Whoever comes to occupy the White House, gold could yet shine better

The environment remains highly favourable for the yellow metal in the medium to long term

Gold recorded a spectacular performance during the third quarter, soaring to an all-time high of $2,067/oz in early August, driven by escalating fears over the global economic downturn caused by the Covid-19 pandemic and massive stimulus measures introduced by central banks around the globe in an attempt to lessen the impact. Gold averaged $1,909/oz in the third quarter, up by 27% from the previous three months and 30% above the level seen over the same period of last year.

Q3 gold demand at a glance

Gold physical demand recorded another poor performance in the third quarter, tumbling by 30% year-on-year to an estimated 562 tonnes. Jewellery fabrication remained the worst affected segment, with global offtake contracting by 23% to a total of 314 tonnes. Despite many markets re-emerging from severe lockdown restrictions prevalent for most of Q2, demand remained poor across all the key regions. Turning to retail investment, which is the sum of physical bars and all coins, demand was marginally up year-on-year, as a strong rebound in official coin fabrication was largely offset by poor physical bar investment. Official coin fabrication surged by 53% to nearly 72 tonnes as fears around the Covid-19 crisis and the global market turmoil, along with the improved gold outlook saw resurging interest among the retail investors, driving premiums to unprecedented levels. Meanwhile, demand for gold bars slumped by 20% to just under 97 tonnes, the lowest quarterly level since the financial crisis of 2008/09.

What’s waiting for India during and post-Diwali?

We projected earlier that the broader economy would start recovering from September onwards and our projection has been largely on track. The economy has opened up and we have already observed some encouraging retail numbers, such as a rise in demand for mobile phones, a recovery in new car sales, and a rise in credit card spending, to name just a few. The government did a commendable job of restricting the spread of the virus into the hinterlands, which was a cause of a grave concern at the start of the pandemic.  At the time of writing, Refinitiv India gold is quoting at Rs 51,550/10gm, lower by 7% from the August high. The price has stabilised more or less at the current level and the key festival season has already commenced. Our market sources have informed us that footfall traffic has significantly increased since October 15 and retailers have seen a sharp rise in heavy purchases for marriage requirements. Local spot prices are trading at a premium of up to $3/oz, further cementing the argument that demand is picking up. It is widely believed among retailers that demand will grow stronger during Diwali time. We expect this will continue throughout the fourth quarter; that said, it would be interesting to observe if retail gold volumes could be sustained given that the current price is more than 30% higher when compared to the level seen last year.

US election and gold price

With no clear outcome of the U.S. presidential election at the time of writing, markets remain cautious on side lines, expecting further volatility, particularly amidst Mr. Trump’s fraud allegations and legal challenges. But does it really matter for the gold market who will end up in the White House?

While the two candidates represent radically different views on the future of the world’s largest economy, from domestic policies to the United States’ role in the global arena and climate change, the near-to-medium term focus, despite the election outcome, will be on battling the Covid-19 crisis and stimulating the economic recovery.

Under either outcome, the current path of massive fiscal spending and ultra-low interest rates will likely remain in place for the foreseeable future. Moreover, either result would support the dollar weakening trend and, if anything, under Biden’s administration the dollar is likely to be less exposed to volatility due to geopolitical risks. At the same time, prospects of lower tariffs and more constructive trade agreements under a Biden victory could see the dollar depreciate even further. Under both scenarios, the economy faces a long and bumpy recovery.

So, in conclusion, whoever ends up in the White House, it is important to emphasise that the underlying macroeconomic conditions such as economic headwinds, the low interest rate environment, ongoing tensions between the United States and China, rising inflationary expectations and the looming second wave of Covid-19, remain highly favourable for gold in the medium-to-long term. We may well see the yellow metal hit a fresh record before the year-end. The gold price is forecast to average $1,784/oz in 2020.

Saida Litosh is a manager and Debajit Saha is a senior analyst with Refinitiv Metals