a result of Brexit.
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Deutsche points out that gold ETF inflows are already running at the fastest pace on record this year — annualized 29.7 million troy oz, above the previous high of 20.8 million troy oz in 2010 — and there is scope for this to increase. In fact, the ideal conditions are in place to drive further demand for the metal. It’s widely expected that interest rates will fall further from current levels, there are plenty of political risks on the horizon, GDP growth expectations are being curtailed, and the US dollar is weakening. Add all these four factors together and you have the perfect environment for higher gold prices.
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Gold prices have shown a highly positive correlation to US real yields since 2007, and it’s unlikely this trend will break anytime soon.
“The sharp move in gold indicates that investors were too complacent about the risk of a Brexit vote. This will dent confidence and in our view reset the bar for gold. Simply put, investors will now be more willing to pay a premium for an insurance policy.” — Deutsche Bank on gold following Brexit
Commodities: Not much impact on oil
When it comes to oil, Deutsche believes that Brexit could lead to a -100,000 barrel per day decline in oil demand from current forecasts. The UK will account for the majority of this decline as weaker sterling will reverse the stimulative effects of lower oil prices. The impact to demand could be as high as 150,000 bod. Although, to put this decline into perspective, Deutsche points out that, global supply outages have increased by 140 kb/d in May alone and by 990 kb/d since the start of the year. Some of these outages will be back online by the end of the year, but it’s clear that any Brexit impact on oil demand will be negligible.
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What could have a greater long-term impact on the oil price is a change in investor risk perceptions, which could come along/have already arrived with the Brexit debacle. Deutsche believes that the change in risk perceptions could be detrimental to upstream investment, suggesting that a reversal of the sharp declines in 2015 and 2016 is still some way off. In other words, it’s entirely possible that Brexit could end up being supportive to long-term oil prices.
What about copper?
The copper market is unlikely to be severely affected by Brexit. Deutsche’s economists estimate that Brexit could take as much as 0.2% off global growth forecasts this year pulling global GDP forecasts down to 3.4%. Historically, it is only when global GDP falls below 2.3% that copper demand goes negative, “so on current estimates, we still have some way to go to breach that level.”
