Golden rewards during an economic downturn

The safe-haven commodity has remained robust during the COVID-19 crisis. Credit: The Perth Mint

Not many commodities are as good as gold when a crisis hits. Vanessa Zhou speaks with the World Gold Council and The Perth Mint about the past, present and future of the precious metal.

The severity of the dwindling global economies that have been impacted by the coronavirus pandemic has put pressure on the development of many mining prospects.

While mining is declared an essential activity by government heads in Australia and overseas, commodity prices can’t escape the bitter taste of global financial decline.

This includes widely used products such as iron ore and copper, along with precious metals such as platinum and silver, according to Deloitte’s ‘Impacts of COVID-19 on the Mining Sector’ report.

One outlier emerges from the corresponding price drops: gold. This is another indication of the commodity’s established strength as a safe haven asset during troubled times and market duress, World Gold Council (WGC)’s director of member and market relations, John Mulligan, says.

“Gold has performed well during this difficult period and been fairly robust, in sharp contrast to many other asset classes that have struggled, with their values plummeting in the wake of COVID-19 shutdowns,” he tells Australian Mining.  

“Year to date, we’ve seen the gold price rise around 10 per cent in US Dollar terms, but local gold prices, particularly in producer nations, have been far stronger, breaking records in many cases.

“At the time of writing, gold had risen 24 per cent in Australian dollars since the beginning of the year.”

The robustness of gold defies around two weeks of panic selling that heralded the global slowdown, according to The Perth Mint chief executive Richard Hayes.

The Perth Mint chief executive, Richard Hayes. Credit: The Perth Mint

 

Gold exchange-traded funds (ETF) were one of the assets that acted as investor means to meet their margin calls, Hayes adds.

“The wholesale markets overseas have seen quite heavy selling from time to time, but we’ve seen a lot of that tailing off. A lot of that (panic selling) has walked itself out of the system,” he says.

Mulligan shares the same view, stating that the WGC has seen a “very strong investment demand” for gold, particularly from professional and institutional investors.

In March alone, the WGC saw net inflows into gold ETFs of 151 tonnes, valued at $US8.1 billion ($12.8 billion), boosting global assets under management for these products to a new all-time high of 3185 tonnes.

Similarly, The Perth Mint observes a definite increase in demand for its depository and minted products from Australian buyers. Although Australia is not a big market for retail demand, the spike is undeniable.

“Most of our depository and minted products are purchased by people who buy and hold,” Hayes says.

“We didn’t see much panic selling among our Australian and overseas clients in that sense.”

What’s more, The Perth Mint’s online products for gold have increased by 22 per cent, a trend that is congruently seen across the board over the first three months of 2020.

Commenting on the rising demand for gold in Australia, Mulligan says: “We recognise local investor interest in the country has been growing lately and has significant potential to grow further.”

In fact, Hayes considers gold’s role as a safe haven asset to be more cemented and mainstream today than it’s ever been in the last 100 years.

“If you look at the big upheavals of the 20th century such as World War II, those who were able to survive and prosper in Europe afterwards were those who have held gold,” he says.

“You look at the 1970s when Vietnam collapsed – all those Vietnamese who were able to emigrate to Australia, the United States and Canada were those who took their gold with them and used them to re-establish themselves in the west.

“You look at the Asian Financial Crisis of the late 1990s and the Global Financial Crisis (GFC) of 2008/2009 – what’s the common theme across all those? It’s been where people used gold as a great insurance policy against periods of economic upheaval and political turmoil.”

In the months and years ahead, gold prices are still biased towards the upside. Even more so given the devastating damage that coronavirus inflicted on the world’s economies.

Bank of America analysts have even raised their gold price prediction to $US3000 ($4751) an ounce by 2022, up from its previous 18-month target of $US2000.

The strength of gold as an asset is proven by its advantage over global reserve currencies such as the US Dollar, Euro and Pound Sterling. When the currencies failed to fulfil the role of a global currency reserve during the GFC, gold did.

“Had the US economy been much weaker prior to COVID-19, you’d see a much higher gold price right now, because gold would have started to fill its prior role as a global reserve currency to a degree,” Hayes says.

Looking ahead, demand for gold products looks buoyant. Mulligan predicts there will be some pent-up demand as key physical gold markets reopen and consumer confidence returns.

Gold will also play a role as an asset as global economies get back on their feet and recover from the corrosive impacts of the pandemic.

“One thing everybody will learn is, nobody learns from history. Everyone forgets what happened. When another catastrophe occurs, people start piling gold and sell them when it’s over. The cycle continues,” Hayes concludes.

“Those who have kept gold consistently throughout those times have prospered. Not always, but there’s an underlying theme.”

This article will appear in the June edition of Australian Mining.

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