The Lasting Impact Corona Crisis Could Have On The Gold Market

Given gold's impressive gains, adding between 2 and 10 percent in gold to an average investor's portfolio would have resulted in higher risk-adjusted returns over the pandemic and economic crisis (as well as over the past decade). Similarly, according to a separate WGC's research, higher allocations to gold would have improved the performance of a typical central bank's total reserve portfolio during the coronavirus crisis.

When it comes to the future, the WGC points out that expectations for a V-shaped recovery are shifting towards U-shaped or even W-shaped (a double-dip recession). Such transformation keeps uncertainty high, supporting safe-haven assets such as gold.

However, the key takeaway from the report: no matter what shape the recovery is, the epidemic will likely have a long-term, positive effect on the gold market, strengthening the role of gold as a portfolio diversifier. According to the former WGC's analysis of the potential impact of coronavirus crisis on the gold market, the deep recession would be, of course, the best for the gold prices, but even in the scenario of swift recovery, gold would shine this year and maintain positive returns until 2022, as the Fed would keep its monetary policy loose, while the real interest rates would remain close to zero.

In a former report entitled "Gold supply chain shows resilience amid disruption," the WGC notes that the pandemic has caused unprecedented disruption to various parts of the gold supply chain, but the gold market has remained resilient after all.

However, the epidemic and the resulting supply crisis has hit the retail segment, which is more fragmented and has a more complex supply chain, holding fewer stocks of small gold bars and bullion coins. This is why "the supply and logistical issues caused depletion of some dealer inventories and left many investors facing long wait times and high premiums". So, not necessarily manipulation, but supply disruptions explain the high premium for coins over spot price.

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Interestingly, and somewhat similarly, the logistical disruptions triggered by the coronavirus and the Great Lockdown caused the widening of the differential between the London spot price and the futures price on Comex, which jumped from $2 to $75 at one point.

Not surprisingly, the WGC is, as always, bullish on gold. The organization believes that "the combination of high risk, low opportunity cost and positive price momentum looks set to support gold investment and offset weakness in consumption from an economic contraction". This time we agree with the WGC. The coronavirus crisis and the following economic crisis and the response of the central banks and governments significantly shifted the already bullish fundamental outlook for gold prices into an even more bullish one, also potentially strengthening the role of gold as a strategic asset.

The thing is that the Fed and other central banks have cut interest rates to zero and reintroduced or expanded the quantitative easing. In consequence, equity and bond prices are elevated, which increases the risk of pullbacks. Moreover, the soaring fiscal deficits and public debts raise concerns about the sovereign-debt crisis or a long-term run-up of inflation. All these risks and uncertainties related to the ongoing pandemic and fragile economic recovery could increase the role of gold as a strategic hedge in investor portfolios.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Written By: Sunshine Profits