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Gold: perhaps, the best-known cure for coronavirus

16 march 2020

      Image credit: Nattanan Kanchanaprat (Pixabay)

Gold investors experienced anxious moments in late February when the stock market experienced the most ‘bearish’ week since the financial crisis of 2008-09. Gold that plays the role of a protective asset has fallen victim to massive sales due to news about the coronavirus spreading around the world. In a related move, the global demand for gold is declining due to high prices and lower consumer spending in China and India. The economic slowdown caused by the coronavirus clearly does not help in changing this trend. Does this suggest that the best time of gold is behind?

Very unlikely. Central banks continue to buy gold on a broad scale trying to decrease the dollar share in their reserves. The diversification impetus boosts the demand for investments - while increasing the share of risky products, for example, stocks or high-yielding bonds, the investors around the world use gold to balance their portfolio. The regulators, on the other hand, are cutting rates in an effort to mitigate the economic impact of the temporary collapse of trade chains caused by the virus. The best that can happen to gold is the low and negative rates, as investing in the yellow metal becomes more attractive compared to investing in the sovereign bonds, in particular, the US treasury bonds. Fundamentally, gold also supports the depletion of the existing deposits and the lack of new projects due to low exploration spending.

MARKET insights

In 2019, the global demand for gold decreased by 1% to 4,356 tons after a 4% increase in 2018. The World Gold Council (WGC) writes that the last year was broadly a year of two distinct halves: resilience/growth across most sectors in the first half of the year contrasted with widespread y-o-y declines in the second. For example, in the fourth quarter, the demand for gold dropped by 19%, amid the rising prices.

The consumer demand for gold saw an 11% decline due to the rising prices. The main drivers of the decline were the lower demand for jewelry and bullions, which was also a response to the rise in the precious metal price. The global demand for gold jewelry declined by 6% to 2.1 thousand tons, China and India became the leaders in the decline, and the retail purchases adjusted to a 10-year low level. The demand for gold in the technology sector dropped by 2% to 327 tons.

At the same time, there was a huge influx into the exchange-traded investment funds (ETFs) and similar products. The investments grew by 426% per year to 401 tons ($19.2 bn). Such powerful inflows are explained by the monetary policy changes and geopolitical factors, with major purchases made in the second six months of the year. The largest inflows were into the North American funds (206 tons), mainly into the SPDR Gold Shares and iShares Gold Trust. They were followed by the European funds (188 tons), among which, the largest inflows occurred into the British funds against the backdrop of the Brexit. In January 2020, the volume of gold in the ETFs, under the influence of news on spreading the coronavirus, reached a record of 2.95 thousand tons ($150.1 bn). The inflow amounted to 61.7 tons ($3.1 bn). The coronavirus-related uncertainties brought the investors into a ‘safe haven’, the WGC explains.

For the tenth consecutive year, the central banks were net buyers having replenished the reserves by 650 tons, which was the second highest result within 50 years. The main contribution was made by the central banks of the Southeast and Central Asia that have strong trade and investment relations with China and are interested in gold as a hedge instrument against the dollar during the restructuring of their reserves. The Russian central bank - responding to the Western sanctions - directly pursues a de-dollarization policy and within its framework, it reduces the share of the US treasury bonds in favor of gold. As the First Deputy Chairman of the Central Bank of the Russian Federation Dmitry Tulin noted, gold is "a hundred percent guarantee against legal and political risks".

The gold price in the fourth quarter of 2019 reached $1,481 per ounce, the highest since the beginning of 2013. In dollars, gold rose in price by more than 18.4% over the year, and in all currencies of the G10 countries, except for the US dollar and Swiss franc, the price became the highest ever recorded.

Gold demand and supply, tons:


As for the supply, 2019 brought a 2% increase to 4.78 thousand tons. The main growth factor was a sharp rise in recycling - by 11% to 1.3 thousand tons. This is the highest level since 2012 when the price of gold in dollars was much higher. The key condition for increasing recycling was the rise in the gold price, especially in those markets where the weak local currencies provided an outstripping price increase.

At the same time, the production last year decreased by 1% by 2018 to 3.46 thousand tons. The growth in Russia, Australia, Turkey and West Africa could not compensate for the decline in other regions, including China, where the production volumes decreased for the third year in a row as well as in South Africa where another round of wage disputes took place, and in South America.

