Metals Drop as Oil Crisis Spurs Market Into New ‘Dash for Cash’

(Bloomberg) -- Industrial and precious metals slumped as broader market sentiment soured on weakening oil prices, spurring another wave of selling across metals.

U.S equities tumbled the most in three weeks after crude oil futures slid below zero on Monday, losing value as chronic oversupply overwhelms the world’s crude tanks. The plunge threatens to fuel worldwide deflation that could derail efforts to restart major industrial economies, even as the coronavirus pandemic shows signs of peaking.

The turmoil is leading to a “dash for cash” in the metals market amid a panic across wider markets, Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by phone Tuesday. Copper futures in London posted the largest decline in three weeks while gold futures reversed Monday’s advance.

“This is another round of deleveraging that’s taking place in the market,” Hansen said. “When we have these periods, it doesn’t really matter what you hold. It’s all about getting your exposure reduced to a manageable level.”

As investors bought the U.S. dollar, which was up 0.5% in New York, gold and other precious metals lost favor as alternative stores of value. Gold futures for June delivery fell 1.4% to $1,687.80 an ounce as of 1:30 p.m. on the Comex.

While the bullion market is facing headwinds from a strong dollar, equity-market volatility and weak demand for jewelry, Bank of America Merrill Lynch said fiscal and monetary stimulus to counter the fallout from the virus should drive further gains. Gold prices are likely to hit $3,000 an ounce within 18 months, the bank’s analysts said in an emailed report.

The dollar also pressured palladium futures, which fell as much as 17% as both its appeal as a precious metal declined and as weaker industrial sentiment reduced demand for its physical applications. Palladium, used in automobiles, has a relatively smaller market than other precious metals and so price moves are often sharper.

Meanwhile, base metals were all lower on the London Metal Exchange. Copper led declines, falling 3% to $5,030 a ton. Nickel closed 2.5% lower, the most in four weeks, and iron ore futures in Singapore dropped.

BHP Group, the world’s top miner, said Tuesday that the prospect of a second wave of virus infections poses a major risk to China’s industrial recovery. The warning adds to doubts about the sustainability of a rebound in activity that’s helped lift base metals from four-year lows struck last month.

The oil crisis has “hit sentiment” for base metals at a time when “the price rebound is losing steam,” said Jiang Hang, vice president of the trading division at Jinchuan Maike Metal Resources Co. “The market is yet to price in the weakening market ex-China as the virus lingers.”

©2020 Bloomberg L.P.