HomeBusiness DigestA good year for commodity investors

A good year for commodity investors

Kumbirai Makwembere

THE past year belonged to commodity holders on the global front. Economic turbulence across the globe fuelled demand for both base and precious metals. When the economic outlook is positive investors jump into risky assets like stocks and any currency whose fundamentals would appear favourable at that point.

On the contrary, when the outlook is gloomy investors sell out of currencies and stocks and pile into safe haven assets usually commodities.

In the US, economic data was dull the greater part of the year. The housing and employment market continued to show signs of weakness. The FED embarked on phase two of Quantitative Easing (QE) in the last quarter of the year so as to stimulate economic growth in the country. Under this programme, the FED may purchase government securities to the tune of US$600 billion until mid 2011.

Elsewhere, debt problems weighed down the performance of economies in the Euro zone. The crisis that initially manifested in Greece has spread to Portugal, Ireland, Italy and Spain (PIIGS). Ireland was the most affected amongst the PIIGS, a development that compelled the EU ministers to put together an aid package worth US$113 billion.

Furthermore, rating agencies amongst them Moody’s downgraded sovereign debt ratings of these five countries.
Economies in Europe are intertwined and fears remain high that the crisis will end up covering the whole continent.
All these adverse developments favoured the performance of commodities.

Gold in particular took centre stage the greater part of the year setting a new record high of US$ 1 432,50. For 2010, gold jumped a hefty 29% for the year and chartists are projecting the price to breach the US$1500 mark by June this year.

Demand for gold in the past year increased as appetite for stocks, as well as currencies namely the US dollar and the euro weakened owing to the downbeat economic data being published.

Demand for gold was again increased by central banks from China, India and Russia who were buying the metal as they tried to diversify from a weakening greenback.

Silver also benefitted from the economic turmoil reaching its highest level in 30 years at US$30,80.

The price surged a massive 80% for the year. Like gold, silver is also regarded as a safe haven asset.

Each time gloomy data filters onto the market, the price spikes in line with gold because of its safe haven appeal.

Investors again buy silver on positive economic data as there is anticipation that demand for the metal will increase. This is because silver has several uses that range from industrial, jewellery, silverware production and art. If there is optimism on the future of the economy, it implies that industry will perform well. This will again mean that people can spend more on jewellery and silverware. As a result, there is always strong demand for silver making it less susceptible to economic downturns.

Other commodities also followed suit over the year. Prices for Platinum and Palladium also firmed over the year. The former grew by 20% while the latter jumped by 102%. Copper on the other hand jumped by 31% for the year setting a record high of US$9 728 in the process. The price of copper was spurred by strong demand from industries in China.

Zimbabwe nonetheless did not fully benefit from the metal prices boom despite the vast resource base the country has.

Mineral production remains low regardless of the fact that the mining sector is expected to have grown by 47% in 2010. Gold production for instance is expected around 8 tonnes which equates to a growth of 61% from the 4,47 tonnes produced in 2009. This is far below the 28 tonnes produced at the country’s peak in 1999.

Recovery in the sector is being constrained by a host of challenges which include inadequate financial resources.

Most, if not all, mining houses are still in need of finances to both acquire new machinery as well as retooling the old machines. These finances are proving difficult to come by. Bindura Nickel Corporation for instance has been under care and maintenance for more than two years now. Another listed entity, Rio Zim, failed to raise US$40 million for its operations in the past year.

The bullish trend on commodities particularly gold is projected to cascade into the current year.

The country should therefore put in place measures that will enable it to fully harness the benefits of the upside in metal prices. One critical area that has to be addressed is that of ownership of mines.

There is need to clarify the indigenisation laws to allow sector players to secure offshore capital to revive their operations. Local players have proved that they do not have the necessary financial muscle to recapitalise these mines. Encouraging though are the huge investments that are being done by some companies in the gold and platinum sectors.

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