Gold is Still the Safe Haven

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

Inflows into global gold ETFs reached an annual record of 877.1t (US$47.9bn). Increased uncertainty and the policy response to the pandemic likely fuelled consistent inflows through October, before a recovery in sentiment and a drop in the gold price likely led to 130t of outflows in Q4. 

Demand for gold bars and coins grew 10% in Q4. A recovery in China and India in the second half of 2020 added to continued strength in Western markets to lift annual demand to 896.1t (+3%).

2020 marked a record low for gold jewellery demand. Despite a quarterly recovery in Q4, demand was unable to overcome the continued challenges presented by COVID-19.

Gold buying by central banks slowed sharply in 2020, almost 60% lower at 273t. Q4 saw a return to net buying: global official reserves grew by 44.8t during the quarter, more than reversing the 6.5t of net sales from Q3.

Gold will continue to enjoy safe haven status and sustain an upward trend in near future due to challenging environment across the globe in the wake of the Covid-19 pandemic, Knightsbridge say.

The commodity analysts believe that any development and issues related to transportation of the Covid-19 vaccine, performance of global economy as well as US Treasury yields will massively influence the yellow metal price in 2021 and 2022.

‘The yellow metal prices will trade in the range of $700 an ounce at the current price level to trade between $1,800 to $2,500 in 2021, say Knightsbridge economists.

With the rollout of the Covid-19 vaccine worldwide, analysts believe that this will bring confidence into the global economy, hence, central banks will lift interest rates and that could put pressure on the price of the commodity.

Gold price closed at $1,814 an ounce on Friday. The yellow metal is down by $101 an ounce, or 5.3 per cent, in the last 30 days and $256 an ounce or 12.4 per cent in the last six months. It was up by $249 an ounce, or 16 per cent, during the last year.

Positive news on the Covid-19 vaccine front in recent weeks should be further raising economic prospects for second half of 2021 and will likely continue to support investors’ appetite for risk ahead, boding poorly for safe-haven demand and gold prices, they offset is the massive Money Printing exercise about to be launched in the USA.

Logistical challenges to distribution of the Covid-19 vaccine to the masses and emergence of second strain of the virus could push safe-haven demand and gold prices higher.

Primarily driven by the COVID-19 pandemic and its far-reaching impacts, China’s gold demand in 2020 declined by 27% compared to 2019, the lowest in a decade.

One of the side effects from such weakness was the widest Shanghai-London spot gold price discount in history. Averaging -US$24/oz in 2020, the local Chinese gold price spread remained far below its 10-year average between 2010 and 2019. 

Our analysis shows: 

  • China’s gold supply shortage, costs associated with importing gold, as well as restrictions on gold’s imports in China contributed to a local gold price premium during most days
  • Significantly weakened gold demand, relatively ample gold supply and the restrictive nature of gold exports could be main drivers for the record-level Chinese gold price discount in 2020
  • China’s gold consumption in 2021 is likely to recover further, albeit with challenges.

Fourth quarter gold demand of 783.4t (excluding over-the-counter – OTC – activity) was 28% lower y-o-y, making it the weakest quarter since the midst of the Global Financial Crisis in Q2 2008. The coronavirus pandemic, with its far-reaching effects, was the driving factor behind weakness in consumer demand throughout 2020, culminating in a 14% decline in annual demand to 3,759.6t, the first sub-4,000t year since 2009.

Gold jewellery demand in Q4 fell 13% y-o-y to 515.9t, resulting in a full-year total of 1,411.6t, 34% lower than in 2019 and a new annual low for our data series. While demand improved steadily from the severely depleted Q2 total, consumers across the world remained at the mercy of coronavirus lockdowns, economic weakness and high gold prices.

Bar and coin demand grew 10% y-o-y in Q4, pushing annual retail investment up 3% to 896.1t. Nevertheless, demand remained weak relative to the 10-year average (1,199.5t).

Despite 130t of outflows in Q4, gold backed exchange-traded funds (gold ETFs) saw record annual inflows: global holdings grew by 877.1t in 2020. In addition, evidence suggest that OTC activity, which is not directly captured in our data set, was also robust throughout the year.

Central bank buying slowed sharply in 2020, particularly in the second half of the year. Q4 saw a return to modest net buying (44.8t) after the prior quarter’s small net sale. Annual central bank purchases came to 272.9t (-59%) of which 86% was added in H1.

The technology sector, impacted by disruption from COVID-19, saw gold usage decline 7% in 2020 to 301.9t. But the year ended on a relatively positive note, with Q4 seeing marginal y-o-y growth to 84t.

Total annual gold supply of 4,633t was 4% lower y-o-y, the largest annual fall since 2013. The drop was largely explained by coronavirus-related disruption to mine production, offset by a marginal 1% increase in recycling to 1,297.4t for 2020.