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Episode 39

The 2020 Gold Rush

Published on: August 17, 2020 • Duration: 10 minutes

Roger Hirst and Cameron Alexander, Refinitiv’s Director of Precious Metals, talk about the key drivers of gold and silver. Are the physical or financial markets powering the moves in these commodities? 

  • [00:00:06] Welcome to the Corona Correction Series in association with Refinitiv, I'm your host Roger Hirst. Gold has been one of the biggest consensus trades of the last few months. And although contrarians could argue that the trade is crowded, gold and other precious metals have still not disappointed despite the recent pullback, after gold had surged to a new all time high of over two thousand U.S. dollars. Cameron Alexander, Refinitiv's Director of Precious Metals, summarized the key drivers of gold and silver outlining which markets such as physical or financial were powering the moves in this space. 

    [00:00:39] Yeah look we've seen gold absolutely take off in the last month or two. We've seen gold just in the last, in July, up by some 12% and up 30% for the year, so that's quite extraordinary. You have to go back to when we spoke last in April, you know gold at that time we'd see a bit of a rally on the back of the first of sort of understanding of what the pandemic meant for the world in terms of the financial markets. At that time the US dollar was actually quite strong. And we saw a bit of a rally in the US dollar around that period and sort of in March, April. Since then, we've seen the US dollar come off quite a lot, and losing sort of 8% since that March high. And you know, really now at a two year low. So that's one reason why we're seeing gold prices in sort of the last recent weeks or so really started to accelerate. It really has been a very uncertain time on the economic front. Obviously Covid there has been a big impact right through the financial markets. We've seen the US economy really start to falter, and I think that's one reason why we're seeing a lot of investment demand for gold. You know, we're seeing investors trying to sort of perhaps review what they're holding in terms of that their asset mix. We're seeing a bit more money flow into sort of the safe haven type of safer assets. And gold is obviously one of those. Now, you know, we've seen very strong ETF demand for gold. In the first quarter this year we saw some 300 tons of of of fresh inflows, and the second quarter saw 436 tonnes from our estimates. And so we're taking in total holdings of net ETF holdings now, to well over three thousand six hundred tons. And that's an extraordinary level. Now if we can take this, continue this kind of trend on for the remainder of this year we're certainly going to be at record levels by the end of 2020. So we also obviously mentioning, you know strong ETF flows, but we're also seeing very strong gold futures trading at the moment, and that's supporting the price. There's a lot of interest from investors really just betting on the US economy slowing. And we're going to see a continued weaker US dollar. On the physical markets, we're seeing quite a contrast, actually. On one side we're seeing obviously the Covid impact has been extraordinarily on the second quarter. And look at China. We saw China in the first quarter, they really felt the pain in that first quarter with their fabrication down by more than 40% during that period. But the pain was really felt in most markets in the second quarter. And if we look at jewelry fabrication, for example,  that was down by more than 50% in the second quarter on a global scale on a global level. You know, China, as I said in the first quarter, their jewelry fabrication was down by some 40% cent and they saw a very strong recovery in the second quarter, but they were still down by 19% compared to last year over the same period. Markets like India, for example, were absolutely decimated by the Covid lockdown. And really they would lockdown from end of March right through to right now, they're still in lock down at the moment. So fabrication, you know retailers and fabricators have been shut this almost entire time. So it wouldn't surprise you to hear that, you know, Indian fabrication was down by over 90% in the second quarter. That's quite extraordinary for a market like India, which really just really does revolve around the gold market. Also, we talk about industrial use for gold as well, electronics and those kind of things. Also heavily impacted this year during the Covid lockdown, and also a lack of consumer spending by consumers as they are now very concerned about what the future might hold in terms of employment opportunities and where the economy is going. So we're seeing quite a quite a massive reduction, actually, in the amount of retail spending in most key markets. So that's also having quite an impact on industrial demand for gold, which is down by some 16% in the first half of the year. Bar demand has also been very mixed in several markets. Western markets or the industrialized markets have been very strong. We're seeing incredible demand in the US markets and across Europe. But in Asia it is quite, quite different. We're seeing a lot of profit taking in some of these price sensitive markets. So markets like, you know, Thailand or Indonesia or Singapore, people who bought gold at much cheaper prices are taking advantage of these record gold levels to take profits. We're seeing quite a lot of gold come back into the market. Markets like Thailand or Indonesia, for example, are now net