Gold Demand Fundamentals In 2020

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Gold Demand Fundamentals In 2020

Gold has certainly been a good portfolio diversifier so far into 2020:

  • It is doing better than global equities YTD, up 3.8% through today.
  • Gold’s price correlation to the S&P 500 over the last 30 days is -0.48, zigging when equities zag.
  • The yellow metal is up 1.3% since January 17th, the starting point for investor concerns regarding the Wuhan coronavirus.

All that certainly feels like a follow through from 2019’s trends, which saw gold prices rise by 18.4% in dollar terms, but here’s the funny thing: this performance came with a 1% DECLINE in global gold demand. That data is from the World Gold Council’s annual trend demand report, and it highlights several important facts about who is buying gold and for what purpose.

4 takeaways from the WGC report:

#1: Exchange traded funds and similar products were the chief source of incremental demand last year. Holdings here grew by 16% (401 tons) to 2,886 tons and currently sit at all time records. Most of these inflows came in Q3 as gold prices broke out with suddenly increasing amounts of negative-yielding global debt.

Worth noting: our ETF source shows 2020 US listed gold ETF inflows at +$1.4 billion YTD, well above the 1-year average run rate of $755 million/month.

#2: Central bank gold buying was down slightly in 2019 (-0.9%) but remains near 10-year highs at +600 tons last year. Why do central banks like those in Russia and China buy gold when they are in charge of maintaining a fiat currency system? Because it is a way of gaining US dollar exposure (gold is priced in greenbacks globally) without helping the American government fund its ever-growing budget deficit. Gold is also a hedge against their local currency, of course.

#3: The shortfalls in 2019 gold demand came from reduced purchases of jewelry (-133 tons versus 2018) and bar/coin demand (-223 tons lower). According to the WGC, that was 80% due to the Chinese and Indian end markets. Higher prices and weaker local economies “were the main culprits”.

#4: Total gold supply was up 2% in 2019, to 4,776 tons. Most of that came from an 11% increase in gold recycling on the back of higher prices. Global mine output was actually slightly down last year to 3,464 tons, the first decline in over a decade.

As for what all this means for gold prices in 2020, 3 points in conclusion:

  • Global ETF demand will continue to drive prices. The Chinese economy is stalled at present, and India continues to slow. It will be up to financial market investors to pick up the slack of lower jewelry/coin/bar demand. Given macro uncertainty at present (and ever-lower sovereign debt yields), it is reasonable to expect that they will.
  • Chinese central bank buying was important last year (+50% of total CB purchases), but the phase 1 trade deal and more recent health crisis may put them on hold in 2020.
  • Building on the political discussion in our “Markets” section, gold does offer some hedging protection in the case of a progressive Democratic nominee winning the White House. In a way, this is a version of Ray Dalio’s case for the yellow metal, underpinned as it is on monetary stimulus and central bank debt monetization. See the link below for his thoughts.

Summing up: as always, we recommend a 3-5% weighting in gold for diversified portfolios.


World Gold Council report:

Chinese Central Bank gold purchases:

Ray Dalio on gold: