Gold among 2020`s best-performing assets
Wednesday, January 13, 2021 - 10:00:51 PM
Mining Weekly

While the ultralow interest rate environment drove inflows in January and February 2020, the global spread and severity of the Covid-19 pandemic from March onwards boosted interest in gold, the council states.

The heightened risk environment, fiscal and monetary responses to the economic impact of the pandemic, and gold price momentum continued to drive inflows well into the second half of the year, though the pace of inflows slowed after the gold price hit a new record high – above $2 000/oz in early August – before reverting to the $1 900/oz level.

The strength in demand for gold ETFs was further underscored when compared against other forms of physical gold investment. The WGC says that, in response to the pandemic, demand for bars and coins was mixed, leading to strength in western markets and weakness in eastern markets before recovering in the third quarter.

As a result, over the first three quarters of 2020, gold ETFs accounted for almost two-thirds of total investment demand.

“This is significantly higher than any previous full year. Gold ETF demand was also equivalent to a quarter of the average [yearly] gold mine production over the past five years.”

However, as investors reduced hedges and increased risk-asset exposure amid positive sentiment following the US election and the announcement of successful Covid-19 vaccines, there were sizeable outflows of 109 t in November, and while outflows continued into December, they slowed considerably and were modest by comparison, at 40 t.

In contrast to the first three quarters of 2020, which saw a cumulative 1 007 t added to global assets under management (AUM), the fourth quarter had net outflows of 130 t.

Overall, the gold price increased by 25% during 2020, hitting a historical high of $2 067.15/oz on August 6.

Despite dropping 12% in March, when markets were rocked by the onset of the Covid-19 pandemic, gold recovered to finish the year among the best-performing assets, despite many stock indices reaching or surpassing all-time highs.

The council notes that gold’s volatility during the year was also higher, with annualised volatility at 20%, the highest level since 2013 and significantly above the longer-term average of around 16%.

However, the increase in gold’s volatility should be viewed in the context of the volatility of all assets, the WGC advises, pointing out that most assets experienced greater volatility last year.

Gold trading volumes also increased, with the 2020 daily volume average of $182.7-billion being significantly above the 2019 average of $145.7-billion.

“Even gold’s lowest trading volumes for the year – which occurred during April or the relatively muted December – were still quite robust, trading on average $139.9-billion and $143.2-billion, respectively.”

Net long positioning of Comex gold futures fell to an yearly low of 716 t in November but recovered to 816 t by year-end, which the WGC says was the highest level since September, below the yearly average of 873 t, “but significantly above the long-term ten-year average of 529 t”.

“Generally speaking, net longs were higher throughout the year because of positive price momentum, which attracted investors and speculators.

"We believe net longs did not finish the year at or above the all-time highs of 1 209 t, which were seen earlier in the year, because the dislocation of the Comex futures market from the over-the-counter (OTC) market, which occurred in March, made it more expensive to hold futures compared to other choices like OTC and gold ETFs. Many investors likely migrated futures into OTC or gold ETFs, or likely shifted out of the gold market altogether.”

For this year, the WGC forecasts that many of the same drivers of gold demand, such as lower rates and improved opportunity costs, fiscal stimulus, lofty stock valuations, and the economic effects of Covid-19, are likely to continue.


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