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Gold still has important role to play, despite Covid-19, says World Gold Council

30th April 2020

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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JOHANNESBURG (miningweekly.com) – Global gold holdings are said to have held firm at 1 083.8 t in the first quarter of the year, marking a rise of 1% on the same period last year, according to the World Gold Council’s (WGC's) latest Gold Demand Trends report.

The global Covid-19 pandemic fueled the safe-haven investment demand for gold, with gold-back exchange-traded funds (ETFs) attracting inflows of over 298 t to push global holdings in these products to a record high of 3 185 t.

In contrast, the consumer-focused sectors of the market weakened sharply during this period, with jewellery demand being hit the hardest by the effects of the outbreak, and subsequent lockdowns and physical distancing regulations. Here, the quarterly demand dropped by 39% year-on-year to a record low of 325.8 t.

The pandemic further cut demand, where the jewellery decline is led by a 65% drop in China – the largest jewellery consumer, and also the first market to succumb to the outbreak.

According to WGC market intelligence manager Krishan Gopaul, this is an “understandable” move as consumers have been confined to their homes for their own safety, and retailers having to close owing to various restrictions in efforts to curb the spread of the Covid-19 virus.

While “unsurprising”, he tells Mining Weekly in an embargoed interview that while it impacted on jewellery quite extensively, the sector was not the only one hard hit, as all areas “across the board” were impacted.

Although the decrease in demand isn’t confined to just that of the yellow metal, Gopaul believes a positive investor sentiment is still rife in the market, as while in contrast to demand numbers, “people were not able to operate as normally as you would expect”.

In turn, he advises that the contraction in jewellery demand was “unavoidable” and that the gold market, and the rest of the world, are “facing very exceptional circumstances”.

However, the slump is not expected to last forever, as Gopaul states that the demand recovery rate will likely increase gradually over the course of the next few months.

The analysis by the WGC are similar to those published by researcher Refinitiv Metals Research, which said on April 30 that physical gold demand fell to 753 t in the first quarter, the lowest level since 2009 as high gold prices, in light of Covid-19, led to a drop in consumption.

Jewellery fabrication volumes, which typically account for about 55% of total physical demand, recorded severe losses in the first quarter of the year, slumping 40% on a year-on-year basis.

Demand for gold used in industrial applications was estimated to be down 19%, with losses recorded across all the major segments. Official sector net purchases are estimated to have dropped by 11% year-on-year, with higher gold prices weighing on the level of buying from some of the traditional gold buyers.

Further, sharp investment inflows helped push the dollar gold price to an eight-year high, where demand in value terms reached $55-billion – the highest since the second quarter of 2013.

The gold price also reached a new record high in Indian rupees and the Turkish lira, besides others.

Central banks, meanwhile, continued to amass gold, although at a slower pace, considering the heightened volatility and uncertainty. Global gold reserves grew by 145 t in the first quarter.

Gopaul notes that this action “speaks to the way in which gold is viewed”, explaining that, despite central banks focusing on the economic impact of the virus and measures that are being taken to minimise and contain the impact thereof, “the need for robust, liquid and diversified reserves is still there, if not more so”.

In fact, he notes that with central banks remaining within the net purchase region, it “highlighted the fact that even in circumstances like these, central banks still feel that gold has a very important role to play in international reserves”.

The sentiment is similar to that of the last decade. 

Commenting on investor sentiment in particular, Refinitiv noted that the beginning of the year was characterised by a strong rebound in investor interest among the professional investor community and, on the other hand, sluggish demand on the retail side.

Exchange-traded product (ETP) investors added 300 t of gold during the first three months of this year, with the bulk of buying taking place in March, driven by the price correction taking place that month and a pick-up in safe haven demand in light of the spread of the pandemic and the worsening situation particularly in the West, along with growing fears of the global economic recession.

As a result, Refinitiv said total ETP holdings rose to a “fresh high” of over 3 000 t by the end of the quarter.

Russia has also announced that it would suspend its long-term buying programme, signalling a slowdown in global net buying for the second quarter and beyond.

Touching on supply, total first-quarter supply fell by 4% as the lockdowns imposed in response to curbing the Covid-19 virus disrupted mine production and gold recycling, as operations were halted at many projects in an attempt to curb the spread of the virus.

Meanwhile, with South Africa to head into a Level 4 Lockdown from May 1, and mining companies expected to resume mining up to 50% capacity of their operations, Gopaul warns that, while the global gold supply market has “shown incredible resilience”, it may be too early to make predictions on what this could mean for the South African gold market, and international supply, during the rest of the year.

“However, it is reasonable to assume that South Africa’s production and supply will, overall, be lower year-on-year, but that’s because of the significant impact that Covid-19 has had.”

The council’s report indicates that bar demand weakened to 150.4 t in the first quarter, a year-on-year decline of 19%; while demand in the technology sector also fell, but by 8% to a new low of 73.4 t.

Meanwhile, according to preliminary estimates by Refinitiv, mine production increased by 3% year-on-year to an estimated 842 t.

On the other hand, scrap flows slipped by 2%, and the drop may “come as a surprise” given a relatively strong price performance recorded in the first quarter and even more so in other currencies.

Nevertheless, Refinitiv indicated that it was driven by decreased supply in Asia, particularly China, where disruptions caused by the Covid-19 crisis and the shutdown of the economy resulted in an over 40% drop in scrap volumes.

By contrast, with the gold price in Indian rupee rising to fresh highs, scrap supply there soared by 29%, offsetting some of the decline in Chinese flows.

Recycling, meanwhile, came to a near standstill towards the end of the quarter as consumers were more to their homes, according to the WGC.

According to WGC market intelligence’s Louise Street, in a statement by the council published on April 30, the Covid-19 pandemic has “had a significant and unprecedented impact on global gold demand”.

She adds that gold demand will continue to feel the effects of the pandemic for the rest of this year.

“In particular, the divergence between investment in gold-backed ETFs and consumers via jewellery will likely continue until there is greater economic and market certainty,” she says.

However, to summarise what the industry has experienced in the first quarter of the year, Gopaul describes it as an example of the “self-balancing nature” of the gold market, where the yellow metal is “doing what it should be doing in the first quarter” – providing liquidity, and a safe haven, in the face of a tremendous amount of uncertainty.

“It’s key to always bear in mind that the safe haven investment sentiment that we’ve seen in the quarter was particularly strong, despite the high levels of uncertainty,” he tells Mining Weekly, adding that the global financial stimulus from a monetary and fiscal level globally “has really helped fuel the sentiment of a safe haven demand, which is key to get an investor perspective on gold and shows that there’s still a huge level of positivity in the gold market”.

Refinitiv precious metals research manager Cameron Alexander shared the sentiment, and said that, while gold may remain vulnerable to further losses in the short term (particularly should the Covid-19 crisis continue and the equity markets experience another meltdown), factors could lead to another bout of liquidation across all asset classes, including gold.

“Having said that, with heightened uncertainty and expectations of the global economic recession, unprecedented levels of stimulus from central banks around the world and interest rates remaining at historically low levels and in negative territories, we believe that gold will rebound to even higher levels.”

Refinitiv expects gold to average $1 637/oz this year, with a possibility to test and move beyond $1 800/oz later in the year.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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