The flight to gold

Adelina Toader, Emilia Olescu (Translated by Cosmin Ghidoveanu)
English Section / 04 mai 2020

The flight to gold

Dochia: "If stock market prices rise for two or three weeks, then the rise of gold will slow down"

Mitroi: "It's no longer the time to invest in gold, except extremely selectively and with very low amounts"

Codirlaşu: "The Fed can't print gold, and so it can and will remain a safe haven in the future"

Just like in any economic crisis, in this pandemic period which foreshadows a recession, investors are very careful when it comes to the assets that they are put their money into. And this time, gold is among the winners, even though nobody knows how the looming crisis will end.

Gold prices have been very volatile lately, with significant jumps and sudden drops alike.

Experts reiterate that gold is a safe haven asset in times of economic panic. Financial analyst Aurelian Dochia explained to us: "Gold has always been the main safe haven currency, just as is happening now. It's just that there are various phases of the crisis and of investors, which are often subjective. All of us see the same things, but we interpret them differently". According to Mr. Dochia, the real trend of rising gold prices is clear and has been obvious for a long time, not just in the last two months. The trend of positive evolution of the yellow metal price will continue, although from week to week we could witness some price drops. "We also noticed that the stock markets had moments of surprising optimism, and if they behave like this, obviously gold will no longer be very attractive, because it is a passive investment. Real investors prefer to go to the capital markets, where the risk is higher, but so are the profits. Therefore, I think that if the stock prices rise for two or three weeks, then the rise of gold will be hampered, but the long-term trend, for example over the next three years, will be upwards". Aurelian Dochia is of the opinion that when there are significant movements in a large market, major players, such as central banks, are often behind them.

His claim comes as lately, there have been significant interventions on the gold markets, with the central banks of Russia and China buying large volumes of gold.

Codirlaşu: "Central banks have printed unprecedented amounts of money to fight this crisis"

Generally, gold price is very volatile, and in times of financial crisis or in times of high risk aversion investors buy gold, causing its price to go up, says Adrian Codirlaşu, the president of CFA Romania. "Central banks have printed unprecedented amounts of money to fight this crisis, the major ones have done so like never before. And amid large volumes of money, rare assets will be in demand, and gold is a rare asset. The Fed can't print gold, and so gold can continue to be a safe haven in the future, given how much money has been printed. So the trend that the price of gold will have in the long run, will be upwards, but amid a high volatility, depending on the risk episodes. When risk is on, gold price falls, when risk is off, the price goes up, but with an overall upward trend, following the extremely high liquidity in the market globally. Also, since central banks have injected a lot of liquidity in the market, investors have bought stocks, as they expect that the crisis will probably end in about six months".

According to Mr. Codirlaşu, bitcoin is also a rare asset, which is very volatile, and at the end of last week one such cryptocurrency had risen above 8,000 dollars.

Mitroi: "Gold is no longer an asset to speculate in"

People feel that we will escape the current drama quickly, risk a lot of capital and lose a lot, and after the crisis the poor start to lose even more, because they think they are buying opportunities and they either buy in too early or too late, Adrian Mitroi, professor of behavioral finance explained. "What distinguishes the poor from the rich? Poverty means you don't have a very good risk management strategy. We also have to watch the system. After the crisis, a lot of capital is lost, and during the crisis the loss of capital is a pandemic. The same happened with gold, which is already priced very high. The flood of money in the world markets imposed by the central banks, which comes from the "enter" button - which allows digitally printing money - gives the feeling that the price of risk is very low. And then, people see gold as the only refuge from future inflation (which won't happen, because wages are no longer rising, and then we no longer have the number one argument in favor of inflation happening). The instant fear causing people to run to an asset to protect them from inflation was unjustified. It made sense in the days leading up to the correction, but the bidding up of the gold price has caused small investors to lose a lot of money. The price of gold has entered a new range".

Adrian Mitroi stresses that the fundamental concepts we used to know don't necessarily work, as a lot of money is being lost during this period, given that the extreme volatility of the market is only apparent, influenced by the very low price of apparent risk induced by central banks, when in reality the price of risk is much higher. "People tend to ignore the fact that the price of risk is higher than it seems. So gold is now certainly no longer an asset to be speculated on, as it was immediately after the crisis. It has joined the area of financial assets such as the stock market, equity, oil and currencies, it has entered an area of normalcy, where it is almost impossible to make money, but it is very easy to lose it. My opinion is that now is not the time to buy, and buying should only be done very carefully and with very little capital, because if you lose, you seriously harm your capital. It is now very risky to speculate, because the risk seems very low, amid high liquidity, but it is in fact extremely high due to the implicit volatility of the markets and the obvious interference of politicians, who couldn't keep away during this crisis.

Gold no longer has major growth potential, says Adrian Mitroi: "Those who owned gold have already sold, and most of us were afraid, in the first stage, of the side-effect of excessive liquidity, which we thought would be inflation or currency devaluation. Neither of those has happened, we will have low inflation for a long time, with a drastic economic decline and with very large budget deficits, because we no longer have upwards pressure on wages and the pressure of commodity prices.

As a conclusion, the middle class remains up the creek, because we do not have well-established risk management rules, which should prevent us from leaping blindly while also preventing us from constantly sitting on the sidelines. We have to anticipate what politicians are doing, and to adjust our positions based on what they and the central banks are doing. Those elements are very important in the current economic equation".