Indonesian Grasberg copper-gold project (owned by Freeport-McMoRan) has confirmed the status of the world's largest source of gold supplies. In addition to Grasberg, the top five gold mining assets include Barrick Nevada (the USA, Barrick Gold and Newmont Goldcorp joint venture), Polyus-Krasnoyarsk (includes the Olympiada and Blagodatnoye deposits), Pueblo Viejo (Dominican Republic, also Barrick and Newmont joint venture), and Lihir (Papua New Guinea). The world's leading gold producers are Newmont Goldcorp (7.4 mn oz), Barrick Gold (5.1 mn oz), AngloGold Ashanti (3.25 mn oz), Russian Polyus (2.8 mn oz), Kinross (2.5 mn oz).

In addition to the factor of strikes in the South Africa’s mining sector, the decline in the production has deep-rooted cause. In 2019, the gold production has decreased for the first time since 2008, despite a favorable wind in the form of rising prices. This decline was not a surprise.


Despite the commissioning of some important deposits, the overall project portfolio remains weak. In recent years, the major gold miners have increased their cash flows and reduced their debt burden, but the investments in the production development remain at the long-term low levels. According to Wood Mackenzie, due to low exploration spending, in 2018, the gold deposit average life dropped to 11 years from 16 years in 2012.

Due to low exploration spending, the gold reserves of the world's largest producers decreased from 400 mn oz in 2012 to 270 mn oz in 2018, according to the Russian Polyus’s figures. The gold grade in gold reserves decreased from 2.3 g/t in the early 2010s to 1.5 g/t in 2018. The number of global projects with the reserves of above 1 mn oz also decreased - while 10 years ago, there were 350 global projects, in 2018, there were only 150.

“the production in our industry cannot grow by 10% per year. Two factors affect the production dynamics, on the one hand, the existing assets are constantly depleting, on the other hand, someone builds an enterprise here and there. Therefore, everything is more or less balanced and it turns out that the production grows by 1% per year. But this is not the amount that is able to satisfy the growing demand,” the CEO of Nordgold Nikolai Zelensky explained in his interview with Interfax. The existing mines reduce their production, even if the gold beneficiation plants have enought ore, the extraction and grade are lower year by year.

Instead of investing in new exploration projects to increase production, the gold miners are fond of increasing dividends and other forms of compensation to the shareholders. The profit growth caused by the positive gold environment prompted the largest gold miners Newmont Goldcorp, Barrick Gold and others to raise the dividends and implement the buyback programs, buying back the shares from the market, which shareholders have been demanding for years.

Meanwhile, the lack of new deposits poses a significant risk to the industry, while a gold grade decrease in the ore leads to an increase in the operating costs, the industry executives warned, and their opinions are quoted by Reuters.

In several years, the problem of supply mismatch may arise in gold mining, said AngloGold Ashanti CEO Kevin Dushinski at the BMO Global Metals and Mining conference in February. Despite this concern, the same month, AngloGold Ashanti claimed dividend yield of $1.65 per share, up from 95 cents in 2018. Earlier in February, Barrick increased its dividend yield by 40%. Newmont said it would raise its annual dividend by 79%, to $1 per share.

According to the gold miners and industry analysts, this trend is likely to continue and may lead to even greater consolidation in the industry where several multi-billion-dollar transactions were closed last year. “The price of gold where it is now gives the companies an opportunity to invest,” says Kirkland Lake Gold CEO Tony Makuch. The problem is that now there is a period when shareholders suffer from the fact that they have not seen profits for a long time.”

Only one of the major players is trying to balance priorities. The Kirkland company that bought rival Detour Gold for $4.3 bn said it would double its annual dividend yield while increasing exploration spending at the same time.

However, Mark Bristow, CEO of Barrick, warns that the industry is on the brink of the abyss, as he believes the global gold production has peaked. “We, as an industry, haven’t invested in our future,” he says.

On the other hand, not all the manufacturers today have a strong motivation to ramp up gold production. The lack of new deposits will support the price of gold, said AngloGold Ashanti’s CEO Kelvin Dushnisky. He believes the decline in the ore quality and production levels, the lack of new discoveries and the extended development time inspire optimism about the medium and long-term forecasts for the gold exchange rate. 


Assessing the prospects for 2020, the World Gold Council proceeds from several key premises:

- financial and geopolitical uncertainty coupled with the low interest rates are likely to continue supporting the investment demand for gold;

- net purchases of gold by the central banks are likely to remain stable, even if they are below the recent quarters’ record highs;

-   the high price volatility and expectations of weaker economic growth may lead to lower demand in the near future, but structural economic reforms in China and India will support demand in the long-term.

