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Copper/gold ratio continues to slide amid safe-haven demand for bullion

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Copper/gold ratio continues to slide amid safe-haven demand for bullion

London — The copper/gold correlation continued to slide this week, as the industrial metal felt the pinch from the coronavirus outbreak and bullion remained well bid on safe-haven demand.

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Copper is often cited by market participants as a bellwether for the state of the global economy. Gold, a zero yield investment, historically catches a bid when the rest of the markets are suffering -- representing a flight to safety hedge.

A declining ratio typically indicates a weak economic outlook from markets.

Three-month London Metal Exchange copper was spot bid at around $5,650/mt as of 1000 GMT, while gold was spot bid around $1,650/oz.

Although bullion was down from the Monday highs of around $1,690/oz, the precious metal was still well bid, albeit over-bought in the view of some market participants.

Copper, whose majority buyer is China, remained under pressure Thursday. This wasn't helped by the large losses in global equities markets earlier this week.

"European equities are sharply weaker on coronavirus pandemic fears and yesterday's dead cat bounce on Wall Street left the bulls exposed," Markets.com analyst Neil Wilson said in his daily note. "The FTSE 100 plunged 2% at the open and will do well to hold the 6,900."

Copper started 2020 at $6,188.50/mt, while gold started around $1,518/oz.

The World Health Organization (WHO) reported Wednesday that the number of new cases of COVID-19 outside of China exceeded those within China for the first time.

"Ex-China COVID-19 developments offered renewed support to gold and this strength has continued in early morning trading today," ING told clients Thursday morning. "Given this uncertainty is likely to linger, along with the prospect for lower rates, it suggests that gold prices are the to remain well supported."

COVID-19 impact

Rio Tinto may feel the impact of the coronavirus on demand for its products in the first quarter due to the "significant" near-term uncertainty the virus has the potential to create, particularly in supply chains, executives at the diversified mining company said Wednesday.

CEO Jean-Sebastien Jacques said: "There are two key drivers for the mining industry: global GDP growth and trade. Today, we face a very uncertain world on both drivers, due to the outbreak of the coronavirus...the Chinese economy has already been impacted -- mainly the services, construction and manufacturing sectors -- and supply chain disruptions are a real possibility."

Sources have told S&P Global Platts that delays in loading and delivery of cargoes in the tanker, dry bulk and container shipping segments are being reported as ships are forced to sit idle because of a lack of crew availability.

Recent statistics on the number of coronavirus cases have had two separate narratives: cases in China are no longer growing rapidly; but there are new cases in discrete geographical areas, hinting that global efforts to contain the disease may have problems.

Authorities in northern Italy have ordered the closure of schools, bars and other public spaces until March 1, following a flurry of new confirmed coronavirus cases.

Feeling the stress

Platts Analytics has adjusted its 2020 global oil demand growth outlook down to 860,000 b/d, the weakest level since 2011.

Asian refined product demand is expected to grow by 380,000 b/d in 2020, "posting its weakest growth since the global financial crisis in 2009," according to Platts Analytics.

Separately, S&P Global Ratings published its take on the impact of the virus.

"What we know for sure is that the month of February will record the worst oil demand contraction since the Great Recession. We also know that global aviation will be hit very hard across Asia and take months to get back into shape," Ratings said in its research. "In addition, we are aware that our best-case scenario — a V-shape recovery we last saw during the SARS-2003 outbreak — is already unachievable due to China's inability to go back to 'business as usual' at the beginning of February, and we project it will take another month for full normalization ... If outbreaks [ex-China] persist, we will be forced back to the drawing board to update our worst-case scenario."

ASEAN's vehicle sector faces a tough drive in 2020 as global market uncertainty stunts demand, while the COVID-19 outbreak adds further doubt amid consolidation efforts by global carmakers.

The challenges come after ASEAN's 2019 vehicle production fell 4.8% year on year to settle at 4.16 million units, data from the ASEAN Automotive Federation showed, its first decline since 2015 when output dipped 2% from 2014.

COVID-19 could pose a challenge for Indonesia's automotive industry, the country's automotive industries association Gaikindo said. The association had checked the components of imported vehicles from China, which could have an impact on the national automotive industry.