Fiona Boal, head of commodities and real assets at S&P Dow Jones Indices, has warned the record low demand for gold jewellery in areas such as India and China will put pressure on short-term prices.
The price of gold has rallied significantly amid the coronavirus outbreak with investors seeking safe haven in the precious metal.
Highlighting this, gold-backed ETPs saw record quarterly inflows in Q1 2020, a seven-fold year on year increase, according to the World Gold Council.
The record flows and high demand caused the price of gold to climb from $1,520/oz on 1 January to $1,735/oz by 15 April, a 14.1% increase.
However, a recent report by the World Gold Council said consumer-focused sectors of the market weakened sharply in Q1. Jewellery demand was significantly hit by the outbreak as quarterly demand dropped 39% to a record low of 325.8 tonnes.
Speaking to ETF Stream, Boal (pictured) said the coronavirus impact on China and India, in particular, has been a large factor for the fall in demand for jewellery.
As a result of countries going into lockdown to control the spreading of coronavirus, China, the world's largest jewellery consumer, saw a 65% fall in demand.
“It is likely with the global lockdown, places like India will likely miss the entire wedding season which is one of the major demand periods for gold,” Boal added.
Additionally, she highlighted other factors impacting gold demand such as institutional investors approaching their maximum gold or safe haven allocation having built this exposure for many months prior to the coronavirus turmoil.
“At some point, particularly large institutional investors will reach their maximum allocation to gold,” Boal said.
“The interest in gold for a lot of institutional investors has been building for months. Gold had cemented itself as the safe haven of choice last year after central bank policies and negative interest rates in tandem with geopolitical events such as the trade war between the US and China caused uncertainty.”
It is likely, however, that these institutions will expand their safe haven allocation brackets given the current state of the market, according to Boal which suggests there is potential for demand in gold-backed ETPs could continue to grow into Q2.
In preparation for a fall in demand and the safety of employees, numerous global gold mines have been temporarily closed which has caused “disruption to the supply chain”, according to Boal.
The World Gold Council recorded a 4% fall in supply during Q1 as coronavirus lockdowns disrupted mine productions and gold recycling.
In comparison, oil has been another topical commodity in recent weeks as the supply of oil has heavily outweighed the demand given factories and travel were temporarily halted.
This came to a head when suppliers were forced to pay consumers to purchase May futures contracts causing West Texas Intermediate to plummet as low as $-40 a barrel before rebounding.
Storage issues of this kind are unlikely to be the case for gold given buyers will already have products in the pipeline and also have access to several sources of gold, not just from the mining suppliers. For example, someone could make a gold necklace or a bar from the freshly mined gold but someone can still buy it and melt it down to make something else.
However for oil, once someone buys it and uses it, that commodity is then gone and becomes worthless.
This is not unseen territory for gold investors though. Boal has covered the commodity markets for nearly 20 years and saw the market's reaction during the Global Financial Crisis in 2008.
Gold was the commodity of choice in 2008 as well, but Boal highlighted that the GFC and the coronavirus pandemic are two different events and have different underlying natures.
Boal said gold is viewed as the “currency of last resort”. But during the GFC, the financial system was flawed with systemic risk and moral hazard as Lehman Brothers collapsed and transactions within the financial chain ceased. This is different to the recent events witnessed in 2020.
“The situation we are in now, there does not appear to be any concerns about the stability of the financial system,” Boal continued. “There is no obvious moral hazard being shown and no one is necessarily to blame for the financial market downfall we have seen.”
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