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Gold to Receive a Boost from COVID-19 Disruption

Wednesday, April 15, 2020

It doesn’t take an economist to see that COVID-19 is the single most disruptive event to have hit the global economy since World War Two.

With over one and a half million people estimated to have contracted the novel coronavirus since late 2019, the decisive measures to lock down whole countries and halt the spread of the virus have done much to protect lives. Even so, the immediate economic impact is likely to be severe. Unsurprisingly, markets have responded.

A sharp sell-off in equities came after weeks of apparent euphoria, despite the mounting evidence of a looming epidemic which was already sweeping through East Asia back in February. Now we find ourselves in April, with the outlook for economic growth downgraded in even the most buoyant of economies.

In the meantime, while equities flounder, 2020 proves to be the year to buy gold, as it outshines other assets.

Bottleneck in gold supply

One of the primary reasons why gold prices have the potential to be elevated in 2020 and beyond is the significant bottleneck in supply that is occurring worldwide. Gold that hasn’t been melted down and remoulded from a pre-existing item will need to be mined and extracted from the earth, something which is highly labour-intensive.

Unlike currencies such as the pound and the US dollar, gold is finite and there’s only so much to go around. Based on the latest estimates, there are 18,000 tonnes of unrecovered gold in the US alone. When you consider how much earth and rock will need to be extracted in order to reach it, it sounds like a small number, considering how thick the Earth’s crust actually is.

With a growing number of countries adopting stringent lockdown measures to contain COVID-19 as effectively as possible - the US included - the world’s untapped supply of gold will have to remain where it is, and we’ll all just have to make do with what little gold we have already.

In Peru, mining activity has virtually ground to a halt, while South African gold producer Harmony Gold has revealed that a three-week lockdown imposed by the Government would result in them being able to produce just 650-700kg of gold, significantly below their usual productive capacity.

Supply is one thing, but what about the demand side of the equation?

Supply grows in atmosphere of fear

The Gold Bullion Company has noted a significant increase in enquiries about investing in physical gold to secure the value of wealth. This suggests to us that demand for gold is unusually elevated. If you were to look at the raw troy ounce price of gold in pound sterling, you would see that, despite its volatility, it has lacked the decisive upward shift expected by some.

Based on our own observations of the gold market, it is highly likely that the initial fall in gold prices during the general market turbulence made complete sense, if you consider just how many investors in the broader market were invested in gold exchanged-traded funds (ETFs). Otherwise known as paper gold, gold ETFs are backed by the real thing but lack the security of having an actual investment to reach out and touch. When the markets sold off sharply in March, many investors conducted a basic fire sale, selling off any assets they could to avoid losing money.

Gold ETFs were one of many investments that bore the brunt of this bonfire of assets, potentially distorting the actual price of gold itself in the process. Now that much of the paper gold has been flushed out of portfolios, the price action in gold markets is likely to start relating more closely to the intrinsic value of gold itself over time. With recent  US jobless claims data suggesting over nine million Americans could be out of work virtually overnight, the fuel is very much there for a significant new gold bull market.

Gold thrives in an atmosphere where job security is low and growth is weak, acting as something of an inversely correlated asset to the stock market. Where shares tumble, gold rises higher and higher.

In 2020, the price is right

Economists present moments such as the 2008 financial crisis as once-in-a-lifetime occurrences, but the last decade has surely taught us to expect the unexpected - not least when it comes to gold. Between 2011–15, gold prices peaked and trended down, leading some to call the end of the great bull market as part of the wider commodity super-cycle. In 2016, markets were astonished to see prices leap over 50 per cent in just a few short months.

The UK voted for Brexit and the US elected Donald Trump to become US President, during an ongoing global slowdown. The gold price started to trail sideways for the next three years as concern subsided, but the seeds of the next bull market were already being sown, and since late 2019, prices have been surging again. In nominal terms, UK gold prices are close to all-time highs, but this could be just the breakout phase. With new highs made, it’s easy to imagine a melt-up taking place, propelling gold to new highs.

When you consider that inflation has been a constant since that original peak in 2011 and that gold prices have only just started hitting new highs again, inflation-adjusted prices remain below that 2011 peak. This means there’s still room for a further rally. A savvy investor sees more than just the raw numbers, when looking to invest in gold. Bear markets in this precious metal often seem long and arduous, but, when it returns to a bull market phase, the gains often unfold at a rapid pace, with prices spiking exponentially.

Remember how gold surged to high after high in the 1970s, taking a decade to peak? And again in the 2000s? When a bull run starts to take off, price levels start to whizz by at a dizzying pace. Who knows what level gold prices could come to rest at when the coronavirus crisis is finally over?

Recession-proof safe haven

Downturns are unfortunate times for many, entailing heightened job insecurity and diminished confidence. In the 1970s, stagflation sapped much of the UK economy’s vitality, prompting a long-running devaluation of the pound. Inflation ate away at savings, and sky-high interest rates crippled any prospect of growth for a time. It was an era without any clear exit - but gold led the way.

The 2008 financial crash was another seemingly endless stream of crises, one after another. First the global financial system was at risk. Two years later, the Eurozone was seemingly on the brink of collapse. By 2016, emerging markets were feeling the pain acutely. Now, as COVID-19 brings the global economy to a standstill, everyone is feeling the pain again, making COVID-19 the ultimate black swan event. And yet out of nowhere, the pandemic has given the impression that there are very few safe havens.

Confirming the suspicion of many, the latest data from IHS Markit suggests that the UK economy contracted sharply in March 2020. If this contraction were to continue into the summer months at such a rate, the UK economy is highly likely to enter a recession for the first time since 2009. The lockdown restricts the movement of people, so consumer spending is stifled. Weak consumer spending leads to lay-offs and wage cuts, or even the collapse of entire businesses. Those finding themselves out of work lose a steady source of income, diminishing their purchasing power, stopping them from spending, and thus the cycle continues.

The current predicament will end eventually but, as with many downturns, as the economy takes a hit, so gold responds inversely. It is highly likely to respond by rallying significantly.

Buy gold from the Gold Bullion Company

Lockdown brings about its own challenges for us as a business. Here at the Gold Bullion Company, we have faced disruption with couriers, which means we are unable to dispatch any orders for the time being. However, what we can do is facilitate orders through our website, with the guarantee of locked-in prices at the time of purchase, as well as speedy dispatch as soon as full service can be resumed.

We provide a top-notch service, having made over 100,000 deliveries over the course of our existence. We hold a rating of 99.6 per cent from over 9,000 customers, and we base transactions on real-time pricing to ensure that you can make a purchase at some of the most competitive rates on the gold markets.

Furthermore, when delivery is finally assured, it is fully insured. As the price of gold climbs to record highs in the coming months, lock in those prices by investing in bullion with the Gold Bullion Company today.

If you would like to learn more about investing in gold with us, call us on 01902 623 259 or contact us here for more information.