Individuals, Not Banks, Will Support Gold In 2020

One of the biggest arguments for gold bulls in the last couple of years has been the steady and substantial increase in gold purchases from sovereign entities. I’m referring of course to the buying binge that several of the world’s central banks embarked on in 2018 to 2019. There are signs, however, that the ardor of these banks toward gold is cooling, and this has led many investors to worry that gold is losing a major long-term support. As I’ll show here, though, this likely won’t be the case as individual investors will step up gold purchases and pick up the slack left by reduced bank demand.

News headlines concerning central bank gold buying were frequently seen last year, but in recent months, there has been a notable paucity of such headlines. Indeed, banks have seemingly been on a hiatus ever since the coronavirus commandeered the spotlight. This slowdown in official gold demand isn’t surprising, however, given that central bankers around the world have been forced to concentrate all their recent efforts on stimulating their economies in the wake of the COVID-19 pandemic.

Banks haven’t completely stopped shopping for gold, however. Despite Russia’s recent announcement that it would suspend gold purchases beginning April 1, central banks were still net buyers of gold in February. Central banks in February collectively added a net 36 tons of bullion, which was nearly a third the amount of January’s totals, according to the World Gold Council (WGC). However, gold buying among the banks was 52% lower on a year-over-year basis. According to the WGC, Turkey, Russia, Kazakhstan and Qatar were the biggest buyers for February, while Uzbekistan was the only seller.

Source: World Gold Council

Commenting on the latest data, WGC’s Krishan Gopaul wrote:

“The past two months clearly suggest gold continues to be an important component of foreign reserves despite heightened levels of demand in recent years… And while we believe central banks will remain net buyers in 2020, it’s reasonable to think we may not see as much buying as we did over the past two years.”

The recent surge in volatility levels across global financial markets is a big reason why central bankers may be reluctant to make new commitments to gold. I agree with the WGC’s assessment that until global volatility diminishes, we’ll likely see less central bank participation in the gold market in 2020 compared to the prior years.

If not central banks, then, where will gold’s primary support come from in the months ahead? The answer isn’t hard to predict: individual investors, who have been accumulating gold at an accelerating rate since December, will be 2020’s biggest buyers.

Normally it would be troubling from a contrarian’s perspective for retail participants to be the leading buyers of gold bullion. But as was the case in the wake of the 2008 financial crisis, the public’s unmitigated level of fear over a very uncertain economic future will be intense and unrelenting. Further, when the public is “all-in” on a given asset, that asset’s price can move higher in an explosive fashion over a period of several months or even years. This was the case not only for gold in 2009-2011, but also for equities in 1997-1999. With that said, look for increasing demand for physical gold among individual investors in the coming months as the coronavirus crisis continues to boil.

Retail investors aren’t the only ones who will continue to provide support for gold this year, however. Institutional investors are also likely to increase their participation levels in gold based on some considerations we’ve discussed in previous reports, most notably gold’s relative performance factor.

Institutional investors typically consider how well assets like gold are performing relative to the benchmark S&P 500 Index (SPX) before allocating capital to the metal. And as can be seen in the following graph, gold is impressively outperforming the equity market from a relative strength standpoint. This graph provides a powerful argument for institutions since there are few safe choices for parking capital in the midst of the recent turmoil.

Gold vs. S&P 500 IndexSource: StockCharts

A final consideration for the gold outlook in 2020 is the likelihood that global mining output will almost certainly be curtailed by the coronavirus. Lockdown policies in major gold producing countries have already resulted in diminished output, and more stringent measures are expected to contain the virus’ spread. According to consultancy group Metals Focus:

“At present, we expect 2020 gold production to be significantly impacted and lower than the 3,541t [metric tons] we were forecasting at the start of the year.”

The group added that junior mining firms are having difficulty securing financing for new and existing ventures, which will further reduce new supply this year.

In conclusion, even without strong central bank gold purchases, unremitting worry over the extent of the global pandemic will fuel increasing safe-haven demand for physical gold among individual investors in 2020. Institutional players, too, will likely be enticed by the prospects for higher gold prices based on the metal’s impressive relative strength versus equities. Finally, reduced supply from mines related to the pandemic will act as an additional support for the yellow metal and will likely boost prices in the coming months. In view of these factors, a bullish intermediate-term (3-6 month) posture toward gold is warranted.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IAU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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