Hopes Of US Fiscal Stimulus, Weaker Dollar Lend Support To Commodities This Week

For better part of November, we had witnessed risker commodities like base metals and crude oil trend higher while safe havens like gold and silver struggled. This was due to improvement in risk appetite amid positive development on vaccination front. AstraZeneca, Pfizer-BioNTech and Moderna all reported positive results in their coronavirus vaccine trials; fueling hopes of recovery in global health that’s been besieged by worsening virus situation.

Gold and silver's safe haven demand noted huge dent with prices of both the metals slipping to June and September lows respectively. For the week however, both the metals are poised to end on a higher note after noting decline for past three consecutive weeks. Furthermore, the uptrend has also persisted across base metals pack and crude oil.

The major factor that has lent support to commodities at large is signs of progress on US stimulus talks along with weakness in US Dollar Index. After months of political impasse, House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer have called on majority leader Senator Mitch McConnell to return to the negotiating table with a bill less than half that size as a starting point. As per Reuters report, a bipartisan, $908 billion coronavirus aid plan has gained momentum in the US Congress on Thursday, a far cry from Democrats original call for over $2 trillion, fanning hopes of a deal before year-end.

The growing hopes of US stimulus along with reduced safe haven demand and worries over US health in face of surging virus cases in the nation have weighed on the US Dollar, lending further support to commodities at large. The US Dollar Index hit April 2018 lows of 90.511 as on December 3 and at 90.66 is down nearly 6 percent year-to-date.

Safe havens gold and silver have further sought support from worries over surging virus cases and its impact on global health along with mixed economic data from major economies and uncertainty over Brexit.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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On virus front, conditions continue to worsen with global cases reaching 65 million and deaths exceeding 1.5 million. US remains the worst hit with the nation hitting grim milestone of over 2,00,000 cases in a single day and more than 2,500 fatalities for the third consecutive day on Thursday. The accelerated pace of contagion is fanning possibility of adoption of tougher restrictions which in turn may threaten the economic recovery.

The deteriorating virus situation however has had limited impact on commodities like base metals and crude oil as they hold on to the gains amid general optimism over virus vaccination. Furthermore, in case of base metals prices are also seeking support from upbeat demand outlook from top consumer China. Recent spate of healthy economic data from China including this week's robust factory activity as well as services activity data reinforce improving pace of recovery in the region fanning demand outlook for metals.

Overall, even though there are both positive as well as negative factors, the recent trend in commodities is being influenced by progress over stimulus and its impact on US Dollar.

(Ravindra Rao, VP - Head Commodity Research at Kotak Securities.)