As we have already noted, China and India made the main contribution to the consumer demand decline, they account for about 75% of the total global demand for gold. In China, the economic growth slowdown and rising prices for basic goods hit the buyers’ budgets and limit the jewelry spending. In addition, in the luxury segment, the demand from the younger generation is increasingly shifting towards innovative products of a fashionable design and with a lower gold content. Since 2017, the Goods and services tax has been introduced in India, the gold import duty has increased, which puts pressure on demand. Overall, the WGC expects the consumer demand to remain sluggish in 2020. Nevertheless, reforms are underway in China and India to stimulate the economic growth and domestic consumption, which is positive for gold in the long-term.

The consensus forecast made by the London Bullion Market Association (LBMA) published in early February suggests an average gold price of $1,559, which is 12% higher than in 2019 ($1,392.6). At the same time, the LBMA notes a gigantic spread of $780 per ounce: the spread of the analysts' forecasts suggests the price fluctuations from $1,300 to $2,080. Among the top three factors that will affect the gold price in 2020, the analysts surveyed by the LBMA noted the geopolitical and economic tensions (38% of respondents), the monetary policy of countries, especially of the United States (35%), and the demand dynamics, especially in India and China (15%).


In 2019, the stock markets, especially in the United States, reached their record highs, which was largely due to the Fed’s policy, as well as that of other world central banks, to reduce rates and provide quantitative easing (QE). These measures are intended to prevent a recession. However, the economic and geopolitical risks are not lower, and in this situation, gold plays an important role as a tool for hedging investor portfolios. "As investors looked to balance higher stock prices with an increasingly uncertain environment, the gold price increased by 18% by the end of the year outperforming EM stocks, global bonds, and most commodities," the WGC annual review noted. It is logical that the peak in the gold price in 2019 coincided with the minimum yield on 10-year US Treasury bonds.

This year, the situation will show no fundamental changes. The geopolitical risks have remained on the agenda, and extremely low interest rates around the world can help the stock market to reach new peaks. The Fed, which previously had a tough policy of maintaining the rates, cut the rate three times in 2019, thereby giving impetus to the regulators around the world. Under the influence of the coronavirus, the Fed used this measure extraordinarily in early March 2020, and at present, the market thinks it highly possible to see at least one more rate cut this year. Historically, gold looked great for 1-2 years after the Fed moved from raising rates to maintaining or lowering them. The demand for protective assets such as gold will only increase under these conditions, the WGC said.

Investing in gold will become even more attractive in a situation where a quarter (and taking into account inflation, 70%) of the sovereign debt of the developed countries is traded with de facto negative rates. Despite the fact that the classic investment in the gold ETF, unlike stocks and bonds, does not bring dividends or a coupon income, the low rates encourage the investors to increase their risk level by purchasing shares, long-term or high-yield bonds. Gold, more than bonds, allows investors to diversify their portfolio and achieve long-term profitability goals, the WGC says.


But even with such a fundamentally solid base, gold is not immune from troubles. “In times of coronavirus panic, even havens can be unreliable,” Clara Ferreira Marques writes in a column on the Bloomberg’s website.

The gold prices were at their highest level in 7 years reaching around $1,650 per ounce, which is partly due to their escape to the safe assets amid the growing global concern about the coronavirus. At the end of February, gold has experienced the biggest daily slump since 2013. The panic due to the coronavirus spread that caused a stock market crash, also affected gold. “That’s a rare phenomenon for a metal that tends to shine brighter when everything else looks gloomy,” said Marquez believing that this situation would be short-lived.

She recalls that during 2008, when the markets were hurt by the financial and economic crisis, gold dropped by more than a quarter, after which it made an impressive jump by $1,900 per ounce, as soon as the world central banks began to reduce their rates. Now, the same impulse is coming from the Fed, as the regulator is concerned about the impact of the virus on the economy. The opinion is that the reputation of gold as a shelter was not affected, and the sale was due to the fact that investors compensated for losses by selling gold that reached its maximums. Some of them had to fix the gold to avoid margin calls. A few days later, the gold price recovered, but the vast majority of the stocks declined are still far from their levels they left because of the coronavirus.

The decline in the gold price was not typical for a period when the risk off moves sharply increased, Adam Perlaky of the WGC agrees. He also believes that this is due to the profit taking that occurred and can be explained by the fact that since the beginning of the year, gold is the strongest performing major asset class than all other asset classes as it has risen by 5% in price. Gold has become a source of liquidity that has helped many market players avoid margin calls caused by a savage correction in the stock market. The investment demand for gold, in particular for gold-backed ETFs, remains strong. In the last week of February alone, the inflows amounted to more than $1.5 bn, and in February global ETFs grew by 4%, Perlaki notes.

Igor Leikin for Rough&Polished