Commodity prices liquidated, weighed down by a sharp rebound in the US dollar followed by Donald Trump’s win in the recent US Presidential election. The 25-basis point rate cut by the US Federal Reserve in the first week of November also affects the commodities’ price outlook.
Commodity prices and the US dollar are inversely correlated. As most of the international commodities are priced in the US currency, a change in the value of the US dollar can affect its prices.
Last week, the US dollar advanced to a one-year high against other major currencies. It has gained over 3 percent post the US presidential election. The currency has been on a recovery path since the first week of October, in hopes that the US Central Bank will continue lowering interest rates.
Gold and silver, which have been on a bullish trajectory for the last several months, plunged considerably after the US election results.
Gold prices in the key London spot market shed more than 9 percent from its all-time high of $2790 tested in October to $2536. Silver prices lost more than 14 percent during the same period. However, limited selling pressure was seen in domestic gold and silver due to an all-time weak Indian Rupee.
In addition to a strong US currency, there are expectations that the new US government may engage in ongoing global geopolitical issues which may bring down the demand for safe assets like gold and silver.
Selling pressure was witnessed in the base metals complex as well. Copper and Zinc prices corrected to about 7 percent in the last two weeks. While losses were limited in metals like Aluminium and Lead.
Industrial metals prices were highly volatile throughout this year due to factors pertaining to their fundamentals. Slow Chinese demand, uncertainty over US rate cuts, and feeble global growth outlook amid worsening geopolitical tensions were the reasons behind the fluctuating price performance.
However, a trade war under the Trump administration could dampen the global growth outlook and demand for industrial commodities later.
Crude oil prices also traded down after Trump’s victory. Faltering demand from China and swelling American supplies continue to put pressure on prices.
There are forecasts that there may be less regulations on crude production under the new US president, possibly leading to a supply glut and consequently lower prices. Trump has also vowed to put more sanctions on Iranian and Venezuelan oil, and this may result in tighter market conditions potentially boosting prices.
Natural gas prices continue to gain trading near one-year highs. Market movements in recent days show little evidence of a market reaction to the outcome of the election.
Looking ahead there are fears that Trump’s endorsement of protectionist policies could trigger another trade war with China. During 2018-19, Trump’s trade war with China was widely seen as detrimental to industry growth as it hampered trade between the largest incremental producer and consumer, China. Commodity market participants are cautiously awaiting clarity on the new president’s course of action once he takes office in January.
First published in Economic Times