Gold Price Update: Q2 2020 in Review

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The gold price climbed 9.2 percent during the second quarter of 2020, driving its year-to-date increase to 14 percent. As other commodities struggled to regain value lost in the mid-March market meltdown, the yellow metal displayed resiliency.

Standing in stark contrast to Q1, the second quarter saw the safe haven asset surpass a seven year high.

After climbing back from a March low of US$1,498 per ounce, gold has steadily edged higher, ending the three month period approaching US$1,800 — that’s a price unseen since September 2011.

Q2 started with gold trading at US$1,621, driven higher by stimulus announcements, which pushed investors toward the safe haven asset class. The motivation to seek more secure ground was brought on by the rapid worldwide spread of COVID-19.

“The lockdowns accelerated what was already very dovish monetary policy,” explained Gerardo Del Real. “Billion-dollar bailouts became trillion-dollar bailouts and forced central banks to either let the business cycle play out or step in with trillions in liquidity.”

The editor of the Outsiders Club’s Junior Mining Monthly newsletter pointed out that the pandemic response has led to central banks doing “what they always do — and that (is) provide a clear path forward towards new all-time highs in US dollars.”

By the end of April, gold had added 3.9 percent to its value. The yellow metal ended the month at US$1,685, the highest month-over-month gain of the quarter.

Gold price update: All that glitters

As investors flocked to assets that retain value in uncertainty, concerns around a potential shortage of physical gold began to hit the market in earnest.

This was compounded with an insatiable demand for gold-backed exchange-traded funds (ETFs), with inflows ballooning month after month in 2020.

In fact, over the first six months of 2020, net inflows into gold ETFs topped US$40 billion, which was a new record. Large gains were also registered quarter-over-quarter, with Q1 accounting for 299.8 tonnes and Q2 surpassing that at 434.1 tonnes.

The mounting global interest in ETFs was the focus of an Investing News Network (INN) interview with the World Gold Council’s Adam Perlaky in mid-June.

“I would say first, with the economic and geopolitical uncertainty, lofty stock valuations and low-rate environment, there’s certainly been drivers for investment demand, and that clearly led some new investors into the space,” he said. “But I also think the growth in the number of funds globally has also given access to additional investors.”

To date, the gold ETF space has seen inflows of 734 tonnes for 2020, which already significantly exceeds the previous yearly all-time high of 646 tonnes in 2009.

For the namesake of Adrian Day Asset Management, the rise is less new attention and more a case of investors deciding to increase their positions in a variety of gold options.

“Another very important consideration is that most investors — retail and institutional — have under-owned gold for several years,” said Day. “So even a small increase in interest, say funds going from zero gold to 0.5 percent gold, has a significant impact on a small market. We are seeing this in physical demand, in bullion ETF inflows and in demand for gold shares.”

Gold price update: Demand increasing, supply declining

It should come as little surprise that mine closures and project curtailments will lead to supply reductions. And not only has production been impacted by the global pandemic, but logistical disruptions have impacted the ability to move gold.

During a recent Metals Focus webinar, analysts projected a global gold supply decline of 1 percent for 2020, with output from the mining sector expected to decrease by 5 percent.

“This year there is increased uncertainty in the forecast (compared to) previous years because the situation is still developing,” said Adam Webb, director of mine supply.

“The impact for most countries was felt in Q2, and obviously miners haven’t reported that information yet, and the possibility of future outbreaks (also) needs to be considered.”

The year-over-year reduction will be compounded by a 9 percent uptick in physical gold investment, which is likely to push prices even higher. But sustained investment demand may be offset by a large decline in jewelry buying, according to Johann Wiebe, lead metals analyst at Refinitiv.

“On the demand side, jewelry has been particularly hard hit,” he said via email, pointing out that some wholesalers have sold very little throughout Q1. In his opinion, a global decrease of 50 percent or more in gold jewelry demand would not be surprising.

“Investment on the other hand has been strong, at least in the US and Europe, leading to spikes in premiums and a shortage of bars and coins,” the analyst added. “In Asia, due to the gold price denominated in other currencies recording new highs across the board, investment sales have dried up too, while scrap returns have increased.”

As South African COVID-19 cases increase daily and the world readies for a second wave, uncertainty around projecting supply and demand trends has intensified.

“The full effect of the lockdown on metal supply and demand fundamentals is still unclear in my view,” said Brian Leni of Junior Stock Review. “While the supply disruptions are fairly straightforward to follow and predict, the demand side is where the question marks remain.”