World Gold Council: "In the first quarter, the price of gold rose by 6%, expressed in US dollars, and at the end of April, the rise was 13%"

This year, there is one aspect that dominates all the others, namely the coronavirus with all its consequences, the representatives of the World Gold Council stressed in a video conference on Friday. According to them, the spread of the virus and the economic and social deadlocks it caused have influenced the gold sectors differently. The most significant impact, especially if we take into account what influenced gold prices in Q1 2020, was on investment demand. According to the Council, they have lately noted substantial levels of institutional and professional investing and related flows from them.

"We've been seeing a high and rising price of gold since the second half of 2019, and that has led to increased interest in gold-based products. Starting with February, Covid-19 made its presence felt and came to dominate the market sentiment, attracting significant flows to products that exploit the perceived safe-haven nature of gold. The phenomenon has also taken place together along with an increased volatility in every other financial asset", representatives of the World Gold Council said. "During the first three months, the price of gold rose by 6%, expressed in US dollars, and at the end of April, that rise was 13%. This is a very strong performance compared to other important assets, but this does not mean that as a result, gold has been devoid of volatility. We saw a significant drop in the price in mid-March, when almost all the gains it had made since the beginning of the year were lost, but the price recovered after just a few days".

Driven by investment, gold demand reached 1083.8 tons in the first quarter of the year

The global COVID-19 pandemic has fueled the demand for gold, offsetting a sharp weakness in consumer-oriented market sectors.

According to the World Gold Council, total demand for gold in the first quarter rose marginally to 1083.8 tonnes, up 1% from the same period last year. The outbreak of coronavirus, which swept the globe in the first quarter, was the main factor behind the demand for gold. As the scale of the pandemic - and the potential economic impact it caused - began to take shape, investors sought safe haven assets. Gold ETFs attracted huge inflows of 298 tons, which pushed the overall holdings of these products to a new record high of 3185 tons.

Total investment in gold bullion and coins fell to 241.6 tons (- 6%), as a 19% decrease in the demand for bullion (down to 150.4 tons) led to a sharp increase in the demand for gold coins (+36% to 76.9 tons), amid a search for safety by Western retail investors. Surprisingly, demand for jewelry has been particularly affected by the effects of the outbreak; quarterly demand fell 39%, to a record level of 325.8 tons.

Technological demand also fell to a new level of 73.4 tons (-8%). Central banks continued to buy gold in significant quantities, although at a slower pace than in the first quarter of 2019: net purchases reached 145 tons (-8%). The virus also caused disruptions in the supply of gold: mining production has fallen to a five-year low of 795.8 tons (-3%).

Gold ETFs recorded the largest quarterly inflows in four years, amid global uncertainty and financial market volatility. Exploitation of these products reached a record level of 3185 tons by the end of the first quarter, according to the World Gold Council report.

These investment inflows have helped push the price of gold to an eight-year high. As a result, global demand for gold in terms of value reached 55 billion US Dollars - the highest since Q2 2013. The price also reached record highs in Indian rupees, Turkish lira and RON, among others.

The pandemic crushed the demand for jewelry as governments around the world imposed emergency measures. The demand thus recorded the lowest record, due to a 65% decrease in China - the largest consumer of jewelry and the first market affected by the outbreak, according to the quoted source.

Central banks continued to accumulate gold, although net purchases are expected to slow abruptly. Against the background of increased volatility and uncertainty, global gold reserves increased by 145 tons in the first quarter. But Russia has announced it will suspend its long-term buying program in April, which foreshadows a sharp slowdown in global net purchases.

Total supply in Q1 decreased 4% as border closures caused by the coronavirus affected mining output and gold recycling. Many projects halted operations in an attempt to stop the spread of the virus.

In addition, the effects of the pandemic on global aviation also disrupted large gold transfers and created geographic price discrepancies. Ingots are normally transported via passenger planes, but as the airlines have kept their planes grounded, there are more disagreements over the logistics of transporting gold bullion. In part, this is what has created the difference between the price of gold futures in New York and the spot price in London. According to Zerohedge analysts, this difference persists because arbitrators do not have sufficient access to funding while demand in New York remains high.

Also, on March 23rd, three gold factories in Switzerland temporarily closed due to the coronavirus pandemic, after local authorities ordered the closure of a non-essential industry to reduce the spread of the coronavirus, according to Reuters.

Bank of America: "The Fed can't print gold"

Unlike any other asset, the Fed cannot print gold, so its price continues to rise given the growing demand for gold, according to Zerohedge.

Bank of America recently announced that while "the balance sheet size of major central banks has been stable at 21-28% of GDP over the past decade, as has the price of gold," things are changing rapidly and "as central banks and governments doubles their balance sheets and fiscal deficits, we are raising our target from 2000 to 3000 dollars / ounce. "

The bank warned that "a strong dollar, declining equity market volatility and weak demand for jewelry in India and China may remain at the forefront". In addition, Bank of America also reported that gold is "the last store of value."

According to Zerohedge analysts, as a safe haven asset, the evolution of the price of gold has been favorable over the last 15 months, seeing a 12% rise since the Fed implemented the new monetary policy in January 2019. More recently, the gains have far exceeded those of other major asset classes last year. Only long-term bonds and high-tech stocks have provided comparable performance.

Of course, the yellow metal did not have a smooth ride; according to the analyzed data, it has seen ongoing volatility.

In fact, the Financial Times reported that there is an absence of physical gold in the market, also reported by traders who complain of a growing global shortage of gold bars, as the outbreak of the pandemic of coronavirus disrupted both demand and stocks.

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