Gold’s Demand as a Safe Haven Rises in the West But Falls in the East Due to COVID-19: WGC

Trading near a seven-year high, gold is heading for its biggest monthly gain since 2016 as central banks ramp up the stimulus to keep up the economy after being damaged by the coronavirus pandemic.

Gold rallied in 2020 as investors sought safe haven amidst the unprecedented monetary stimulus sparked concern about currency debasement. The bullion is up over 13% YTD compared to Bitcoin’s 25% gains.


Source: Bloomberg

In 2020, the precious metal’s allure as a store of value boosted as evident from the fact that gold ETFs saw their highest quarterly inflows in four years amidst the global uncertainty and financial market volatility, as per the latest report of the World Gold Council.

Total gold investment demand that includes bars, coins, and gold-backed exchange-traded funds (ETFs) all soared, increasing 80% YoY in the first quarter to a high of 3,185t fueled by the COVID-19 pandemic.

The global gold demand in value terms reached $55 billion, the highest since Q2 2013 and climbed to new record highs in Indian rupees and Turkish lira, among other fiat currencies, and to an eight-year high in US dollars.

Diversion between East and West

While the demand for gold rose in the west to the levels last seen after Donald Trump’s election and Brexit vote, the bar, jewelry, and coin consumption in India and China dropped to multi-year lows amidst the coronavirus-led lockdowns at higher prices.

“It was an interesting diversion between East and West,” said Louise Street, a market intelligence manager at the council.

In China, the first quarter saw gold consumption declining 48.2% y/y to 148.63t along with the country’s gold production which was down 10.9% y/y. Secretary-General Zhang Yongtao who also noted the increased prices said,

“Since the outbreak, the country has adopted strict prevention and control measures (and) consumer demand has faced an impact.”

Though difficult to forecast demand due to the virus, gold’s safe haven appeal is “very much prominent,” Street said while gold ETFs in Europe and North America dominated purchases, funds in China and India also saw large increases in buying last quarter.

“Gold demand will continue to feel the effects of Covid-19 for the rest of 2020,” Street said.

“In particular, the divergence between investment in gold-backed ETFs and consumers via jewelry will likely continue until there is greater economic and market certainty.”

Central bank hoarding gold too

Meanwhile, central banks continued to amass gold, which grew by 145t in Q1 amidst heightened volatility and uncertainty, but down 8% from 1Q19. WGC is expecting the global gold reserves to slow sharply.

The most significant purchases were made by the consistent recent buyers, with Turkey by far the biggest buyer during quarter one, accounting for 50% of the Q1 global total. Other central banks viz. UAE, India, Kazakhstan, and Uzbekistan increased their official gold reserves by at least a tonne.

The largest gold buyer since the end of 2005, Russian central bank meanwhile, announced with no explanation that it would suspend its gold buying from April 1st, but it hasn't been completely ruled out. Recently, it drew down reserves to protect its currency in the face of lower oil prices and economic impact of the coronavirus outbreak, pushing their gold’s share of total reserves at 21%.

Total gold supply also fell 4% in Q1 due to coronavirus lockdowns that hit mine production and gold recycling.

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