Gold's safe haven status threatened by covid-19: Cerulli

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Gold's safe haven status threatened by covid-19: Cerulli

Gold and other precious metal funds have not responded in typical safe-haven fashion since the start of the covid-19 crisis, according to research published in the latest issue of The Cerulli Edge—European Monthly Product Trends.

Historically, precious metals have appealed to investors seeking to diversify from asset classes with high correlations. These commodities have also served as a store of currency. However, research from Cerulli Associates finds that although the price of gold soared in 2019 on the back of geopolitical risks, the coronavirus crisis has been less favorable for precious metal equities and prices.

Some investment vehicles give investors exposure to physical gold, silver, and other precious metals such as copper, palladium, and zinc. Others offer investment in related equities by holding, primarily, mining companies. Whereas in March, silver registered its lowest price in 11 years due to lower industrial demand, in the first three months of the year, global mining companies lost substantial market capitalization.

Given a scenario in which a reasonable global economic recovery drives up asset price inflation, gold could recover as it did in 2009–10 after the global financial crisis. However, there is another possible scenario in which the recovery is marred by extremely low growth in a deflationary environment, meaning asset prices suffer, including gold."

"It would be understandable to assume that the pandemic, its impact on financial markets, and the countermeasures taken by central banks would send commodity prices soaring again, but this time, there is more to consider," said Fabrizio Zumbo, associate director, European asset management research at Cerulli.

Asset prices rise only when there are enough investors with liquid capital to buy the assets. With the immediate liquidity crisis sparked by the pandemic now resolved, buying should resume. However, the actions taken by central banks to ease the liquidity crisis—and broader economic crisis—may have neutralized some of the buying power of dollars, euros, and sterling.

"Given a scenario in which a reasonable global economic recovery drives up asset price inflation, gold could recover as it did in 2009-10 after the global financial crisis. However, there is another possible scenario in which the recovery is marred by extremely low growth in a deflationary environment, meaning asset prices suffer, including gold," said Zumbo.

For long-term investors in mining companies, there is some expectation of a rebound. The collapse in the oil price will be a key factor in reducing operating costs, so the outlook for gold and silver prices may turn positive, continued Zumbo. "However, after gathering more than €600m ($648m) of net inflows in January, Europe-domiciled precious metals equity funds registered some €200m of net redemptions by the end of March."

Last week II reported that the price of gold is expected to reach an all-time high of $3,000 by the end of 2021 on the back of record central bank balance sheets and government fiscal deficits, according to research by Bank of America (BoA).

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Christopher Copper-Ind

Christopher Copper-Ind is editor-in-chief of International Investment. Before this, he was editorial director of The Business Year, from 2014 to 2017.

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