Picture: BLOOMBERG/BARTEK SADOWSKI
Picture: BLOOMBERG/BARTEK SADOWSKI

Launceston — One of the few beneficiaries from the outbreak of a deadly new coronavirus in China has been gold, which is fulfilling its customary role as a safe haven. But the epidemic may actually end up being bad news for the precious metal.

Gold market watchers, particularly those in the Western world, tend to focus heavily on risk-on, risk-off sentiment swings and subsequent flows into, or out of, gold investment products, such as exchange-traded funds (ETFs).

While this is a valid method of assessing investor interest in gold, it also ignores the fact that about half of the physical gold market is made up of just two countries, China and India.

Gold demand in those two heavyweights is already struggling amid slower economic growth and higher bullion prices, with China’s jewellery demand dropping 8.6% to 629 tons in 2019 from a year earlier, according to figures from GFMS.

China’s investment demand was better, increasing 1% in 2019 to 235 tonnes, aided by uncertainty over the trade war with the US.

But the overall picture for China was one of weakness in gold demand in 2019, and it’s virtually certain that the outbreak of the virus won’t help retail demand, given the likely hit to the Chinese economy and to consumer confidence.

The new coronavirus, which started in the city of Wuhan, has so far left 170 people dead, infected more than 7,700 and spread to at least 15 other countries.

Spot gold has lifted since the virus started grabbing headlines, with the price rising from a recent closing low of $1,546.12/oz on January 14 to end at $1,577 on Wednesday, a gain of 2%.

The price rise has been mirrored in inflows into ETFs, with holdings in the largest, the SPDR Gold Trust, increasing from 28.12-million ounces on January 14 to 28.92-million by Wednesday, a jump of 2.8%.

In isolation that doesn’t look like a weak performance, but gold certainly hasn’t benefited as much from safe-haven flows as other commodities have been slammed by fears about the economic effect of the virus.

Benchmark London copper has plunged 10% from its close on January 16 of $6,277.50 a ton to end at $5,641 on Wednesday, while Brent crude futures have dropped 9.0% from the close on January 20 to Wednesday’s final price of $59.81 a barrel.

There is a chance that investors have oversold copper and crude, or indeed that they haven’t piled hard enough into gold.

Much will also depend on the future trajectory of the virus, with copper and crude likely to recover if it appears it will only be a short, sharp hit to the Chinese and wider Asian economies.

Such a scenario would likely cause gold to lose some of its safe-haven flows, but this could be outweighed by a return of consumer demand in China.

Soft India

India is also a concern for gold, with imports of the precious metal plummeting in the second half of 2019 to 267 tons, down from 564 tons in the first half, according to a government source quoted by Reuters on January 3.

Imports in India normally rise in the second half of the year amid buying for festivals and the wedding season, making the slowdown particularly concerning.

It’s likely weaker economic growth in India and higher bullion prices contributed to the slowdown in imports.

These dynamics illustrate gold’s dilemma. In order to get stronger consumer demand in India and China, prices will have to moderate.

But if the safe-haven rally fizzles, then investors in ETFs may withdraw support, putting downward pressure on prices.

For gold in the short term, it comes down to whether safe-haven demand can outweigh the negative effect on consumer demand from the virus in China and economic challenges in India.

Reuters

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