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Gold Market Overview

Annual Report 2020

Gold Market Overview

The strength of the gold price during such difficult times in 2020 has helped to underscore its value as a safe haven investment.

Gold prices performed historically well in 2020.

An all-time high spot price of $2,075/oz was reached on the back of strong investor interest due to global economic uncertainties, primarily from the impact of the spread of Covid-19, reductions in short- and long-term interest rates and large-scale fiscal stimulus measures in major economies, a weakening of the trade-weighted US dollar, and a search for safe haven assets.

2020 was a challenging year on many fronts, but the strength of the gold price during such difficult times has helped to underscore its value as a safe haven investment. The economic consequences of the pandemic are likely to continue for some time and the related monetary and fiscal stimulus measures put in place by global central banks and governments is expected to result in a continuation of low interest rates and large fiscal deficits though 2021, providing a conducive environment for continued robust gold price performance.

Annual Demand - ETFs and Similar Products

Annual Demand - ETFs and Similar Products Source: World Gold Council

The average price of gold in 2020 was $1,770/oz, a 27% increase over the $1,393/oz average in 2019. This $1,770/oz average was a new record high, surpassing the previous high of $1,669/oz reached in 2013, and represented the fifth straight year of annual average price increases.

Gold prices ended 2020 at $1,888/oz, representing an increase of 25% since the end of 2019.

A reduction in global interest rates during 2020, including 150bps of benchmark rate cuts by the US Federal Reserve during March 2020 to a range of 0% to 0.25% and a continuation of negative 10-year yields in parts of Europe, helped to increase gold prices by reducing the opportunity cost of holding gold. Investor demand from gold was exceptionally strong in 2020, with the World Gold Council (WGC) reporting that collective ETF gold holdings grew by a record 877 tonnes during the year and reached an all-time high of approximately 3,752 tonnes in the fourth quarter of 2020. COMEX net long positions also reached all-time highs during 2020, a significant reversal of sentiment from the net short position that existed in late 2018.

Annual Gold Mine Production

Annual Gold Mine Production Source: World Gold Council

While there was an exceptionally strong appetite for gold from the investment community, overall demand for gold in ounce terms fell in 2020, as the global pandemic and rising prices that reached all-time highs in US dollars, as well as in many non-US currencies, including in Euro, Pound sterling, Japanese yen, Indian rupee and Chinese yuan, reduced both consumer demand for jewellery and net purchases by central banks. In particular, global jewellery demand was down 34% versus 2019, with China and India — responsible for over half of jewellery demand — down 35% and 42%, respectively.

Gold demand for electronics and other industrial uses fell by 7% in 2020 as the spread of Covid-19 reduced manufacturing activity and demand for electronics. A continued increase in demand for 5G infrastructure could help to reverse this trend going forward.

Central bank purchases of gold slowed in 2020 after 2018 and 2019 represented the two highest years of net purchases in the last 50 years. The WGC reports that central banks still added 273 tonnes to their reserves during 2020, even after experiencing a quarter of negative net accumulation in Q3 2020. Some Central Banks looked to their holdings of gold as a source of liquidity in difficult economic times as a result of the global pandemic – with their ability to do so providing a strong statement as to why gold is a valuable reserve asset. Russia suspended its purchases of gold in March 2020, taking a significant buyer out of the market during the remainder of the year. Overall though, central banks have now been net purchasers of gold for 11 straight years as they look to gold as a source of reserve diversification.

Overall supply of gold in 2020 decreased by 4%, the first annual decline since 2017, mainly attributable to a 4% reduction in global mine production tempered by a modest rise in recycled gold and net de-hedging by producers. Global mine production fell for the second straight year, further confirming that the mining industry may have reached peak gold production for the foreseeable future. As gold prices have increased and capital has become more readily available in recent years, there is evidence of increased spending on exploration by mining companies, but the costs of mine construction and the time required for environmental studies and permitting activities before reaching the production stage means that a return to sustained global production growth could be delayed accordingly.

The supply of recycled gold, which is historically positively correlated with the gold price, only increased by 1% in 2020 despite record high gold prices, as the pandemic likely limited the ability of potential sellers to access the market.

Official Sector Net Purchases and Gold Prices

Official Sector Net Purchases and Gold Prices Source: World Gold Council

COPPER MARKET OVERVIEW

Copper prices were negatively impacted early in 2020 from the global reduction in manufacturing and economic activity resulting from the spread of Covid-19, falling to a 4-year low of $1.98/lb in March.

Subsequently, copper prices recovered strongly and steadily over the remainder of 2020, reaching a 7-year high of $3.64/lb in December as mine supply was impacted by the pandemic, global economic activity recovered from its initial drop, especially in China, monetary and fiscal stimulus measures were put in place in the world’s largest economies, the US dollar weakened, Covid-19 vaccines were approved and started being distributed, and global copper stockpiles remained low.

China’s GDP grew at a rate of just 2.3% in 2020, its lowest level of growth in decades. As China is by far the world’s largest consumer of copper, an expected rebound in China’s GDP growth rate in 2021, as global economic activity recovers from pandemic-led disruptions, is positive for copper demand prospects in the near term.

In the longer run, the increase in the volume of copper that is used in the manufacture of electric vehicles versus those with combustion engines bodes well for copper demand, as electric vehicles are poised to comprise a growing share of all vehicles produced over the next decade.