Gold Fundamentals: An Update

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Gold Fundamentals: An Update

The World Gold Council was out with its Q1 2020 Global Demand Trends report today, a good reason to do a check in on the yellow metal. First, a performance review to set the stage:

  • +11.0% YTD
  • +30.8% over the last year
  • At $1,700/ounce today, gold is now approaching its all-time highs of $1,900 set in August 2011.
  • The prior highs were in the early 1980s at $850/oz., which works out to $2,660/oz today on an inflation adjusted basis.

The WGC report highlights the following points to frame this year’s move:

  • Global gold demand rose 1% in Q1 2020, to 1,083.8 tons while supply fell by 4% as “lockdowns hit mine production and gold recycling.”
  • Gold exchange traded fund purchases totaled 298 tons in Q1 2020, up dramatically from 40.3 tons in Q1 2019. These products (US and international funds combined) now own 3,185 tons, a new record.
  • Central bank demand was still solid in Q1 at 145 tons, but down 8% year over year.
  • The negative drivers: bar and coin demand (-6% year over year, all due to lower bar demand), jewelry demand (-39%, to a new record low level) and technology manufacturing (-8%, also to a new record low).

The Council offered these insights about current and future fundamentals:

  • China is the world’s largest gold jewelry market; demand was down 65% in Q1 as the country locked down its economy.
  • Central bank gold buying has been an important source of demand in recent years, and that continued in Q1. But, as the WGC notes, “Russia announced that it would suspend its long-term buying program from April, signaling a sharp slowdown in global net buying.”
  • Gold reached record high prices in Indian rupees (an important end market for jewelry) as well as the Turkish lira and other currencies which have weakened against the dollar.

Those are good touchstones to consider gold fundamentals for the rest of the year:

The base load is global ETF demand. This was also the case in 2019: ETFs bought 325 tons last year, which offset declines in jewelry (-133 tons), bar/coin (-223 tons), technology (-8 tons) and lower central bank buying (-6 tons). Worth noting: Q1 2020’s ETF demand of 298 tons is +250% higher than 2019’s quarterly run rate.

The big question: will ETF investors reduce their gold fund purchases if equity markets continue to rally or even merely stabilize? So far, the answer is “No”. Even as global equities rose over the last week, US listed gold fund ETFs saw $1.3 billion of inflows.

The most important source of incremental demand in 2020 will be jewelry. In normal times this is 50% of the end market for gold. Demand here will come down to Chinese and Indian consumer confidence.

Our take: hard to predict, but keep in mind that gold rose 11% in Q1 2020 even with China shut down for much of that period. As the country continues to reopen, Q2 and Q3 demand should improve. Indian demand is harder to call because of local currency weakness. At least there are several months to go before wedding season, the customary seasonal peak for Indian demand.

Gold supply should resume as producing countries reopen, as should recycling. Still, with global jewelry demand likely weak for the next year or two, we doubt production will come roaring back.

The bottom line: the direction of gold prices over the rest of 2020 comes down to continued investment demand (likely to remain strong around the world given fears of non-dollar currency devaluations) combined with a resumption of jewelry production and sales (probably not great, but better than Q1).

To us, that looks like a reasonably bullish setup.


World Gold Council report: