Less shiny gold market

THE Covid-19 pandemic, which resulted in unprecedented measures such the movement control orders, has impacted livelihood, business and financial markets severely.

Gold is no exception. It has been on a pandemic-driven roller-coaster ride since 2020.

With such turmoil in the markets, the precious metal spent much of its time in its traditional role as a hedge against uncertainty.

The pandemic saw gold reaching new heights as investors sought refuge from the financial fallout.

But it is not just the risk and uncertainty from this pandemic that boosted demand.

The cheap interest rates – which help reduce the opportunity cost of holding gold over competing assets such as bonds and fiat currencies – and fiscal expansion caused investment flows to be higher.

Driven by the two factors – the pandemic and ultra-low interest rates – the demand for gold-backed exchange-traded funds (ETFs) in 2020 surged to a record 877 tonnes, an equivalent of US$48bil (RM203bil).

And the magnitude of the flows contributed to the gold price skyrocketing throughout the first three quarters of 2020, reaching a historic high of US$2,067.15 (RM8,755.41) per ounce in August.

For the full year, gold surged 24.1% to reach an average of US$1,772 (RM7,505) per ounce (oz).

Meanwhile, the rising gold price posed serious problems too.

In particular, the global jewellery demand in 2020 has weakened.

Due to various movement restrictions introduced across the globe at the end of the first quarter of 2020, retail markets had shut and this, coupled with consumers being more frugal in times of uncertainty, contributed to the overall decline in annual demand by 14% to 3,759.6 tonnes in 2020.

Accordingly, global gold supply also took a hit.

It dropped by 4% year-on-year or y-o-y (4,633 tonnes), the largest annual fall since 2013.

The drop can be largely related to the pandemic-related disruption in mine production, albeit offset by a marginal 1% increase in recycling to 1,297.4 tonnes for 2020.

Difficult to remain bullish

However, golds performance has been less than stellar at the start of 2021. It started the year at US$1,898 (RM8,039) per oz and is now at US$1,753 (RM7,425) per oz (as of yesterday). Its year-to-date performance showed that the metal has lost 7.6%.

With the pandemics gradual easing together with the rollout of vaccination programmes worldwide, financial markets are poised for growth again and as a result, gold stumbled to its worst start to the year in almost a decade.

Also, it is difficult to remain bullish on the precious metal, given the hawkish outlook for the US monetary policy.

The US Federal Reserve is expected to dial back monetary easing and slow its stimulus efforts as the economy recovers from the pandemic.

Also, real yields will “go less negative” and that means more downside for gold.

When real yields rise, gold prices fall and vice versa.

In such a scenario, the opportunity cost of holding gold, a non-yielding asset, is higher as investors are foregoing interest that would be otherwise earned in yielding assets.

We can expect outflows from the gold ETFs and futures markets.

A stronger US dollar, combined with a gradual increase in US 10-year real yields, suggests that gold prices should trend lower.

The gold prices and greenback have an inverse relationship.

As the dollar gets stronger against other currencies, gold prices will soften as the precious metal becomes more expensive in other currencies, driving down demand.

After such record-breaking highs and with the global economy finding its feet again, the correction seemed somewhat inevitable.

Gold is likely to fall to around US$1,680-US$1,720/oz (RM7,116-RM7,285/oz by the end of 2021 and US$1,600–US$1,650/oz (RM6,777-RM6,989/oz) by mid-2022.