How would the possible Grexit hit commodities?

By Hamza Khan, senior commodity strategist at ING

The Greek government’s decision to hold a referendumon the latest creditor package shocked the bond and equity markets. Shouldthere be similar fundamental or financial shocks for commodity prices?

From a fundamental perspective, no. Greece as an economycontributes 0.4% of global GDP and its largest impact on the commodity markets– shipping – is unlikely to see disruptions as a result of the referendum.

The financial, or theoretical, perspective is different. Webelieve the fear of contagion and impact on currency markets will be felt mostacutely in gold, crude oil and the base metals.

For gold, the rush to a safe, tangible commodity has anobvious appeal. During the global financial crisis in 2009, global gold ETFholdings increased by 623 tonnes, nearly double the 321 tonnes added in 2008and nearly two and half times the previous five year average of 260 tonnes. In2010, when the Euro crisis emerged, central banks increased gold investmentsfrom 77 tonnes in 2010 to 457 tonnes in 2011 and sent prices close to $2,000/Ounce.

European gold ETF holdings also doubled from about 500 tonnes in2010 to about 1,000 tonnes in 2012 before falling back to about 600 tonnes in 2014. Thecaveat for gold is that USD strength and expectations for a US rate hike havepulled investors towards interest or coupon bearing assets. If the Grexitcrisis becomes global, gold could rally above $1,200 per ounce. If the crisisis confined to Europe and the US equities recover, the higher dollar could leadto a test of the $1,150 floor seen recently.

The currency impact is also key for crude oil, as a rally inUSD engenders proportionate adjustment in USD denominated crude oil prices.Since June 2014, an 18% appreciation in USD has pushed crude oil prices down by46% (or 2.5x as much) and we expect crude oil weakness in similar proportion ifthe Euro softens further. Although other fundamental factors are supportive tothe oil prices (including improved demand, low shale oil supply); the dollarlooks king in the short term.

For the base metals (aluminium and copper), downwardrevisions in European growth would translate into lower demand for Chinese andJapanese goods which will in turn have a negative impact on industrial metalsdemand. Europe takes nearly 16% of China’s merchandise exports and remains amajor end user for Cu and Al. As the recent sell-off in Asian equities hasdemonstrated, industrial demand appears to be at a precipice and a collapse inEurozone confidence could push base metals significantly lower.

All told, we cannot predict the ultimate outcome of theGreek referendum, but believe it will be a key driver for prices of gold, oiland the base metals.