The gold market, like almost every other, has been shaken by the onslaught of Covid-19. As the scale of the pandemic and its potential economic impact started to emerge, investors sought safe-haven assets and turned to the gold market.

According to the World Gold Council, gold-backed ETFs – funds that allow investors to track the price of gold – attracted huge capital. In total, global holdings in these products increased to a record high of 3,185 tonne,. an increase of 298 tonnes from the previous year, and demand for gold coins increased by 36% year-on-year.

By April, the price of gold had reached seven-year highs, and slowed only in May after promising results from an early coronavirus vaccine trial.

Yet in other areas of the market, the picture was very different. Due to strict lockdowns in almost every country, jewellery fabrication volumes, which typically account for around 55% of total physical demand for gold, recorded severe losses in the first financial quarter, slumping 39% on a year-on-year basis.

Gold demand

“What we have seen is the self-balancing nature of the gold market and gold doing what we expect it should; providing liquidity as a solution to the uncertainty,” says Krishan Gopaul, market intelligence manager at the World Gold Council.

Before the onset of Covid-19, demand for the precious metal had already been strong due to general uncertainty and economic concern. This fuelled investment demand towards the end of 2019; the emergence of the coronavirus just added another layer of uneasiness that drove investors further to the yellow metal.

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“It’s going to stay that way for some time and this will likely feed back into the investment sentiment around gold,” Gopau adds.

However, not all parts of the market are faring well. In China, the largest market for jewellery, the World Gold Council notes demand for retail gold has suffered a 65% year-on year-drop. Similarly, gold purchases in India were heavily impacted by record prices early in the year, before being almost wiped out completely by a lockdown that resulted in a 34% drop from 2019 levels.

Demand for gold in industrial applications was also estimated to be down by 19%, with losses recorded across all the major segments. Financial hardship and concerns over the gloomy economic outlook, combined with higher gold prices, has also encouraged many to sell their existing stocks.

Cameron Alexander, manager of precious metals research at Refinitiv, has suggested gold may remain vulnerable to further losses in the short term, particularly if the Covid-19 crisis continues to worsen in the West, but will be bolstered by stimulus from central banks.

“Due to heightened uncertainty and expectations of the global economic recession, unprecedented levels of stimulus from central banks around the world, and interest rates remaining at historically low levels and in negative territories, we believe that gold will rebound to even higher levels,” he said. “We forecast gold to average $1,637/oz in 2020, with a possibility to test and move beyond $1,800/oz later in the year.”

Overall, the market has been particularly volatile. Refinitiv stats show gold plunged by 12%, or nearly $200, over a ten-day period, from its seven-year high of nearly $1,680/oz on 9 March to a three-month low of $1,470/oz on 19 March.

Impact on supply

Perhaps surprisingly, given the level of mine closures due to the pandemic, World Gold Council statistics show that gold mine production dropped by only 3% in the first financial quarter when compared to the previous year.

“Compared to the scale of the pandemic, I think the 3% so far is actually quite a modest decline,” says Gopaul.

“It goes to show the resilience of gold mining. It also helps that mines are geographically diverse, that has helped minimise the shock of the pandemic,” says Gopaul.

New projects in some regions actually saw increases in output. Mine production in Ecuador jumped 51% compared to the previous year, primarily due to the ongoing ramp-up at Fruta Del Norte, before work was suspended towards the end of March. Burkino Faso and Bulgaria both increased production by 18% year on year, due to the Whagnion project in the former and the Ada Tepe project in the latter.

However, in mid-April S&P Global Market Intelligence data showed that several gold mines had been forced to close in some of the top producing countries. 20mines were shut down in South Africa, 15 in Mexico, 18 in Canada and 8 in Peru. Many have announced extensions to their closures.

Gopaul says it is expected that Covid-19 disruption will likely impact supply into the next quarter.

“But I think it could be a limited thanks to that geographical dispersion and because some restrictions are now being lifted,” he says.

On 19 May, Newmont, the world’s biggest gold producer, announced that, of its 12 operating mines and two joint ventures, 13 sites would be fully operational in the coming weeks. Although the company’s long-term guidance remained unchanged, it noted that the second quarter of 2020 is expected to be the lowest production and highest cost quarter of the year as the sites ramp up.

Mining investment

The volatility in the gold market has presented a mixed picture for mining investment. The VanEck Vectors Gold Miners ETF, a major exchange traded fund that tracks the performance of gold miners globally, fell 38% from the last week of February to a low on 13 March. Yet by early May the ETF was posting higher by 19.1% year-to-date.

Though gold has held its value well during the crisis, it’s not certain that this will translate into more investment for miners and new mining projects. Many miners have already slashed their capex budgets by around $6.4bn, (almost 19%), according to data compiled by Reuters.

Furthermore, it usually takes a sustained period of rising demand to drive gold prices higher and keep them there. But with the lockdown putting many out of work, retail sales, especially in gold buying hotspots such as China and India, are expected to remain low, even if investment in gold-backed ETFs is set to remain strong.

Therefore, it’s not yet clear whether the price of gold is headed for steady highs or will level out in the longer term, all of which will affect investor sentiment and miner’s plans. It takes time and lots of CAPEX to get mines up and running.

“I think the balance sheets of gold miners are still relatively healthy, but I think they are still investing primarily in existing projects. [The future] remains to be seen, though the gold mining space is in a relatively healthy shape compared to some others; despite the coronavirus pandemic, it’s possible we might see more investment going forward,” says Gopaul.

Longer-term outlook

Much will depend on what happens in some of the largest economies: China, India, Europe, and the US.

Emphasising the uncertainty ahead, Qaurum, an interactive gold valuation tool from the World Gold Council, has considered four macroeconomic scenarios informed by Oxford Economics and looked at how gold might perform in those circumstances.

In a V-shape swift recovering scenario, gold’s returns decrease between 2020 and 2022 before turning negative over the following two years. In a deep recession, gold’s strong performance in 2020 is much more long-lived, with robust but decreasing gains through 2023, before turning negative in 2024. In this scenario, gold provides a compounded annual return of approximately 20% over the five-year period.

For now, Gopaul says that while the market has seen some distortions, it has remained strong.

“The gold market has been able to function fairly well; it is one of the few assets that is a true safe haven in this kind of environment of uncertainty, so I feel that’s likely to persist for a while and the momentum we’ve seen will continue purely because we’re not out of the woods yet. Everything is very tentative,” he says.

While this is more than likely to result in elevated gold prices for now, a surge of investment in gold miners and new gold mining projects in the near future is far less certain.