GOLD Demand

source: World Gold Council

Demand for gold is always there, during times of economic expansion and high growth consumer gold demand increases for jewelry and technology. But during bad times of low growth and crisis gold demand increases again for the sake of safety among investors.

In the chart below we noticed that in the first Quarter 2020, where global output growth shrinks amid the corona virus pandemic and social distancing measures. Gold demand for consumption purposes has decreased, against a sharp increase in demand for investment. This led to a net increase in total gold demand by 1.2% on a year on year basis, and 3% from previous quarter.

source: World Gold Council
source: World Gold Council

GOLD SUPPLY

source: World Gold Council

GOLD supply has decreased in the first quarter because of the COVID-19 pandemic and much disruption in the supply chain, in front of an increasing demand from investors.

GOLD supply made a total of 1066,19 tonnes in the first quarter compared to 1224,24 in December 2019 a decease by 3,8% from the same quarter of previous year. 

Risk and uncertainty:

Risk measures: corporate bond spread and the VIX.

We observe a relative decrease in market risk measures such as the VIX, and U.S corporate bond yield spread.  volatility as measured by the VIX is still considered at high levels around 33.6, while Moody’s Baa & Aaa corporate bond yield spread is now at 1.47%.

This decrease was primarily due to the FED insurance to keep supporting economy and financial markets through security and corporate bond purchases containing high yield corporate JUNK bonds, and secondarily by the start of partial reopen of the economy at a domestic level in some U.S states, which is expected to start gradually if things go well and the number of infected cases continue decreasing along with the necessity to afford more COVID-19 testing tools.

Volatility measures:

Gold volatility as seen through the CBOE GVZ (Gold volatility index) is decreasing as GOLD took its steady upward trend after the BOOM and BUST made in early March.

However, the index is still relatively high at around 24.97 and has not yet close the gap made in early march.

Inflationary pressure:

money supply, central banks balance sheet

The coronavirus pandemic has widened the gap between actual inflation levels in major developed countries and the central banks aim of a sustained inflation around 2%.

Although the inflation target was not reached sustainably in the real economy and consumer demand, other areas are facing strong inflationary pressures; like financial securities and other assets including gold.

The shrinking consumer demand in real economy and falling goods and services prices find their opposite in GOLD with lower mining activity and higher demand as a safe haven.

In addition, as the famous quote says “central banks can print money but cannot print gold”. Increasing money supply and central banks balance sheets helps weakening currencies purchasing power against gold.

GOLD momentum: COT report.

In a matter of momentum, the Gold futures traders positioning reported by the CFTC COT report shows that traders are still long GOLD, and managed money Open Interest % change spread is still considerably high at 29.3.  

To sum up, this period is generally marked by a slight decrease in risk measures, but that is not strong enough to push investors from keeping Gold as a crucial component of their portfolios.  Against this, a strong gold momentum as shown in the futures commitment of traders open interest, and uncertainty about what is coming on in the future keeps gold strong for the rest of Q2-2020 and probably beyond.