That said, he noted that he believes supply and demand fundamentals are not the main drivers of gold’s movement. “With that said, when taken to the extreme, given where the global economy appears to be headed, I think demand will be very strong, and thus any further supply disruptions could drive the price up even further,” he commented to INN.

By the end of May, gold had added another 2.5 percent to its value, ending the month at US$1,728.

Watch the video above to hear Rick Rule of Sprott (TSX:SII,NYSE:SII) talk about positioning in the mining sector.

Of course, while supply and demand dynamics may not be price catalysts for some, they do incentivize explorers and miners. And as the Outsider Club’s Del Real pointed out, exploration success is being rewarded at this point in the cycle.

“There simply aren’t enough world-class gold deposits in the world,” he said. “I believe we are entering a critical discovery cycle where companies making discoveries will be able to monetize those discoveries at a premium as record high gold prices will support higher valuations.”

Solidifying Del Real’s stance is the magnitude of merger and acquisition (M&A) activity seen in Q2, specifically in mid-May.

Watch the video above to hear Byron King of Agora Financial discuss gold M&A activity.

In the second half of 2020, he advised investors watch for M&A activity related to gold-copper plays.

“I see gold-copper M&A increasing as mid-tiers and majors start to leverage those robust share prices by going shopping for attractive copper-gold assets,” he said.

Gold price update: What’s next?

Heading into June, gold was well-positioned to surpass US$1,750, trading for US$1,738.

A slip on June 5 sent the price below US$1,700 for the first time since early May. But the yellow metal quickly regained its lost footing, spending the rest of the month trending higher weekly.

By June 30, gold was moving for US$1,771, at the time its highest year-to-date price as well as a seven year high. With gold firmly planted in the US$1,800 range as of mid-July, market watchers offered their Q3 and Q4 price projections.

For Day, future gold price activity will be heavily influenced by the response to a second wave of the pandemic. “We are already beginning to see this, with announced openings now either canceled or actually reversed for a majority of the US population,” he said.

Day explained that more closures will lead to a decline in economic activity, triggering more monetary stimulus, “which means the Fed’s helicopter money will continue.”

“Debasement of the currency in this way will see a significant response from gold,” said Day. “And when you are buying insurance, you are less concerned about price. People will buy at US$2,100 just as they are buying at US$1,800.”

Short term, he forecasts gold will reach US$1,950 with the potential to hit US$2,000 in Q4 or next year.

Del Real referenced a 2019 interview with INN where he predicted that the gold price would reach US$3,000 to US$5,000 over the next three to five years, propelled by market volatility.

Listen to the interview above with Del Real at the 2019 New Orleans Investment Conference.

“Unfortunately that’s exactly how it’s played out, and unfortunately I don’t see an end anytime soon to that enhanced volatility,” he said. “Good for gold, transformational for many parts of our society.”

Del Real also offered some advice for investors looking at the junior space, pointing out that bull markets bring out the best and worst of the sector.

“Make sure companies you speculate in deserve the market cap they’re being assigned,” he advised. “Pay attention to companies that are doing real work, have a real asset/assets and watch out for those whose only asset is the ability to promote a gold bull market.”

Watch the video above to hear Ronald Stoeferle of Incrementum discuss the current gold bull market.

Junior Stock Review’s Leni expects Q3 to play out similar to what has already been seen in 2020, with a special focus on the unprecedented quantitative easing already experienced.

“I think it is possible that the US Federal Reserve may institute controls over the yield curve, which would be even more bullish for gold,” said Leni. “All in all, it is my view that the gold thesis will only get better over the next three to six months — which is unfortunate.”

Like Del Real, Leni pointed out that an exorbitantly high gold price indicates significant societal woes.

“Thus, higher gold prices are telling us the economy is in trouble, and the reality is more will lose in this high gold price environment than those who will profit, and in the end this is a very bad thing.”

When asked if gold will break any other records after surpassing a seven year high, Refinitiv’s Webb said that will be determined by the world’s ability to combat COVID-19.

Containment of the virus would see gold prices get back to normal, while another spike would be a driver as it was in Q2.

“I think H2 could well be supportive for gold based on the fact that government-provided furlough programs will run out in H2. Business will have to pick up that tab, and since revenue for many has been low to zero, we could see more layoffs and further economic havoc,” said the lead analyst at Refintiv.

“Not a scenario I hope will emerge, but it is a possibility despite all the governments’ and central banks’ efforts. That scenario would be supportive for the gold price.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.