May began with gold closing above $1,700 per ounce (oz). The high price and market lockdowns have led to a decline in physical demand for gold. According to Refinitiv, it fell to 753 metric tons (mt) in the first quarter — the lowest levels since 2009.

Jewelry fabrication ordinarily accounts for around 55% of total physical demand, but slumped 40% on a year-on-year basis. The greatest losses were recorded in Asia with this bloc declining over 43% year-on-year. Chinese demand recorded a precipitous 62% YoY decline in jewelry fabrication in Q1 as a result of disruptions caused by the coronavirus (COVID-19) crisis and the complete shutdown of the economy. Indian offtake was heavily impacted by record gold prices earlier in the quarter before the government mandated lockdown in late March all but wiped out retail activity, with fabrication demand for the quarter plummeting 34% from 2019 levels.

“Looking ahead, gold may remain vulnerable to further losses in the short term, particularly should the COVID-19 crisis continue to deteriorate in the West and if we see another meltdown in equity markets, which would lead to yet another bout of liquidation across all asset classes, including gold,” said Cameron Alexander, manager of precious metals research at Refinitiv. “Having said that, with heightened uncertainty and expectations of the global economic recession, unprecedented levels of stimulus from central banks around the world and interest rates remaining at historically low levels and in negative territories, we believe that gold will rebound to even higher levels. We forecast gold to average $1,637/oz in 2020, with a possibility to test and move beyond $1,800/oz later in the year.”

The first quarter proved to be very volatile. Gold plunged by 12% or nearly $200 over a 10-day period, from its seven-year high of nearly $1,680/oz on March 9 to a three-month low of $1,470/oz on March 19. It recovered most of its previous losses later that month, averaging $1,582/oz for the quarter, which was up by 7% from the previous three months and up 21% year-on-year. It is worth adding that the gold price expressed in other currencies recorded even more notable gains, recording double-digit percentage increases and soaring to all-time highs on some occasions.

The beginning of the year was characterized by a strong rebound in investor interest among the professional investor community and, on the other hand, sluggish demand on the retail side. Looking at CFTC weekly reports, long speculative positions jumped to a record high level of nearly 1,000 mt by mid-February, although this was followed by a bout of liquidation in the following weeks as gold got caught up in a broader sell-off. Investors in exchange traded products (ETPs) added 300 mt of gold during the first three months, with the bulk of buying taking place in March, driven by the price correction taking place that month and a pickup in safe haven demand in light of the spread of the pandemic and the worsening situation particularly in the West, along with growing fears of the global economic recession. As a result, total ETP holdings rose to a fresh high of more than 3,000 mt by the end of the quarter.

By contrast, retail investment posted an 11% year-on-year drop in the first quarter, led by a sharp drop in physical bar investment, which is estimated to have declined by 21% to 151 mt. The drop was driven by weak demand in Asia, which was down by an estimated 67% year-on-year. Both China and India experienced severe falls in physical bar demand, down by 53% and 49% respectively, hit by the economic slowdown, high gold prices and the full lockdown in case of the former, which brought business activities and consumption to a standstill.

The picture was quite the opposite in the West, where a surge in safe-haven demand amidst the COVID-19 outbreak and heightened fears of the economic downturn saw gold bar demand more than double in Europe and up 21% in North America. Meanwhile, coin demand jumped by 26%.

Looking at supply, according to Refinitiv’s preliminary estimates, mine production increased by 3% year-on-year to an estimated 842 mt. On the other hand, scrap flows slipped by 2%.

This article was supplied by Refinitiv, formerly the Financial & Risk business of Thomson Reuters. The GFMS team at Refinitiv is a leading team of metals market analysts. The team was born out of the Corporate Development Department at former mining company Consolidated Gold Fields, and the flagship publication Gold Survey has been recognized throughout the industry since its inception in 1967.