As the total number of COVID-19 cases worldwide hit one and a half million this week, it’s important to take stock of what it has done to the markets in the space of a single month.
While some may look to the slight dip in gold prices as a sign that no asset is safe, during this time of COVID-19 panic, there’s more to this yellow metal than meets the eye. The fundamentals for the gold market are stronger than you think, and prices could actually rise significantly in the coming months.
As stocks lose value and sit at depressed levels and bonds remain a crowded market, gold remains a competitive asset, with prices looking ripe for an imminent bull market phase.
Supply constrained by lockdown
Unlike fiat currency, which can be printed into existence, or bonds, which carry diminishing rates of return as they become more crowded assets markets, there’s only so much gold in the world. Those who wish to buy gold might already be aware that there is so little of it in the world that you could melt it all down and mould it into a cube that would fit under the Eiffel Tower.
It all has to come from somewhere – if it’s not melted down and recycled from existing gold items, you need to dig deep into the Earth’s crust to find more of it. It’s estimated that the US has 18,000 tonnes still undiscovered.
Even so, the world’s untapped supply of gold will have to remain undisturbed for now, as the people who drill for it are under lockdown – more than a third of the world’s population is currently required to stay home and reduce all forms of interaction where possible.
A significant amount of mining activity in Peru has been suspended, while South African gold producer Harmony Gold has admitted that a 21-day lockdown in the country would result in limited gold production. The company estimated that they would be able to produce a maximum of 650-700kg of gold at present if lockdown measures remain in place, far below their usual productive capacity.
But why does constrained supply of gold matter? That’s because demand is outstripping supply at present, and has the potential to push prices higher.
Demand for physical gold soars
Here at UK Bullion, we have seen a marked increase in demand for physical gold as an investment. We say physical gold in comparison to its alternative, gold exchange-traded funds (ETFs), otherwise known as paper gold. By sheer price action alone, you may have seen gold remaining volatile, but lacking that decisive upward move we’ve all been expecting.
The theory doing the rounds in the gold markets is that those with portfolios heavily invested in stocks held on to paper gold assets backed by gold, but then sold them off when stocks began to suffer. Paper gold flooded the markets, temporarily pushing the price down and masking gold’s intrinsic value for a short time. All the while, anyone with a bit of actual investment gold is well positioned, in the highly likely event of a significant price rally.
Gold traditionally shines through during times of crisis and turmoil. The US joblessness claims spiking from 200,000 to three million in the space of a week before spiking again to six million the week thereafter is a clear signal that the world’s largest economy is in a downturn. It will take many months before a recession is actually confirmed, but some of the more real time stats confirm that safe havens are a good bet for now.
When the credit crunch was unfolding in 2008, UK investors were paying just under £500 per troy ounce for gold. By the time the last gold bull run ended in 2011, prices had rallied to £1,182 per troy ounce. Few assets delivered an effective doubling in value in such a short period of time, but gold managed to do just that.
Ideal price for investors to jump in
The past year or so has been the ideal time for investors to jump back in to physical gold, reminiscent of 2008. For up to three years following the EU referendum result in mid-2016, gold rested at roughly £950 per troy ounce. Prices trended sideways for a time, but prices have exploded since the summer of 2019, knocking out the 2011 peak to new all-time highs.
Despite these increases, prices today are now barely above that 2011 peak, and the long-term momentum behind gold suggests that supply will remain weak but demand will be high. In this environment, there is tremendous upside pressure on gold, and any dips that occur in the short term could constitute simply unmissable buying opportunities.
Furthermore, when you consider that inflation has been continuous over the last few years, running over the two per cent target set out by the Bank of England, gold prices barely above their 2011 level means that gold is yet to actually surpass that peak in inflation-adjusted terms. A new price rally to fresh highs in nominal terms will need to be fast and move decisively to the upside, in order to be considered a true continuation of a secular bull market in gold.
A true investor sees the value in not just the short-term price gains, but also sees the bigger picture. Consider the fact that gold has been on an exponential uptrend since the early 1970s. If gold is on the verge of a new bull run comparable with that seen in the 1970s or even the 2000s, expect to see gold prices many times those seen at present. It’s all just a matter of timing, and having sufficient patience to see a gold bull market the whole way through.
Severe economic dislocation
Gold has been a fantastic hedge against most crises in the past half-century. The stagflationary era of the 1970s was marked by weak currencies, including the pound and the US dollar. The end of the Bretton Woods system that had prevailed since the 1940s marked a significant sea-change in the way currencies interacted, as the gold standard withered away.
It’s better to view gold as an inverse measurement of the debasement of a currency, as gold typically experiences significant price rallies during times of profound currency devaluation. In 1976, when the UK famously went to the IMF for a bailout loan, gold was skyrocketing. Fast-forward 40 years and the UK was voting to leave the EU, resulting in yet another crash in the pound, pushing gold 50 per cent higher in just over 18 months.
COVID-19 is the perfect example of a black swan event: there was little to no signal in the markets that such a shock was on its way, and markets remained unaware of the full havoc it would wreak until it was too late. Cue a sharp sell-off in equities by early March when lockdowns began to be enforced. Gold was initially jostled by the market turbulence. When a real crisis hits and investors’ fears are at their highest, , everything is sold: equities, ETFs, gold, oil, copper and other assets.
But when the market has been allowed to digest the shock to some extent and the economy has taken a downward turn, equities remain weak, but gold is able to rally significantly. Based on data compiled by IHS Markit, the UK economy started contracting in the first quarter of 2020. By the middle of the year, if this contraction continues unabated, the UK will be in its first recession since 2009.
Recessions are a manifestation of low confidence in the macroeconomy.
Consumer spending is weak, because wages aren’t rising so fast. Wages aren’t rising so quickly because businesses have less cash flow, and there’s less cash flow because consumer spending is weak. And so the cycle continues. Recessions and downturns will, in time, moderate, and eventually end – but in the meantime, gold can be expected to enjoy a significant price rally, if past recessions are to be taken as an accurate roadmap for the year ahead.
Buy gold at UK Bullion
Despite the turbulence that has hit the UK in recent weeks, which has brought the economy to a virtual standstill, all of us here at UK Bullion are pleased to say that we continue to function as normal. We offer attractive gold investments to willing buyers who are eager to preserve their wealth.
Gold is the ultimate hedge against precisely these types of crises, because gold is a tried and tested safe haven which appreciates value in times of difficulty and maintains its value at a new higher level when certainty is restored. Certainty will prevail eventually in the markets, but when it does, gold will have been revalued as significantly higher, making it clear retrospectively which portfolios were best positioned to weather the storm.
If you wish to make enquiries about buying gold as an investment, don’t hesitate to get in touch with UK Bullion by calling us on 0800 090 3256 or contacting us here.
Please note that, due to disruption with couriers, we are unable to dispatch items immediately. By making a purchase today, rest assured that your order will lock in the price you originally paid for the item, and it will be conveyed to you as soon as disruption is over.