Falling Equity Prices
Equities have begun falling as markets begin to reverse price sky high valuations against realised assets and realistics growth expectations, coupled with election risks. Falling equity prices would encourage central banks to print more money (I.e Quantitative Easing), in order to support markets and the economy. Quantitative easing involves central banks printing domestic currency bills, thus a greater supply of these bills would devalue the domestic currency, when this domestic currency is then compared to gold, gold will be able to benefit from a weaker domestic currency.
General Uncertainty is leading to greater diversification
Even with equity prices generally rising to record highs from a broader view, investors are diversifying their portfolios and we can see this with gold ETF holdings which have increased by 140% up until August, this equates to around 26 millions ounces, absorbing 90% of mine production . The previous record was recorded at 20.7 million back in 2009 , absorbing 24% of mining supply. There is still plenty of supply in the market and ETF’s are on track to absorbing 30% of annual production, further supporting gold prices.
Greater demand for physical gold by consumers
Turkey is one of the largest consumers of gold globally , using gold as a means of inflation protection to paying rent.
As illustrated from above (data gathered from Bloomberg) , consumer demand has significantly increased , especially towards the end of 2019 where the covid-19 virus emerged. It is expected these demand figures will surpass 100 tons in 2020, far outstripping production increases. Thus it is evident uncertainty in the market is causing an influx in physical gold holdings, and gold paper contracts will benefit through this buying/demand momentum.
Second Wave Fears
It has now been almost confirmed that there is a second wave in the midst globally. The US reported its biggest single day increase in covid-19 infections in more than two weeks , with California reporting 4,107 new virus cases yesterday (Saturday) versus the 14-day average of 4,033 , Arizona cases increases by 0.3% against a 7-day average of 0.2% and Florida cases up 0.5% against an average of 0.4%. This rise in covid-19 infections is not just the case in the U.S. , but also Europe and Emerging countries. France have reported more than 10,000 new covid-19 cases since the lock down ended and the French PM Jean Castex warned of a worsening outlook with respect to the spreading of the virus.
Much of the headlines however have been centred around the U.K which has seen the brute of the virus spreading. New U.K covid-19 cases held above 3,000 new cases for a third day in a row. This has not been seen since May, the reproduction rate of the virus has spiked from 1.0 to 1.2/1.3 m which means one infected person can spread the virus to 12-13 people.
Gold may be in for a slight correction/continue to trade in a choppy range below $2,000 an ounce, but remains very well supported. Markets will be closely watching this second wave, especially as we head into the fall, this increases the expectations that central banks will need to up their stimulus programmes… with government debt already sky high. That alone will cause significant worry, how can central banks and leaders continue to support and increase stimulus when country-wide debt is booming , it is unsustainable and raises the question of how the debt will be repaid.