How has the Coronavirus outbreak impacted demand for gold?
The WGC’s outlook at the beginning of the year pointed to strong investment demand, driven by expectations of what will happen in the global economy. On the other hand, we noted relatively weak consumer demand because of slowing economic growth. Since the coronavirus struck, these trends have continued and been amplified. Investor demand has been boosted, particularly from the West, as investors have bought gold to protect themselves or to profit from the impact of the pandemic. In parallel to this, the consumer markets have been weak, or in some cases closed because of lockdown regulations. Central banks, an important component of consumer demand in recent years, have continued to buy gold, but at a somewhat slower pace than before.
In April and May, big bullion banks including HSBC pulled back from trading gold futures. Why did this happening?
This issue started off as a concern about logistics, and has transformed into an issue of risk-appetite amongst some of the banks. Early on in the crisis, in Ticino, the Italian part of Switzerland, three of the four big gold refineries had to close down due to the outbreak in Northern Italy. That, combined with the grounding of international air travel, led to a concern that gold would not be able to get from mine to refinery, and to delivery point for the futures market. Therefore the efficient operation of the over-the-counter LOCO London gold market and the COMEX gold futures market in New York was put in jeopardy. These markets function well individually, but are best when they can arbitrage from one market to the other. As a result of this disruption to logistics, the relative price of the OTC in London and COMEX in New York started to become very volatile, and that volatility caused a big market-to-market loss for some banks. This loss may have been the final nail in the coffin prompting Scotiabank to leave the precious metals market, and it has made banks reluctant to have large mismatched positions. In other words, long London and short COMEX – a staple activity because it was a relatively risk-free trade that did not move around much and allowed banks to facilitate and connect the two markets together – suddenly became a risky play.
Regarding demand dynamics from the Indian market, how much has the interrupted wedding season been offset by a rising demand for gold loans?
Indian jewelry demand was weak in the first quarter, before the virus. However, as certain states have come out of lockdown, such as Kerala (the top gold consumer in the country), there has been strong demand with shops reopening. We also expected to see robust demand for scrap coming back to the market, with Indian owners of gold who may have lost income as a consequence of the lockdown looking to sell due to economic hardship. So far this does not seem to be the case, but people have been borrowing money against jewelry or gold holdings, which is an important part of the Indian lending market. Banks do not like to lend money unless it is collateralized or secured, and because Indian consumers often have a high proportion of their wealth in gold, this is a way they can raise money at a cost-effective basis.
Which markets in the last few months have been showing particular appetite for gold?
From an investment perspective, the North American market and Europe have been particularly active. We can see this in a number of ways; partly anecdotal, looking at the premiums for physical products such as coins and bars. Also, looking at the inflows into exchange traded funds (ETFs), which the WGC tracks on a daily basis and reports on monthly, there has been strong interest. Interestingly, since the depths of the mid-March sell-off caused by the coronavirus panic, we have seen more buying coming out of North America than European-listed instruments, currently trading at about 2/3 to 1/3. Within Europe, Germany is a strong area of demand for gold, and the UK has seen a lot of activity from institutional and retail investors protecting themselves from the potential impacts that Brexit might cause to the currency.
Do you think the lack of global stability has become such a norm that gold does not respond to geopolitical tension as much as it used to?
Historically, increases in geopolitical tension, particularly involving an oil supplier, would see people purchase gold. When tensions return to preexisting levels, which they usually do after a short, sharp war, then gold comes off. In my opinion, this is not the greatest reason to be buying gold. Gold is much more a hedge of economic uncertainty than a geopolitical hedge.
What do you think held gold in the US$1,700/oz range from April until June?
On the one hand, we are seeing strong investment flows coming in via ETFs, but consumer demand remains weak, so the situation has created a balance. If you look historically, gold moves high quickly then consolidates for a while, as high-frequency speculators who have ridden the price up take some profits and test to see where the supported price is. It seems to have been supported over US$1,700/oz, and under the right circumstances it could move higher still. We have seen a rapid rebound in US stocks, and if we see a v-shaped recovery, perhaps demand will weaken. However, if there is a second wave of the virus, and if people start to realize that the genuine economic effects of the pandemic will be long term, investment demand should be driven higher.
A lot of investors in the gold space were burned from 2013 to 2019. What would you say to reassure the market that gold is still a safe haven asset in 2020?
If you look at assets that you can own, what options do you have other than high-risk equities? Bonds: the feds printed vast sums of money and all central banks are expanding balance sheets or monetizing the debt of governments. Credit instruments: you do not want corporate bonds if you expect there to be waves of bankruptcies over the next twelve months. Real estate: who knows what commercial real estate is going to be worth moving forward or whether mortgages can be paid. It is circumstances like these that puts gold onto the radar of those that have not invested in it before, or have not invested recently. The WGC is here to make the case for gold as a strategic asset in any investment portfolio.
(This article first appeared in the Global Business Reports)