Gold in Uncertain Times: Safe Haven or Fools Errand?

Increases in central bank action (read: stimulus measures) continue to push gold as an attractive proposition in these uncertain times. Considered the currency of last resort, gold as a long-term store of value remains a firm reason for investors to dedicate a slice of their portfolio to this precious metal (Daily Forex, 2020).


This Tuesday saw Goldman Sachs support price action in its recommendation to investors that near all time highs could be just around the corner prompting a circa 4% rise for the trading day. Since then gold has continued its rise as equities ride on the coat tails of stimulus measures not seen since the last financial recession (Bloomberg, 2020).

So why has gold risen in value in recent months? Here are three reasons to consider:

Logistics

The way gold typically moves around the globe is on airliners, normal commercial jets that ferry physical gold from mining companies across the world to refineries or brick and mortar vaults primarily located in London, New York and Switzerland. As commercial flights get cancelled en-masse, the industry is struggling to move gold to both dealers and refiners. A particular issue quoted by dealers is in insuring the face value of gold, as insurers remain adverse to moving significant volume through any single flight, insisting a piece-meal approach remains in order to divest and spread out risk from any particular flight.Additionally, the London Bullion Market Association issued a statement this week on its assessment on the impact of liquidity in the market due to recent price volatility in Comex futures.

It reported that the “LBMA has offered its support to CME Group to facilitate physical delivery in New York and is working closely with Comex and other key stakeholders to ensure the efficient running of the global gold market” (LBMA, 2020).

Furthermore, it is worth noting that while COVID-19 continues to develop (today marked half a million cases confirmed worldwide) this is an issue that remains temporary and, in all likelihood, logistical issues will stabilise through the Summer as cases start to decelerate on a global basis. As this occurs, the logistical problems faced today will fade and futures will no longer have this particular crutch to support the elevated price levels seen at present compared to spot pricing.

Supply

COVID-19 continues to wreak havoc on supply lines across a plethora of industries and gold is not an exception. Specifically, this week has seen closures of gold mining operations globally, notably in South Africa as reported this week by Bloomberg, where standing orders for the closure of all mining activity (with few exceptions, specifically relating coal to maintain power plant output) which will undoubtedly cause short term supply issues as countries take significant steps to control this outbreak.

U.S Dollar 

Recent weeks have strengthened the U.S dollar due to its status as a safe haven currency. As gold is generally priced in dollars this poses a material headwind to price action over the coming months. Moving forward, uncertainty is likely to continue which in theory provides support for higher gold prices, especially since the reaction so far in higher prices has been relatively muted. With earnings season approaching, higher prices could be on the horizon as the financial world grapples with what is set to be the worst financial results since the financial crisis. It is worth noting a strong dollar reduces international profitability for many of Americas power house companies, as foreign currencies get converted back into dollars. 

Conclusion

Moving forward investors and traders must remain vigilant to both logistical and supply related factors. Should the situation continue to deteriorate, gold is likely to reach new highs as investors flock to low risk asset classes in an attempt to sail through the uncertainty prominent across headlines today.