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Gold to remain ‘well supported’ in 2021, despite uncertainty, says World Gold Council

WGC market intelligence manager Krishan Gopaul

28th January 2021

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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While 2021 will likely continue to be characterised by uncertainty, owing to the Covid-19 pandemic, gold investment will remain well supported by the interest rate environment, which World Gold Council (WGC) market intelligence manager Krishan Gopaul says, “is likely to stay low for some time yet”.

With lingering portfolio risks and potential inflation resulting from measures to counter the economic impact, he believes there is potential for gold consumption to benefit from some signs of economic recovery across the globe, and especially in emerging markets such as China and India.

However, with general uncertainty still lingering, consumer demand will still be impacted on by a number of factors, such as potential lockdowns, as well as renewed restrictions on people entering public spaces.

“We need to see how the gold price performs, because one of the factors that was impacting on jewellery demand was the fact that the gold price was high. So, on the jewellery side especially, it probably impacted affordability,” Gopaul tells Mining Weekly.

Additionally, the economic fallout from the pandemic and the subsequent recovery, will also continue to play a role.

However, in the meantime, a general reduction in overall consumer spending will remain, considering that some people have lost their main source of income as a result of Covid-19 and resultant restrictions and economic impacts.

With uncertainty characterising the year ahead, Gopaul notes that while rough indications may be possible, an outlook for the year will, ultimately, “be very difficult to try and assess”.

Further, the WGC’s latest 'Gold Demand Trends' report, published on January 28, shows that the Covid-19 pandemic, with its far-reaching effects, was the driving factor behind gold consumer demand weakness throughout 2020, leading to a 14% year-on-year decline in demand to 3 759.6 t.

Last year was the first year consumer demand dropped below 4 000 t/y since 2009.

The pandemic created an “incredibly uncertain and high-risk environment” on top of existing economic uncertainty, low growth and low interest rates. Though all the pandemic really did, Gopaul explains, is “ramp up” this level of uncertainty and highlight the need for investors to have adequate and robust risk management practices in place.

This uncertainty, he adds, sparks investor interest in assets like gold, and its properties as a risk mitigation asset to a portfolio to help offset and balance some of the additional risks that investors are seeing.

Returning to the WGC’s report, global gold demand dropped by 28% year-on-year to 783.4 t in the fourth quarter, making it the weakest quarter since the midst of the global financial crisis in the second quarter of 2008.

Gold jewellery demand in the fourth quarter fell 13% year-on-year to 515.9 t, resulting in a full-year total of 1 411.6 t, 34% lower than in 2019, which had hit a 50-year record. This marks a new yearly low for the council’s data series.

However, while demand improved steadily from the severely depleted second-quarter total, the coronavirus continued to impact on consumer behaviour.

Conversely, increased uncertainty and policy response to the pandemic supported investment demand, which increased by 40% year-on-year to a new high of 1 773.2 t for the council’s series.

Most of the growth came in the form of gold-backed exchange-traded funds (ETFs), aided by bar and coin demand growth in the second half of the year. In addition, evidence suggests that over-the-counter (OTC) activity, which is not directly captured in the data set, was also robust throughout the year.

However, in the fourth quarter there was a notable decline in investment demand for gold ETFs with outflows totalling 130 t.

Total gold supply also took a hit and was 4% lower year-on-year at 4 633 t, the largest yearly fall since 2013. The drop can be largely explained by coronavirus-related disruption to mine production, offset by a marginal 1% increase in recycling to 1 297.4 t for 2020.

Inflows into global gold ETFs reached a record of 877.1 t ($47.9-billion), marking an 11-month consecutive run of positive inflows, starting in December 2019, which came to a halt in November when a recovery in sentiment and gold price drop led to 130 t of outflows in the fourth quarter.

The dollar gold price returned 25% in 2020 supported by investor demand, and after reaching a record high in August across most currencies, the LBMA Gold Price PM dropped back to $1 762.55/oz at the end of November, before recovering to close the year at $1 887.6/oz.

Demand for gold bars and coins grew 10% in the fourth quarter, as a recovery in China and India in the second half of 2020 added to continued strength in Western markets to lift annual demand to 896.1 t, or by 3%.

Further, 2020 marked a record low of 1 411.6 t for gold jewellery demand, and despite a quarterly recovery in the fourth quarter, demand was unable to overcome the continued challenges presented by Covid-19.

Gold buying by central banks slowed sharply in 2020, 59% lower at 273 t, and the fourth quarter saw a return to modest net buying as global official reserves grew by 44.8 t during the quarter, more than reversing the 6.5 t of net sales from the third quarter.

GOLD VS BITCOIN
Meanwhile, commenting on whether other investment alternatives, such as Bitcoin, could topple gold’s stance as an investment safe haven, Gopaul indicates that these are two “very different propositions”.

He explains that gold is considered a proven long-term, strategic investment which has a widespread regulatory framework in place for its products and uses. Compared with Bitcoin, which is generally unregulated and more volatile, Gopaul encourages the use of gold in an investor’s portfolio to help offset the additional risk assets that investing in Bitcoin would bring.

“It’s probably more of a risk asset and a speculative investment, unlike gold, but it would be reasonable to say that investors are [considering] Bitcoin, which they have. It’s likely that like holding any other risk asset, including Bitcoin, it could mean that there is a greater need to hold gold in your portfolio to help offset some of the additional risk assets that Bitcoin will bring,” he concludes.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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