Easy money makes metals shine despite economic shock caused by Covid-19

Not only equities and gold, but industrial commodities have also been on a tear this year, despite the economic shock caused by the Covid-19 pandemic. The LME Metal index, a gauge for performance of non-ferrous metals, posted its fifth straight monthly advance in August — its longest winning streak since 2009. The index is currently up more than 30 per cent from its 2020 lows in March at the height of the Covid-19-triggered sell-off. Copper, zinc, lead, nickel, tin, and aluminium — all have gained between 16 per cent and 47 per cent since the end of March. The sharp rally has boosted the prospects of commodity stocks. 

Analysts say easy liquidity and China demand are driving metal prices up. “One of the major reasons for the metal boom is access to cheap money. There is a continued risk-off sentiment on the macroeconomic front. Despite this, the market has an overall positive view on metals like copper and zinc as Chinese demand has been recovering well,” says Navneet Damani, vice-president (commodities research) at Motilal Oswal Financial Services.

 

The weakness in the dollar has also supported prices. “The accommodative stance adopted by  the US Fed indicates a low interest environment for a prolonged period which has kept the greenback under pressure,  making industrial metals cheaper for other currency holders,” says Yash Sawant, research associate, Angel Broking. Another possible reason for the price rise is hedge funds. Experts say many funds have increased their wager in this space and most have long-positioning.