Gold as an asset class continues to undergo a transformation, and is back to being a key portfolio asset for investors.
A new crisis, a new gold rush. Only this time, one-third of the world’s population is stuck in lockdown. The resulting surge in gold demand, plus the forced shutdown of global supply chains, has fractured the bullion market, causing a dramatic crack in pricing between different forms in different places.
Whatever your own view of gold as a “safe haven”, today’s heavy inflows to gold bullion and related funds simply repeat the pattern of past financial and economic crises. But gold prices were already rising before the coronavirus crisis began, adding 19% last year in US dollar terms and setting new all-time highs for UK and many other investors in September 2019.
The key trends driving those gains have only accelerated as this dreadful virus spreads, led by governments everywhere first tiptoeing, and then rushing to turn what last summer’s inverted yield curve suggested would be an economic slowdown into today’s hit-the-wall depression.
Imposed to stall the outbreak of Covid-19, lockdown is a cataclysm for incomes, jobs and growth. As a result, it has also crushed industrial commodity prices, and now threatens widespread debt defaults and mass bankruptcies. To offset this state-imposed disaster, governments are unleashing massive fiscal spending, funded by record peacetime borrowing, while central banks offer unprecedented support to borrowers and asset prices through potentially limitless money creation.
Hence the very basic, primitive appeal of gold. Unlike a bond or a business, physical bullion cannot miss a payment or go bust. Nor can it be created at will, unlike government debt or currency. These facts give gold a unique safe-haven appeal amid today’s sudden collision of deflation with inflation. Both professional and private investors are buying at the fastest pace since the depths of the 2008-09 equity crash. So, too, are cash savers, drawn by the physical permanence and secure legal title of owning precious metals. That has emptied shops selling coins and small bars around the world.
These so-called retail gold products came into 2020 suffering the weakest demand since before the global financial crisis, dented by the relentless rise of world stock markets (led by the US tech boom 2.0) and also by the metal’s own strong upturn in late 2019, making gold more expensive. Those gains, in fact, saw heavy sales of coins and small bars by existing owners taking profits or getting out near breakeven after buying the top of 2010-2012.
Mints and refineries cannot now re-stock these “retail” products because of their own local lockdowns. Even if they could, reduced air freight and cross-border shipping mean longer lead times with likely delays on top. Altogether this leaves unscrupulous dealers, as well as sellers on auction-sites, able to quote steep premiums for coins and small bars over the value of the bullion they contain. But the market that normally sets that underlying price – the professional spot market of large wholesale bars – has also been fractured by the lockdowns.
Mid-March saw three of Switzerland’s four largest gold refineries announce that they were shutting indefinitely (many of their staff live across the border in Italy). The same day, Boris Johnson put the UK into near-lockdown. The result in New York’s Comex gold futures market was a spike as high as $100 above physical prices per ounce in London, the heart of the bullion world’s storage, trading and transport network, because of fears that metal couldn’t now cross the Atlantic for sellers to make delivery.
Spreads have since eased back, but the gap between London spot at $1,720 and New York’s June Comex future at $1,740 remains at historic levels. Across the world, meanwhile, prices in the consumer giants of China and India have sunk to record discounts, thanks to a collapse in household demand for jewellery. Again, this trend was already in train before the Covid-19 crisis, with last year’s rising spot market deterring Asia’s price-wise buyers. But the current Shanghai discount to London of $50 per ounce shows just how weak demand in the metal’s number one consumer nation has become, creating a glut of supply the wrong side of late-January’s Chinese New Year.
Altogether, these fractures show that, as with any physical good, both form and location really matter to gold prices, and there are, in truth, many different markets all running in parallel. Refiners and air freight are needed to transform and ship metal if traders are to exploit, and so reduce, price differentials as local demand and supply levels change.
More fundamentally, gold as an asset class continues to undergo a very deep transformation, away from the trinket prices of 20 years ago – when the UK joined most of the rest of Europe in selling down its national reserves – and back into a key portfolio asset for both central banks and investors more broadly. That doesn’t mean that gold is guaranteed to rise when other assets fall; many new buyers will have been shocked when prices whipped violently as equities crashed this March. But gold is likely to see continued inflows, supporting and extending its underlying uptrend, as the extent and long-term impact of this latest crisis become clear.
Adrian Ash is director of research at BullionVault, the world's largest online investment gold service.