exporters of gold rather than taking bullion in as they would have done in the past. Now in places like China, we've seen obviously a strong equity market, and that's also to a certain extent, pulling away some of that funds, some of those funds that might have moved back into the gold space. So I think if you look at mine supply, I talked about this last time, with the potential that there was concern that we might see a few mines shut down due to Covid. Now that's exactly what we saw. We saw right across the metal space for gold mines, PGMs and also silver production. We saw a lot of mines basically shut down for a period of weeks. I think our numbers suggest it was over 130 mines that were shut down during, at some point over the last three or four months, which is which is having an impact on some metals. One area has been driving the market over the last few years, has been central bank activity. And this year we've seen quite a decline in purchases from some central banks. In the last few years, we've seen, you know, the Russian bank, the Russian Central Bank being very active and in fact, being the largest purchaser of gold. But since April this year they had been absent from the market and had not purchased anything at all, according to IMF data. So with Russia absent and also China not buying at the moment, we expect to see quite a decline this year in central bank activity. But on the flip side of that, we are seeing much stronger investment demand, and so that will be easily offset the decline in the central banking activity. We are in a perfect storm for gold. We're seeing obviously the concerns over Covid. There's a slowdown in the US economy and also other key economies globally. At the same time, we're seeing that weaker US dollar. And on the backburner, we still have the trade tensions with China really just simmering away. And as we get closer to the US election, you know, we're down to, what, ninety three or ninety four days away from the election, we might start to see those tensions with China start to sort of come back to the fore. At the moment, we're expecting to see the current sort of monetary and fiscal policies to remain supportive for gold over the next few months. You know, bond yields and short term interest rates are going to stay very low, on a nominal basis, and negative terms on a real basis. So these really are going to flow into higher gold prices in the coming months in our view. It's also probably worth is touching on silver while we are in the precious metals space. And silver really  has taken off in the last couple of weeks. And if we go back sort of to last year, no, silver really wasn't really the investor's friend at all. I mean, we saw silver really sort of languishing well below gold and we saw that the silver to gold ratio blow out to well over a hundred and twenty five to one, which is sort of unheard of territory, really. And then the silver sort of taking off in that in the last few weeks has seen that ratio, come back down to sort of the 80 level, still well well above the historical levels of around sort of the mid 60s. In a bull market silver tends to outperform, but in bear market, it tends to underperform. So, you know, I think silver investors, you need to be you know, you've got to have a very intestinal fortitude because it is going be a rough ride up and down. And coming from the terms of fabrication demand, we're seeing very strong investment demand. And for coins and bars, we're seeing a shortage of metal in a lot of retail space, particularly in the US and in Europe. If we can't get Covid under control and the pandemic continues to evolve the way it is going, and the economic stimulus package the governments are having to spend, it's going to create, I think a further chance for a weaker dollar. And under those circumstances, gold really can continue to push higher. We've gone so quickly, so fast for gold, and so I wouldn't be surprised if gold prices just pull back a little bit in the short term. I think our expectation is that gold prices will sort of sit around that sort of, you know, 1850 or sort of maybe 2100 hundred dollar level over the next year or so with the potential for a breakout if things worsen through Covid. 

    [00:08:53] The demand for gold has been primarily driven through financial assets such as ETFs and futures, with physical Asian retail demand having been severely impacted by the lockdown. In fact, many in this region were actually selling to take profits as the rally unfolded. Demand for Refinitiv data on gold has picked up in all regions, with the biggest relative increase coming from Asia, especially from Hong Kong and Japan. This regional increase may reflect the activity on both sides of the market that Cameron identifies. For silver, the recent spike may still be in its infancy. Prior to the move, the only user group showing a significant increase in data usage were hedge funds, suggesting that other investors may have lagged the move. Whilst Cameron identifies a weakness in the US dollar as a significant driver of price, the dollar is now relatively oversold, but uncertainty will remain into the US November election. Prior to that, Cameron expects gold to carve out in the 1850 to 2100 dollar range. Though significant upside risks remain if the Corona crisis continues to hold back the global economic recovery. So despite the recent setback, the gold and silver consensus trade should still continue to be a crowd pleaser. We'll see you later with another update. 

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