Here at EEON, we've written a bit about why investors who are seeking a countercyclical asset to balance their portfolios might purchase gold or shares in gold-adjacent companies. As a brief refresher, the price change in gold and other precious metals is historically uncorrelated to the equities market, and occasionally trades in the opposite direction. Take for example SPDR's GLD index, which has a current beta of around 0.1. This low degree of correlation with the market makes buying precious metals a great portfolio diversification play. 2020 has been a great year for gold for this reason - as volatility has plagued asset markets, investors have bought the precious metal as a hedge.
Precious metals beyond gold also trade well when there is a lot of production in the global economy. Many products we use everyday contain small amounts of rare and precious metals. From iPhones to housing and Tesla batteries, more consumption means a larger appetite for metals like iron ore, nickel, and copper. While 2020 has been a strange year for global consumption, the prospect of a vaccine-induced return to business as usual has inspired some above average performance across the metals market:
The chart above shows that YTD share price of three metals producers: Freeport-McMoRan, Century Aluminum, and Southern Copper. These stocks and the prices of the metals that they deal in have seen a strong upward trend in the back part of the 2020. Essentially, these metals are the building blocks for a vast number of products and some investors believe that the combination of a viable covid vaccine and a potential new round of government stimulus will unleash pent-up demand for industrial production.
The uptick in prices was initially catalyzed by a faster than anticipated recovery from the coronavirus in China, which led to a faster than anticipated recovery in Chinese manufacturing activity, which accounts for around half of global metals demand. As Chinese demand rebounded, good news began to materialize in the hunt for a coronavirus vaccine. Then, Joe Biden's election win made the prospect of additional pandemic-related stimulus more likely while signaling a potential respite from the tense U.S.-China trade relations that have been characteristic of the Trump administration. As each of these events unfolded, investors faced with all-time low interest rates continued to look to alternative assets in search of return.
As the chart above shows, this return has been delivered by metals and metal producers and as both political and pandemic-related uncertainty (hopefully) continues to resolve, there is potential for further upside. Beyond investing in metal producers and mining firms like those in the chart at the top, investors can utilize ETF instruments to place bets on commodity metals appreciation, e.g. CPER, PLTM, and SLX. As an obligatory caveat, as the chain of events detailed above shows, investing in metals is a very complicated activity. Markets are always forward looking and the number of factors that determine the outlook for global metal demand is significant. As you think about admiring the metals rally from afar or jumping into a copper ETF, its might be useful to think through how much time you want to spend tracking Chinese manufacturing activity.