Gold investment demand to offset weak consumption in 2020: WGC

NEW DELHI: With investors looking at safer assets amid the COVID-19 pandemic, investment in gold is likely to make up for the fall in consumption demand for the precious metal, as per a report by the World Gold Council (WGC).

The report titled ‘Gold Mid-Year Outlook 2020’ noted that in the current global economic environment, three factors are supportive of investment demand for gold — high risk and uncertainty, low opportunity cost and positive price momentum.

An economic contraction is likely to result in lower demand for gold in the form of jewellery, technology or long-term savings, it said, adding that this is particularly evident in key gold markets such as China and India.

“Investment demand during periods of financial stress has offset weakness in consumer demand and we believe that 2020 will be no exception. However, gold’s performance may depend on the speed and shape of the recovery,” the report said.

In terms of India, the report said that in the second half of the year, the consumer demand is likely to remain soft due to reduced economic activity, concerns about increasing unemployment, and income erosion. However, additional economic packages from the government and a likely positive monsoon season could help soften the negative impact of an economic deceleration.

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“Additionally, we expect investors to turn to gold as a means of hedging as we have seen in the first half of this year,” it said.

The WGC report observed that although central banks around the world have aggressively cut rates and expanded asset purchasing programmes to stabilise and stimulate their economies in view of the pandemic, these actions are leading to several unintended consequences on asset performance.

It noted that although equity market valuations are soaring, they are not always backed by fundamentals, increasing the chance of pullbacks and corporate bond prices are also increasing, pushing investors further down the credit-quality curve. Further, short-term and high-quality bonds have limited, if any, upside, reducing their effectiveness as hedges.

In addition, widespread fiscal stimuli and ballooning government debt levels are raising concerns about a long-term run up of inflation, or significant erosion of the value of fiat currencies. Deflation, however, is seen by some as the more likely risk in the near term.

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“As these dynamics heighten risk and lead to the possibility of ever lower returns than expected, we believe that gold can play an increasingly relevant role in investor portfolios,” it said.

Gold had a remarkable performance in the first half of 2020, increasing by 16.8 per cent in US-dollar terms and significantly outperforming all other major asset classes. Though equity markets around the world rebounded sharply from their Q1 lows, the high level of uncertainty surrounding the COVID-19 pandemic and the ultra-low interest rate environment supported strong flight-to-quality flows, the report said.

Like the money market and high-quality bond funds, gold benefited from investors’ need to reduce risk, with the recognition of gold as a hedge further underscored by the record inflows seen in gold-backed ETFs, it said.

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