4 min read 23 Apr 20
Summary: Caught between its safe-haven status and a broad sell-off in all asset classes, gold has been exceptionally volatile since mid-February. After reaching its highest level since late 2012 in early March, it fell alongside risk assets, only to rebound heading into April. Gold gained support as investors looked to it as a safe-haven after the recent losses in stock markets, along with increased expectations for more moves by global central banks and financial policy makers to boost the global economy.
As panic buying took hold in March, it wasn’t only toilet roll that was flying off the shelves, investors also scrambled to buy gold. The pickup in demand helped to drive prices to almost $1,750 an ounce. In sterling, the price of gold hit an all-time high. Gold futures moved above $1,700 this week as oil prices tumbled with the May contract for US oil finishing in negative territory for the first time in history.
According to the World Gold Council, global gold-backed ETFs and similar products had net inflows of $23bn, across all regions in the first quarter of 2020 – boosting holdings to a record 3,185 tonnes, worth $165 billion.
Whilst gold offers no income, such as coupons from bonds or dividends, it traditionally acts as a safe-haven in times of stress and can provide a hedge against inflation, acting as a store of value over time. Gold benefits from diverse sources of demand – as an investment, reserve asset, jewellery and in technology.
Gold typically acts as a hedge, but fell alongside other risk assets in March, and some started to question if the precious metal had lost its safe-haven status. There are a number of possible reasons why gold didn’t rally in March.
Disruptions to supply chains have further complicated the movement of gold prices. In late March, there were fears that there would not be enough physical supply of 100 ounce gold bars required to keep pace with demand. For the first time in 100 years, three large refiners in the Swiss canton of Ticino (Europe’s biggest gold-refining hub) temporarily closed, alongside supply from gold mines being disrupted and the grounding of passenger airlines that usually transport gold between international markets due to government lockdowns – creating a price-boosting shortage of gold bars and coins.
Open gold contracts on the Comex exchange in the US far exceeded the volume it held in warehouses – which led to a price premium of as much as $100 in New York above London’s spot price, due to fears of a lack of physical metal to settle the contracts. The gap is usually a couple of dollars. Adding to the difficulty, Comex’s main gold futures run on 100-ounce bars, meaning 400-ounce bars from London must be melted down and recast, usually in Switzerland, before shipping to New York. This dislocation affects the entire gold supply chain as companies use futures to hedge their exposures.
Whilst a lack of liquidity widened price spreads during March, more gold was on its way to New York in April replenishing stockpiles, as traders holding gold futures rolled over their paper contracts to the next expiry date, averting a major shortfall in delivery. The partial reopening of several refiners also helped increase supply, allowing the market to return to focusing on fundamentals. The LBMA (London Bullion Market Association) and CME have reassured the market that they are actively taking measures to ensure the continued efficient operation of global gold markets during this unprecedented time, by working with banks, refiners and shippers to overcome travel constraints and ensure the physical movement of metal via chartered or cargo flights. The CME has also introduced a new physically-delivered gold contract that will enable delivery of 100 ounce, 400 ounce or 1 kilogram bars to provide the market with more flexibility.
Gold still remains the ultimate safe haven asset, but the road to higher prices could be a bumpy one as prices continue to fluctuate and investors take profits. Continued uncertainties around the pandemic, massive monetary and fiscal stimulus packages and the improved opportunity cost of holding gold in a low-rate environment, bodes well for gold. The pandemic is, however, disrupting both the physical supply of gold and demand for the yellow metal, as mines are shut down and as sales of jewellery decline. This dynamic is likely to persist, reflecting political and economic uncertainty, persistently low interest rates and economic concerns surrounding markets. Whilst investment demand for gold dominates short-term prices underlying physical consumption matters in the longer-term – jewellery accounts for about 50% of annual gold consumption globally, with India and China the biggest markets.
It is impossible to say where gold prices might go from here. As the global economy continues to feel the impact of the COVID-19 lockdown and a plummeting oil price, it is worth having an allocation to yellow metal as part of well-diversified portfolio. Gold’s unique attributes as a scarce, highly liquid and un-correlated asset highlight that it can act as a genuine diversifier over the long term. In these uncertain times, it could be a useful insurance policy and help stabilise portfolios, whilst acting as a store of value.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.