By Hamza Khan, senior commodity strategist
The Greek government’s
decision to hold a referendum on the latest creditor package
shocked the bond and equity markets. Should there be similar
fundamental or financial shocks for commodity prices?
From a fundamental perspective, no. Greece
as an economy contributes 0.4% of global GDP and its largest
impact on the commodity markets – shipping –
is unlikely to see disruptions as a result of the
The financial, or theoretical, perspective
is different. We believe the fear of contagion and impact on
currency markets will be felt most acutely in gold, crude oil
and the base metals.
For gold, the rush to a safe, tangible
commodity has an obvious appeal. During the global financial
crisis in 2009, global gold ETF holdings increased by 623
tonnes, nearly double the 321 tonnes added in 2008 and nearly
two and half times the previous five year average of 260
tonnes. In 2010, when the Euro crisis emerged, central banks
increased gold investments from 77 tonnes in 2010 to 457 tonnes
in 2011 and sent prices close to $2,000/Ounce.
European gold ETF holdings also doubled
from about 500 tonnes in 2010 to about 1,000 tonnes in 2012
before falling back to about 600 tonnes in 2014. The caveat for
gold is that USD strength and expectations for a US rate hike
have pulled investors towards interest or coupon bearing
assets. If the Grexit crisis becomes global, gold could rally
above $1,200 per ounce. If the crisis is confined to Europe and
the US equities recover, the higher dollar could lead to a test
of the $1,150 floor seen recently.
The currency impact is also key for crude
oil, as a rally in USD engenders proportionate adjustment in
USD denominated crude oil prices. Since June 2014, an 18%
appreciation in USD has pushed crude oil prices down by 46% (or
2.5x as much) and we expect crude oil weakness in similar
proportion if the Euro softens further. Although other
fundamental factors are supportive to the oil prices (including
improved demand, low shale oil supply); the dollar looks king
in the short term.
For the base metals (aluminium and
copper), downward revisions in European growth would translate
into lower demand for Chinese and Japanese goods which will in
turn have a negative impact on industrial metals demand. Europe
takes nearly 16% of China’s merchandise exports
and remains a major end user for Cu and Al. As the recent
sell-off in Asian equities has demonstrated, industrial demand
appears to be at a precipice and a collapse in Eurozone
confidence could push base metals significantly lower.
All told, we cannot predict the ultimate
outcome of the Greek referendum, but believe it will be a key
driver for prices of gold, oil and the base metals.