2020 was a volatile year by anyone’s standard. The fallout of the global Covid pandemic initially saw a sell-off of risk assets across the board on demand fears, before a synchronised global easing cycle by central banks and government stimulus propped up equity markets leading to stock markets such as the main US index, the S&P 500, hitting record highs. 
Commodities are in general risk assets, correlated with demand for economic cycles, with gold normally inversely correlated. The global accommodative central bank stance has primarily been targeted at supporting businesses, with the target of reducing or limiting unemployment. There is an important bifurcation to appreciate, where increasing unemployment is largely correlated with the service sector, restaurants and bars. Whilst white-collar jobs, typically higher-paid, have been able to operate relatively smoothly, transitioning relatively seamlessly to Zoom calls and remote access. This means that despite an increase in unemployment, end demand has actually been remarkably resilient, whilst rates will likely remain low as governments target unemployment rates. Importantly China has come out of the Covid pandemic strongly, with infection rates remaining subdued, as exports and imports are up 9.9 per cent and 13.2 per cent year-on-year respectively. This is important as China still constitutes around 50 per cent of global commodity demand. Europe has fared less well, with further lockdowns over winter, but this should ease in to next year.
Looking to 2021, the backdrop looks encouraging for resources demand. The Pfizer vaccine is set to begin roll out from December, with further vaccines coming through the testing phase, which should feed through to the pricing of risk assets and anticipated commodity demand. The US election sees incoming Joe Biden and with it a change in international policy, with a softer stance against the likes of China on the US/China trade war likely, with further stimulus and a clean energy focus a key part of his campaign. This should benefit metals like copper and silver, where electrification is a meaningful component of demand.
The longer-term supply dynamic remains supportive, with producer discipline following the change in management teams across the sector in 2015. The large miners continue to restrain from adding new capacity, focusing on dividends and a strong balance sheet, whilst years of underinvestment on exploration leads to a lack of new projects in the pipeline. Supply takes much longer to respond than demand, with eg a new copper mine taking around 10 years to bring in to production, with enhanced permitting procedures extending that timeline further. This may lead to increased M&A as miners look to replace depleted reserves, especially against the backdrop of strong cash flows, which would help close the respective discount of the junior mining sector.
Gold's outlook in 2021 looks favourable, whilst many of the equities are pricing in a lower gold price than the current spot, especially at the junior end, providing an opportunity. Low interest rates and global stimulus continue, with the Fed expecting near-zero rates through 2023. The primary focus is unemployment which looks likely to take time to recover suggesting low yields for the foreseeable future. Ballooning government debt will increasingly become a focus, a key risk to the US dollars reserve currency status, with the potential for diversification away from US Treasuries a possibility, which would be further supportive for Gold. Jewellery demand for precious metals has been weak due to higher prices and closed jewellery shops under Covid, whilst ETF additions have slowed, but central banks continue to look to add Gold. Silver shows an interesting dynamic with 50 per cent of its demand from industrial sources, of which 60 per cent is electrical due to being the only metal that’s a better conductor than copper. As a result, it stands to benefit from the growth in solar panels, wind power, 5G and electric vehicles.
Base metals recovery has been driven by demand in the Covid recovery, especially out of China, where economic data is showing marked improvements on last year. The key positive is the years of underinvestment in new projects, meaning there is a dearth of new projects coming online. Even moderate demand growth would lead to notably tighter base metal markets, whilst the heavy levels of stimulus we see globally targeting unemployment is leading to strong demand for finished products. The post-Covid world looks increasingly focused on electrification, a clear benefit for copper. Government funding for clean energy, such as Boris Johnson’s claim that the UK could be the Saudi Arabia of wind power, is also seen in solar power throughout the world. All of this needs metals, especially copper, nickel and silver.
We remain cautious on energy, although oil should tighten next year as demand recovers, Opec has more than enough spare capacity and if oil approaches $50/barrel the shale producers will begin to accelerate their drilling again. When majors such as Total and BP call for peak oil it doesn’t look good for the sector, although their pessimism may be a little premature, if they are even half right, the metals required for this accelerated global electrification will be the main beneficiaries. Our expectation is that these concerns are more likely to focus Opec’s view to maximising production whilst there is still demand rather than try to manage prices higher.
Uranium is starting to gain a stronger following from the environmental crowd, as the only source of zero-carbon baseload power. With Biden supportive for small modular reactors in his $2trn clean energy plan, there may be further positive signs on the horizon, as these are far quicker to build and maybe integral to help balance the unstable power grids that form from ever-larger variable renewable contributions.
2021 looks a very different year to 2020, with the global economy in recovery mode, demand should remain supportive for commodities, especially as central banks look to provide continued support, whilst years of underinvestment will keep supply constrained. Our preference is for an overweight in base metals and gold, whilst noting the benefits of the likes of uranium that are truly uncorrelated to the global economy due to the fixed cost nature of reactors.
Rob Crayfourd is co-portfolio manager of the Golden Prospect Precious Metals fund. The views expressed above are his own and should not be taken as investment advice.