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Thu 16 Jul 2020 02:22 PM

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Covid-19 pandemic, weaker dollar push gold prices to new highs

The yellow metal is expected to see prices rally up to $2,000 an ounce in the next six to 12 months

Covid-19 pandemic, weaker dollar push gold prices to new highs

While other assets such as currency, oil, stocks and real estate have sharply declined in value, gold has appreciated 30 to 35 percent in the last year. 

Despite an economic slowdown caused by the global Covid-19 pandemic, gold prices have continued on an upward trend and remain popular with investors searching for a safe haven.

Earlier this month, Goldman Sachs forecast that gold prices will continue to rise to $1,800 an ounce in three months, $1,900 in six months and $2,000 in 12 months amid fears of currency downturns and economic uncertainty lingering from the pandemic.

According to the World Gold Council, gold’s strong return in 2020 is largely driven by the uncertainty surrounding the pandemic and monetary policy action, while negative economic growth provides a counterbalance by reducing consumer demand.

In an interview with Arabian Business, John Mulligan, the director of market relations at the World Gold Council, said that “the rising gold price in 2020 has primarily been driven by the strength of investor interest in gold, particularly as the Covid-19 lockdowns started to become more widespread.”

“This is clearly evident in the demand from institutions and investment professionals for gold-backed ETFs,” he added. “There has been seven consecutive months of net purchases, with growing demand each month, and global AUM in these products now represents over 3,600 tonnes of gold, valued over $212 billion. More than 770 tonnes of those gold holdings were bought this year.”

Additionally, Mulligan said that even prior to the pandemic, the gold market was increasingly driven by demand from investors looking to protect themselves from vulnerabilities and risks, including low return opportunities, low interest rates and heavy debt burdens.

“These have all now been exacerbated and accelerated by the lockdowns and consequent policy responses seeking to shore up struggling economies in the wake of the pandemic,” he added.

 Craig Erlam, the senior market analyst for the UK and EMEA for Oanda, said that in his assessment, the primary factor for gold’s rise has been the decline in the dollar, which in turn makes gold more affordable for buyers not using dollars.

“Over the last few months, the unprecedented amount of stimulus has given hold another big lift and that will likely continue into the future,” Erlam said.

TS Kalyanaraman, chairman and managing director of Kalyan Jewellers expects the trend to continue in the long run, with both demand and sale of jewellery set to increase in Q4 2020 with the onset of the wedding season.

“With the prices hitting a new high every couple of weeks, we are currently witnessing a good number of footfalls across the showrooms,” Kalyanaraman added. “There is a segment of consumers who are purchasing gold jewellery anticipating a further increase in prices.”

Covid-19 hits demand

While other assets such as currency, oil, stocks and real estate have sharply declined in value, gold has appreciated 30 to 35 percent in the last year, according to Shamlal Ahamed, managing director – internal operations, Malabar Gold & Diamonds.

“This consistent performance of gold as an appreciating and moveable asset has led to individuals with excess cash reserves beginning to acquire gold,” he added.

According to Mulligan, the demand for gold across the region in Q1 was better than other regional markets during the pandemic. However, more recent figures suggest a limited purchase scenario.

Despite the increasing price index, the consumption of gold has been declining across the region for some years now.

Mulligan told Arabian Business that “The volume of annual gold jewellery demand in the UAE and Saudi Arabia has fallen over a third over the last decade. A range of factors have contributed to this weaker demand, including local consumer uncertainty, regional socio-political tensions, declining tourist numbers, and higher consumer taxes.”

Karim Merchant, CEO and managing director of Pure Gold Jewellers said that “gold buyers are on a wait and watch mind set”.

He added that people’s buying pattern is expected to only go back to normal once their future income sources stabilise. Merchant anticipates gold prices to hit historically high during the pandemic.

However, Mulligan stressed that broader consumer demand for gold, particularly gold jewellery, will take longer to recover. Factors including local economic prospects, income expectations and consumer confidence that might fluctuate in gold’s physical markets will shape the recovery.

“Any immediate gold market recovery may also be hampered by recent disruptions to local stock flows and seasonal buying. Investment demand will therefore likely remain the primary driver of the gold market and a key source of demand for much of 2020. And this form of demand typically translates into a buoyant price,” added Mulligan.

According to Kalyanaraman, jewellery trade, particularly, in UAE and other countries in the Middle East, is dependent on demand from international tourists from Asia, Australia and European countries as well as domestic shoppers.

“During the first quarter, the market situation had been extremely volatile, with consumption hitting rock bottom in certain regions within the Middle East where strict lockdown rules were imposed.”

What will the future look like for gold?

According to Erlam, in the medium term central banks remain will need to be ultra-accommodative to build optimism for precious metals over  several months.

However, Mulligan noted that “the wider macro-economic environment, shaped by policies to defend economies against a rapid and corrosive contraction, will likely limit return opportunities and contribute to greater uncertainty and potential heightened volatility”.

“These factors are supportive of strong investment buying and we therefore expect that, for the remainder of 2020, the momentum behind the trend to seek out gold as a balancing asset and robust store of value will be the paramount force driving gold demand.”

Meanwhile Ahamed added that the ease to liquidate the yellow metal for cash without losing value even during the time of crisis has further increased the dependability of gold.

“Being the only investment to offer the benefits of liquidity and value appreciation, while also being a prestigious lifestyle article, we expect gold jewellery to attract new buyers in the immediate future,” he said.

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