The coronavirus global pandemic has left investors around the world clamoring for the safety of their haven assets amid the recent market volatility. The U.S. dollar has been dominating the global foreign exchange market. However, gold is outperforming against the greenback.
Despite the existence of a systematic banking system financial crisis because of coronavirus, gold still does well. This is because the precious metal is outside of the conventional fiat currency fractional reserve banking system. In fact, even a global debt deflation will not hamper the power of gold.
Gold Demand
Investors see the self-balancing nature of the precious metal market and gold doing what they expected it must, offering liquidity as a solution to uncertainties. Before the Covid-19 onset, demand for precious metals had been strong because of the general uncertainty and economic concern. Such fueled-investment demand towards the end of last year and the emergence of the deadly virus only added a layer of uneasiness that drove investors further to gold. Investors expect this trend to stay for some time, though not all market sectors are faring well.
According to the World Gold Council, demand for retail gold in China, the biggest market for jewelry, has suffered more than 60% year-on-year-drop. Also, gold purchases in India were greatly affected by record prices early in the year, before being nearly wiped out fully by a lockdown that led to a 34% drop from last year’s levels. Moreover, the demand for gold in industrial applications was also down by 19%, with major segments reportedly experiencing losses.
Effects on Supply
As gold is often shipped on commercial flights, it has been in short supply as such flights are curtailed recently. Also, mine closures have caused the gold mine production to decline by 3% in the first quarter when compared to the previous year. In mid-April, many gold mines had been forced to shut down their operations in some of the top-producing countries including South Africa (20 mines), Canada (18), Mexico (15), and Peru (8). A lot of these mines announced extensions of their closures.
Longer-Term Outlook
A lot will depend on what occurs in some of the biggest economies such as the U. S., China, India, and Europe. But, analysts say that despite market distortions, the gold market has remained strong. Gold is one of the few assets that is a safe haven in this type of environment of uncertainty. It is seen to persist for a while.
