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Metals Focus: gold prices to challenge all-time highs by year-end

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(Kitco News) - Gold prices are likely to challenge all-time highs before the end of 2020 on investment buying in the wake of massive global economic stimulus and monetary accommodation in response to the COVID-19 pandemic, said Metals Focus in its Gold Focus 2020 report released Wednesday.

However, analysts also said, physical demand – such as for jewelry – will be weak this year due to the combination of shop closures and other restrictions during the pandemic, as well as lower gross domestic product, which in turn means less consumer buying power.

There have been some encouraging signs during the pandemic – both that the outbreak may be “starting to come under some control” and economic data may not be as awful as initially feared, the consultancy said. Still, the crisis will remain at the forefront for markets during the remainder of 2020 and beyond, Metals Focus said.

“Bond yields and short-term interest rates should stay low in nominal terms and negative in real terms for the foreseeable future.” Metals Focus said. “This will continue to minimize the opportunity cost of holding zero-yielding gold. Low yields will also limit bond markets’ ability to act as a hedge against equity price corrections, given there is only so far down that yields can realistically go, potentially forcing investors to other safe havens.”

Meanwhile, the aggressive stimulus measures mean “already problematic” sovereign-debt levels will now be even more worrisome, Metals Focus said. Eventually, these need to be addressed through tighter fiscal policy, perpetually low yields, higher inflation and debt restructuring, with the potential for default, Metals Focus said.

“We believe this backdrop will drive further inflows of institutional money into gold over the rest of the year and beyond,” the consultancy said. “Importantly, we expect that much of this positioning will be strategic and therefore sticky. With all this in mind, we believe that gold continues to have plenty of upside from current levels. We expect prices to come close to the 2011 peak of $1,921, although we do not expect that it will be breached this year.”

Still, the consultancy cautioned about potential bouts liquidation that could take gold back as far as $1,600 an ounce. However, analysts also said they expect these pullbacks to be short-lived since investors are likely to buy the dips. Metals Focus put its full-year average price forecast at $1,700 an ounce, which is 22% higher than in 2019.

Metals Focus called for physical investment in the form of bar and coin demand to rise 9% in 2020 to 925 metric tons, after it fell by 20% last year to 850 tons. Further, investment in global exchange-traded products is seen rising by 438% this year to 900 tons after a 123% increase to 404 tons in 2019.

“The outlook seems less rosy for gold’s physical demand,” Metals Focus said. “A double digit-decline in jewelry fabrication is inevitable, and we expect the global total will fall to its lowest point in more than 30 years.

“Most other areas of fabrication demand are also expected to suffer hefty declines, mainly due to the impact of the economic contraction on end-product sales. Official sector purchases are also forecast to fall, following two exceptionally  strong years. The rise in physical investment will only offer a small offset to these declines, boosted by the emergence of safe-haven buying in Western markets and also reflecting a low base in 2019.”

Jewelry-fabrication demand is seen falling by 25% in 2020, which would be the biggest decline on record, said Metals Focus. The consultancy pegged the volume at 1,596 tons, the lowest since 1987. The decline was blamed on the pandemic, which meant both restrictions on retail stores and damage to gross domestic product. Gold-jewelry demand fell by 6.5% in 2019 to a nine-year low of 2,137 tons, Metals Focus said.

Net official-sector purchases are expected to fall by 46% to around 350 tons in 2020, which would be the lowest level in a decade, Metals Focus said. They fell by 2% in 2019, although Metals Focus emphasized the decline was from “an exceptionally high base” in 2018 when net buying was the most since the collapse of the Bretton Woods system in the early 1970s.

As for gold supply, mines in a number of nations were temporarily closed this spring to combat the spread of the pandemic, although most have reopened, Metals Focus said. Nevertheless, the consultancy envisions 2020 mine production will decline 5% to 3,359 tons. Global gold output fell 0.8% last year to 3,534 tons, the consultancy reported. Metals Focus also noted that average all-in sustaining costs climbed 2% last year to $941 an ounce.

Meanwhile, recycling is expected to increase by 8% this year to 1,403 tons mainly due to higher gold prices, according to the consultancy. During 2019, this rose by 12% to 1,297 tons, the highest level in seven years.

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