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Copper stages rare rally with gold, hitting highest in a year

Stronger demand and tightening supply outstrip concerns about further fallout from the Covid-19 pandemic

London

COPPER hit the highest in more than a year in London, continuing a dramatic four-month rebound as stronger demand and tightening supply outstrip concerns about further fallout from the Covid-19 pandemic.

Copper's 45 per cent gain since mid-March has been driven chiefly by an unexpected boom in Chinese demand as factories kicked back into gear over the second quarter, and an acute strain on supply in South America.

A key question now is whether the buoyant fundamental outlook will hold up in the face of broader concerns about global growth as the virus rages.

In a rare dynamic, copper is rallying alongside gold, with spot bullion prices this week hitting the highest since 2011 as investors load up on the an asset that's often viewed as a hedge against economic catastrophe.

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Rising cases in the US risk derailing efforts to kick-start the world's top economy, while massive government asset-purchase programs are flattering the outlook for gold and copper. Both assets typically benefit from the side-effects of stimulus, such as declining bond yields and a weakening dollar.

"Some drivers for copper and gold coincide; others are opposite," said Rhona O'Connell, head of market analysis for EMEA and Asia at StoneX Group Inc. "Where they coincide is some pressure on the dollar, low and negative interest rates, momentum buying and massive liquidity in the financial system that is looking for a home."

Still, mounting economic uncertainty will work against copper while benefiting gold, setting the stage for a divergence over the third quarter, Ms O'Connell said.

The speed of copper's rally is also starting to create headwinds, with the recent spate of buying pushing the metal deeper into technically overbought territory, according to Ole Hansen, head of commodity strategy at Saxo Bank A/S.

Even so, Goldman Sachs Group Inc sees the uneven nature of the global economic recovery as a reason to buy both copper and gold, eyeing a scenario where China significantly outperforms the US over the coming months.

"As both rate and growth differentials widen, the dollar weakens, reinforcing higher commodity prices and acting as the catalyst to a positive feedback loop between re-leveraging, recovery and reflation," Goldman Sachs analysts said in an emailed note.

"An environment where China, the world's largest retail buyer, outperforms the US is ideal for gold."

The bank sees gold prices hitting US$2,000 an ounce and copper reaching US$6,500 a tonne within the next 12 months.

Spot gold traded 0.2 per cent higher at US$1,812.76 at 11:40 am in London, bringing this year's gain to almost 20 per cent. Copper rallied as much as 2.1 per cent to US$6,360, the highest since May 2019.

Silver too has a "near perfect environment" to finally perform," Goldman Sachs said in a note dated July 9, based on drivers including a Chinese-led recovery in industrial activity, safe-haven buying and lower supply due to Covid-19-related mining disruptions in the Americas.

It also recommended going long on Brent crude futures , and maintaining short positions in US crude, reasoning that "core US fundamentals are providing headwinds to WTI."

On a three, six, and 12-month horizon, Goldman sees returns of -9.3 per cent, 1.7 per cent and 13.9 per cent on commodities over the S&P GSCI index.

The year-to-date return on commodities is seen at -31.6 per cent, compared with 17.4 per cent in 2019. The bank forecast three-month returns of -4 per cent for industrial metals, -0.9 per cent for precious metals and -11.7 per cent for energy complex. BLOOMBERG, REUTERS

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