Base metals more precious than gold in 2021

Like 2020, year 2021 was also eventful with action aplenty in the financial markets.

On the commodities front, while prices surged, there was also divergence in performance. On the one hand, base metals retained their strength (although there were price corrections). On the other, precious metals lost sheen.

Here‘s a look at the reasons for the divergence and how 2022 can pan out for these metals.

Contrasting performance

Precious metals like gold and silver began to weaken towards the end of 2020, and thus, right from the beginning of 2021, they lacked momentum. A key reason was a change in investor sentiment. “As vaccination cover increased and the global economy limped back to normalcy post the Covid disruptions, risk-on of investors drove assets like equities up, even as gold prices softened from their life-time highs of 2020,” says PR Somasundaram, President, World Gold Council (WGC), India.

Precious metals were further impacted by the rising dollar on the back of the expectation of the US Fed tapering measures and the start of interest rate upcycle. However, the strong dollar failed to impact the industrial metal complex because the prices were largely reacting to the supply-demand dynamics. In essence, supply side constraints pushed up base metal prices.

“While there was recovery in demand for metals, especially in the US and Europe, supply faced constraints because of congestion in shipping and energy crisis. This led to market participants tapping the stocks of warehouses, the London Metal Exchange (LME) in particular, resulting in the depletion of inventory. A moderate recovery in demand met with a severe supply chain disruption. This pushed up prices”, explains Sandeep Daga, Regsus Consulting.

In contrast, gold was not supported by fundamental factors. Investment demand — which drove the price in the preceding two years — saw a slump in 2021. According to WGC data, investment demand in 2021 (first three quarters) stood at 700 tonnes, a drop of about 38 per cent y-o-y.

Total demand, too, contracted to 2,663 tonnes from 2,939 tonnes in the corresponding period.

Among base metals, zinc and aluminium are the top performers of 2021: their continuous futures contract on the Multi Commodity Exchange (MCX) gained nearly 34 per cent each. While gold futures on the MCX depreciated by 4 per cent, silver futures dropped by about 9 per cent this year.

What’s ahead?

The supply disruptions that lifted the base metal prices have started to wane.

“The energy crisis has subsided in China and the industries have started receiving adequate power. Accordingly, the country’s metal production could rise to new highs in the coming months. European output cuts, too, could fade with winter. Rising supplies could limit the upside of metal prices,” says Daga.

As supply increases, the price could even see a decline, especially during the second half of next year.

Precious metals, on the other hand, are likely to stay positive in the next year. “Rising expectations of inflation and uncertainty about interest rate across the globe will continue to support gold price. Moreover, strategic investors have not really moved out of gold and the long-term upward momentum continues to stay,” Somasundaram added.

Notably, gold and silver did not take much of a hit on the latest Fed announcement about tapering and despite the dot plot indicating three hikes during 2022.

Of course, there can be a blip when the US rates start moving up, but these factors are already being priced in. Therefore, the bullion could shine in 2022.

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