Insights   •   Gold

2020’s Gold Conundrum – the Push and Pull

  • A summary of the “Gold: 2020 Demand Trends & 2021 Market Outlook” webinar, which took place on February 10, 2021 at 11am HKT / SGT
  • Jaspar Crawley, Head of Distribution, APAC at the World Gold Council, explains why, despite falling demand, the price of gold rose by 25% last year.

Last year was, in a word, difficult. The onset of the COVID-19 pandemic ravaged the gold market, causing disruption throughout the year. Despite this, gold was still one of the year’s best-performing assets, finishing the year 25% higher than the end of 2019, as well as hitting a record high in August of US$2,067/oz. Except for the tech-heavy NASDAQ, gold outperformed all other major asset classes, including equities, global treasuries, and commodities.

Dual Nature of Gold

Gold’s dual nature, both as an investment and a consumer good, has long supported its price. Jewellery and technology demand, accounting for 41% annual average demand over the last decade, is positively linked to economic expansion and income growth. Almost the same amount (42%) is driven by investment demand, which responds well during periods of uncertainty and heightened risk. The remainder is usually absorbed by central banks (17%), which responds to both environments.

Push-and-Pull Effect

Inflows into global gold-backed exchange-traded funds (ETFs) reached an annual record of 877t (US$48bn) in 2020, demonstrating the strength of investor demand for gold at times of heightened risk, ultra-low interest rates, and positive price performance. At the end of 2020, global assets under management in these products totalled US$228 billion.

Retail investment in gold bars and coins was a more mixed picture. Some markets, particularly in Asia, showed a preference for profit-taking/liquidation as the pandemic took hold. Western investors, meanwhile, focused more on adding to their safe-haven holdings of gold. Overall, these differing dynamics led to modest growth in the demand for bars and coins, 3% higher y-o-y.

Jewellery demand was severely affected by the pandemic, slumping 34% y-o-y in 2020 and below 1,500 tonnes for the first time.

Central Banks Remained Net Buyers

Central banks were net purchases for the eleventh consecutive year in 2020, however demand was 59% lower than the multi - decade
record levels seen in 2019. Modest net buying was the result of slowing purchases coinciding with a sharp pick-up in sales volumes. 

Production Levels Affected by COVID

It would be remiss not to mention the gold-supply disruption induced by the pandemic. Mine production declined 4% y-o-y in 2020 – the second consecutive annual decline in production – and the first back-to-back annual drop since 1975.

Lower Recycling Levels Overall

When the price of gold rallies, it is common to see holders liquidate some of their jewellery into hard currency. Bearing in mind how sensitive recycling is to sharp changes in the price of gold, the fact the recycling volumes edged up by only 1% was a surprise. There was little evidence of distress selling in 2020 despite the economic impact of the pandemic. 

Demand Should Remain Well-Supported

As COVID-19 continues to compound existing risks and produce new ones, we believe the environment for gold remains attractive. Gold remains appealing as a hedge against inflation – with budgets ballooning and deficit concerns mounting, many see the yellow metal as a sensible addition to a balanced investment portfolio.

Consumer demand – jewellery and retail investment – may also benefit should economic growth recover in 2021, particularly in key markets such as China and India. We also expect central bank buying to continue at a moderate pace, although below the record levels seen in recent years.

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