Can gold love a coronavirus crisis?

LONDON / MUMBAI / NEW YORK (Reuters) – Gold loves a crisis, according to the old saying. And with prices rising 13% this year to their highest level since 2012 and many predicting new earnings as investors search for safe places to put their money, it seems true for the coronavirus crisis so far.

But, as individuals and countries see a drop in income, traditional gold consumers in India and China are buying less and central banks are reducing purchases. Without them, gold rises can be difficult to maintain.

For now, XAU = gold costs around $ 1,700 an ounce.

Driven by investor clamor for insurance against the economic downturn and possible devaluation of assets and currencies, some predict a bullish run reminiscent of the rebound in gold prices to record levels of just $ 2,000 in 2011.

Bank of America Merrill Lynch even said it could hit $ 3,000 by the end of next year.

But if history is a guide, it takes a sustained period of rising demand to really boost gold, and given the depth of the economic downturn that economists expect due to the coronavirus, individual consumers may be buying less gold for some weather.

“You find a lot of conventional wisdom about gold, like inflation is driving it, or a bad environment,” said Andrew Sheets, chief strategist at cross-assets at Morgan Stanley.

But gold is not that simple, he said. “Look 2003-2012, gold basically went up in all possible scenarios. Boom, bust, crisis, no crisis. Then for a few years it was reduced every year. ”

ATTEND THE TREND

In the past half century, gold has had two spectacular bullfights.

(Graph: 50 years of gold prices, here)

The first was triggered when governments abandoned control of gold prices and relaxed bans on private property around 1970.

That launched an increase in pent-up demand, said Fergal O’Connor, a professor at the University of Cork in Ireland who has investigated gold prices. Coupled with political and economic upheavals and an avalanche of speculative investments, this brought gold from $ 35 an ounce to around $ 800 in 1980.

The rebound peaked, and two decades of weakness followed when central banks sold thousands of tons of gold. By 1999, an ounce cost $ 250.

Then the situation changed, as the market structure changed. European central banks agreed to coordinate sales, stabilizing prices. China allowed more people to own gold, and purchases skyrocketed. Exchange-traded funds (ETFs), which store gold on behalf of investors, also provided an easier way for people to accumulate gold bars.

Between 2003 and 2011, the annual demand for gold increased from around 2,600 tons to more than 4,700 tons, according to the World Gold Council.

The recovery ended when high prices punctured demand. Prices stagnated until last year, when central banks began lowering interest rates, lowering bond yields and making non-performing gold more attractive.

Holding on to gold

The 2008 financial crisis came in the midst of the last great gold recovery, fueling it, rather than starting it.

At the beginning of that crisis, gold prices fell sharply as a broader fall in assets forced investors to raise money by selling what they could.

The same happened when the global spread of the coronavirus caused panic in the market.

In both 2008 and 2020, investors turned to gold in response to massive central bank monetary stimulus that lowered bond yields and increased the risk of inflation that would devalue other assets and currencies.

“Financial repression has returned to an extraordinary scale,” said Bank of America analysts, predicting that interest rates in most large countries will be “equal to or below zero for a very long period of time.”

Some investors say that central banks’ purchase of assets is equivalent to printing money and diluting the value of the dollar, which again increases the attractiveness of gold. Unlike money, “the Fed cannot print gold,” BofA said.

(Graph: gold yields against bonds and the dollar, here)

BUYER FROM CHINA?

During and after 2008, demand increased not only from investors, but also from central banks, which were shifting from sellers to buyers, and from emerging economies such as China, whose consumption soared from just over 200 tons in 2003 to 1,450 tons in 2011.

(Graph: gold demand vs. prices, here)

Now central banks like Russia’s are slashing their purchases as they strive to boost their economies.

Growth in the Chinese and Indian gold markets stagnated almost a decade ago and has collapsed in the face of coronavirus blockades.

The crisis is leaving millions out of work, and a strengthened dollar means gold prices are already at record levels in currencies including the yuan and rupees.

“Disposable income is falling and gold prices are rising,” said Surendra Mehta, secretary of the India Bullion and Jewelers’ Association, and predicted that people would buy less or nothing.

They Can Sell In Thailand this month, people lined up to trade gold for much-needed cash, and analysts at HSBC expect this year’s supply of scrap gold to reach near-record levels.

India’s gold consumption could drop as much as 350 tons in 2020 from around 700 tons last year, according to N. Anantha Padmanaban, chairman of the National Jewelery and Jewelery Council of All India.

Meanwhile, Chinese demand could be as weak as 640 tonnes, down from 950 tonnes in 2019, said Samson Li of consulting firm Refinitiv GFMS, which studies global gold flows.

(Graph: Chinese and Indian gold demand – here)

GET PHYSICAL WITH FINANCIAL

To raise prices, investors will need to compensate for the loss of demand elsewhere.

So far, they have, increasing their arsenal of exchange-traded funds by more than 400 tons this year to more than 3,300 tons, a record amount of about $ 180 billion.

(Chart: Gold ETF Holdings, here)

“The demand for a hedge (against risk) will outpace everything else,” said Peter Grosskopf, CEO of asset managers Sprott, which manages a gold-backed ETF. “There are enough people who are afraid.”

Most analysts still doubt that gold prices will skyrocket.

Even Bank of America, with its target of $ 3,000 an ounce, believes that prices will average $ 2,063 in 2021 before falling below $ 2,000 in the following years.