Bullion, base metals, crude oil jump on US Fed's surprise interest rate cut

Gold and silver rise sharply on safe-haven appeal in a global economy prone to more downside risk

Base metals’ prices jumped by 1-2 per cent on Wednesday after the United States Federal Reserve (US Fed) announced a 50 basis points (bps) emergency interest rate cut. The Fed also confirmed high downside risk for the global economy as a result of increasing number of coronavirus (COVID-19) cases across the world. 

Gold and silver price increased 2-3 per cent in the Mumbai spot market, while copper contract for delivery in three months on the benchmark London Metal Exchange (LME) jumped 1 per cent to trade at $5,725 a tonne in early afternoon trade. 

Nickel rose by 1.9 per cent to $12,795 a tonne and zinc by 0.9 per cent to $1,993 a tonne on Wednesday. Aluminium prices also followed suit with a 0.6 per cent rise to trade at $1,733 a tonne.

It wasn’t just base metals, prices of crude oil, gold and silver also rose. While crude oil prices jumped by 1.4 per cent to $52.59 a barrel on the InterContinental Exchange (ICE), and on the Multi Commodity Exchange of India (MCX) it rose by 2.3 per cent to Rs 3,537 a barrel.

Gnanasekar Thiagarajan, director of Commtrendz, said the cut by US Fed showed the paranoia around the COVID-19 spread. “Most importantly, base metals and energy have recovered their quantum of recent corrections with room for further rise possible. With COVID-19 spread widening by the day, which poses further downside risk in the global economy, bullion prices have gained sharply in the last two months due to their safe haven appeal with potential for further increase,” he added. Since sentiment around the US Fed’s interest rate cut was building for a couple of days, the quantum wasn’t a surprise, though the timing was. Normally, the US Fed announces a revision in interest rate at its scheduled meeting. 

Tuesday’s surprise cut was the first such since the Lehman Brothers crisis in 2008, which weakened prices of all dollar denominated commodities. In fact, investors aggressively sold their greenback on Wednesday resulting in a fall in the value of the dollar against major global currencies. The rupee in initial trade slipped to 73.90 against the dollar, before closing with a marginal 7 paise appreciation on Wednesday at 73.23.

“Base metals in a first reaction have appreciated sharply on the LME and MCX after Fed’s interest cut. Further gains came in as the dollar slipped for the sixth straight session. Industrial metals turned positive on optimism that China will follow the US in lowering interest rates,” said Naveen Mathur, director (commodities and currencies), Anand Rathi Shares and Stockbrokers.

China is making slow but steady progress in getting back to work. Gold and silver have gained sharply over the past few weeks as investors moved out of risky assets to park their funds in bullion, which offered about 30 per cent returns in calendar year 2019.

Gold prices have jumped by over 8 per cent so far this year on sustained demand, with prices hitting a seven-year high as holdings in bullion-backed exchange-traded funds expanded to a record. “Sentiment is likely to remain positive in the yellow metal,” said Mathur.

Both gold and silver prices in the spot Zaveri Bazaar here gained by over 2 per cent to close at Rs 43,130 per 10g and Rs 46,205 a kg, respectively. Gold was up by Rs 1,054 per 10g while silver was up Rs 1,225 per kg.

Additionally, crude oil’s positive undertone extended into a third day after the Organisation of the Petroleum Exporting Countries (OPEC) Joint Technical Committee suggested an additional reduction of production by 600,000-1 million barrels per day during the second quarter.