An effective vaccine will mean a whole new commodities outlook

On Thursday in the United States, 140,000 new cases of COVID-19 were recorded.

Last Saturday, there were 131,200 new cases and by Monday the US had become the first country to pass 10 million coronavirus cases.

This week, too, Michael Osterholm, Joe Biden’s coronavirus adviser, warned that America was in for a tough time over the holiday season and that it would be the worst period of the entire pandemic.

Dr Osterholm said in a television interview that he would not be surprised if daily new cases passed 200,000, warning Americans they are facing a “very dark winter”.

“The next 12 to 14 weeks are likely to be the darkest period of this entire pandemic,” he added.

It is not getting better elsewhere, either.

Germany, France, the UK, the Netherlands, Spain and Italy have applied restrictions ranging upwards to comprehensive lockdowns, and more countries may join them in the next few weeks as virus infections rise.

When Pfizer announced on Monday it had a vaccine and it would be 90% effective, stocks roared while precious metals tanked.

Gold was hit but silver tanked particularly savagely, down 7% on Monday on the vaccine news.

But it was a different story out of New York by Thursday, with stocks savaged while gold and silver found a bottom and began a rebound on the back of the terrible COVID-19 figures.

As usual, the market had overreacted on Monday with commentators saying at that time that a financial stimulus might no longer be needed and, essentially, that the pandemic safe haven appeal of gold and silver was no longer required.

That’s not the way it is looking now.

Still a way to go with the vaccine

The Pfizer-BioNTech vaccine promises relief, but there will still be a time delay — and North America and Europe will have to get through much of the winter before the vaccine can deliver any relief.

Once the vaccine passes its stage 3 trials, there will have to be a two-month, Food and Drug Administration-mandated safety period even with it being given emergency use clearance.

As the commodities team at ANZ Bank spell it out, the serum must be stored at minus-70 degrees Celsius.

“This means investment in cold storage infrastructure before widespread roll-out can take place,” the team pointed out.

“This suggests the earliest inoculations could start mid-January 2021 on a limited basis, with full delivery taking several more months.”

However, few transport or storage operations can offer that temperature control, so new facilities will have to be built.

The logistics sector is estimating that a worldwide roll-out could requires up to 65,000 tonnes of air freight capacity — four times the quantity of all vaccine transported by air carriers in 2019

Vaccine could be a game-changer for commodities

Caroline Bain, chief commodities economist at London-based Capital Economics, believes an effective vaccine could be a “game-changer” for commodities.

A highly effective vaccine against COVID-19 indicates stronger commodities demand and Capital is now working on reviewing its price forecasts (presumably upwards).

But there is a caveat from Ms Bain: “While this revised outlook is supportive for the prices of most commodities, a more structural move-up in oil and industrial metals may have to wait until there is more detail on the timing and scope of a vaccine”.

Industrial metals will clearly benefit from any pickup in economic activity if the vaccine works (and one hopes it is more effective than the flu vaccine has been in some years).

Industrial metals have already priced in China’s economic rebound, so it is now up to the developed economies — the US, Britain, Germany and France in particular — to provide a second leg-up.

But will oil bounce?

Oil prices have, more than any other commodity, been battered by the spread of the virus.

Therefore, the question is whether a global economic bounce will lift crude.

Daniel Hynes and Soni Kumari at ANZ think not, their latest note on the new optimism saying that that general positive sentiment hitting other sectors will not extend to crude.

They expect global crude supplies to be back in surplus in the current quarter, presenting a quandary for the OPEC+ alliance whose member countries have agreed to production limits (although some, mainly Iraq and Kuwait, have exceeded their quotas).

But the deal allows for a two million barrel per day (m/bd) rise from 1 January.

This could mean, says ANZ, a global surplus of up to 3m/bd in the first half of 2021.

“We feel OPEC has no choice but to delay output increases, most likely by three months.”

Copper looks well supported

ANZ points out that while rebounded to 18m/bd in early August, it has since fallen back to 16.6m/bd.

On industrial metals, ANZ is more bullish.

The analysts believe additional US financial stimulus (likely to be more generous if the Democrats are in power), along with progress on vaccine development, an improving China-US relationship (with Joe Biden as president) and ongoing industrial recovery will help industrial metals.

“Copper looks well supported by both demand and supply.”

Positive outlook for gold and silver

There is a considerable body of analyst opinion that any relief package in the US will help gold, as will physical demand for the metal rebounding ahead of the festive season.

If, as some analysts expect, US real yields will not recover over the next year and may even fall further, then that will offset any risk appetite decline for gold as a safe haven.

Yields will be so low as to not compete with gold in terms of return.

The surge between March and October in the gold price, apart from the safe haven appeal, is being attributed to the plunge in US real yields and a weaker US dollar.

Moreover, as the World Gold Council pointed out during the week, the decline in demand for gold jewellery, bars and coins in China during 2020 has been due largely to, one, economic downturn in China and, two, a fast-rising stock market offering better potential returns, rather than any diminished appetite for precious metals.

Meanwhile, silver has the added benefit of being able to ride any industrial recovery.

And then there’s solar power and its ravenous demand for silver.

Last month Goldman Sachs predicted that, between 2019 and 2023, global solar installations will have increased by 50% over the 2018 level.

In addition, Mr Biden has promised to initiate a US$2 trillion (A$2.8 trillion) move to renewable energy which would require 500 million additional solar panels over the next five years.

Silver miners are going to struggle to meet demand if those predictions turn out to be correct.

Bailouts will help precious metals

Also, for silver, there is still the issue of the vaccine.

Daniel Pavilonis, futures senior broker at Chicago-based trader RJO Futures, is being reported as looking positively at the precious metal.

Firstly, he questions whether a lot of people will refuse to take the vaccine.

In Britain, an opinion poll showed a large part of the population wanted politicians to take the vaccine before they did. Then there have been reports quoting people who were part of vaccine trials saying they became very sick.

Second, Mr Pavilonis believes a Biden administration points to more bailouts and stimulus.

“Unlike quantitative easing, this is like money being printed up and given out — I think the move to metal upside is not over,” he is reported as saying.

And TD Securities commodity strategist Daniel Ghali noted that an industrial recovery, along with vaccine success, will push economic growth rates — and with that, inflation.

“And the Fed is not going to stem those inflation expectations,” he said.

“This is positive for gold and silver.”