Gold has numerous potential tailwinds and headwinds this year, but governments’ “whatever it takes” approach to COVID-19 should be beneficial.
After moving as high as US$1,734.19 per ounce on Friday (April 24), the price of gold fell over the weekend to hold at around US$1,715 on Monday (April 27).
The metal was weighed down by hopes that economic activity could be reignited as lockdowns around the world are potentially eased in the coming weeks.
Gold has risen 34 percent since the end of last April, when it was at about US$1,275, and is one of the few commodities that has benefited from the current unpredictability seen in the markets.
But while gold has hit record highs across consumer and producer currencies, the yellow metal is still below its peak US dollar value.
“It has set fresh all-time highs across a multitude of other currencies — the Australian dollar, the euro, the South African rand, the CNY and the Indian rupee,” explained Suki Cooper during her presentation at the World Gold Forum, held remotely last week.
But it hasn’t all been smooth sailing for the yellow metal, noted the executive director of precious metals research at Standard Chartered Bank. Gold has faced increased volatility and liquidity pressures, as evidenced by the loss of more than US$100 in two trading sessions earlier in the year.
“As equity markets have come under pressure, the need for liquidity and the dash for cash amid broad-based risk aversion meant no market escaped unscathed as portfolios were rebalanced, stock bottoms triggered and capital was deployed elsewhere,” she said.
Holding above US$1,700 for the last week, gold could be subject to some price easing later in the year as key demand segments are under strain and declining.
In 2019, 48.3 percent of gold demand came from the jewelry sector, an area that has felt sustained challenges since the beginning of the year. For example, sales in China and India, which account for the largest consumer demographic, have fallen sharply.
High prices and COVID-19 measures delivered a one-two punch to India’s gold market, with March imports falling by 48 percent compared to the previous month and hitting the lowest level since 2011.
According to Cooper, central bank buying, which comprised 14.9 of gold demand in 2019, is expected to be slow this year.
“While we expect buying to slow in 2020, we do expect it to remain elevated in comparison to historical standards,” the analyst said. “Buying in Q1 has slowed to pace that we last saw in Q1 2018.” However, for context, she reminded listeners that in 2018 buying was the strongest it had been in 51 years.
It’s important to note that last month Russia announced it won’t be purchasing any more gold as an investment — the country has been one of the largest national buyers of the metal for the last decade.
Conversely, Turkey has upped its gold purchases, adding over 100 tonnes during Q1 of this year.
Retail investor demand for gold has also grown during the first three months of 2020, a trend Cooper and her colleagues had expected to be more pronounced during the second half of the year.
March demand surged to multi-year highs as unprecedented policy moves piqued investor appetite.
Over the course of the year, there are several factors that could amount to upside factors for gold, added Cooper. Those include investors flying to safety and quality, the continued pressure of equity markets, low interest rates and an increase in negative-yielding debt, as well as inflation.
Of course, there are also several downside risk factors, such as a V-shaped recovery and deflation, prolonged weak physical demand, a strengthening greenback and short-lived retail investor buying.
While drawing comparisons to the financial meltdown of 2008 and the impact the pandemic has had on markets, Cooper pointed out that governments have responded quickly and proactively with a “whatever it takes” approach, unlike in 2008 when they acted inadequately.
The quick response will ultimately paint a positive backdrop for gold moving ahead.
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.