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Why does gold rise in price when demand for it has fallen?

Author : Andreas Toller

Source : WirtschaftsWoche

Although gold is considered a lifeline in difficult times, even the precious metal market has not escaped the impact of the coronavirus crisis. Global demand for gold fell, especially in the fourth quarter of 2020
23:11, 3 February 2021

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Overall, 2020 has been a good year for gold investors. After falling sharply in March during the first wave of the pandemic to $ 1,467 an ounce, gold recovered by September and broke a new record, rising to $ 2,063. The demand for gold seemed to be higher than ever.

Until the end of the year, the decline in value was small, with 2020 ending at $ 1,897 per ounce. In terms of the entire last year, gold investors have increased their fortune by more than 24%. It was during the pandemic that the precious metal lived up to its reputation as a safe haven away from rising asset risks.

Yet the annual report of the World Gold Council, the lobbying organization of the world's gold producers, shows a different picture. The coronavirus pandemic has led to a 14% drop in global gold demand. Worldwide, demand dropped by 3,760 tons. It was last time so low during the 2008 financial crisis.

Jewelry industry demand fell by more than a third from 2019, despite a rebound in demand in the second quarter. On the other hand, demand from investors has grown by as much as 40%. For eleven months, investors bought more and more gold, until in November this trend was replaced by a decline in the price of gold and investor activity.

First of all, the exchange-traded "gold" funds, which experienced a record inflow of 877 tons, had to sell 130 tons again between October and December. In total, by the end of 2020, the volume of world "gold" funds amounted to 3,751.5 tons of gold worth $ 228 billion.

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But the demand for bullion and coins was also high. Due to the economic recovery in China and India in the second half of the year, the demand for them increased by 3% in annual comparison. In the fourth quarter alone, sales of bullion and coins rose 10%.

The rise in gold prices in 2020 is associated primarily with high demand from investors, according to the document of the World Gold Council. It is likely that the price of gold would have increased even more if central banks did not become more restrained in buying gold and there was no downturn in the jewelry industry. Compared to the previous year, demand from central banks decreased by 59%, amounting to only 273 tons in 2020. In the fourth quarter, they still returned to purchases, gold reserves increased again by 44.8 tons.

“Buyers all over the world were staying at home due to lockdowns, weak market conditions and high gold prices. This led to a new annual low in the jewelry industry,” leading World Gold Council analyst Louise Street explains the impact of the pandemic. "Nonetheless, gold funds on the exchange, thanks to low interest rates and high levels of uncertainty and despite outflows in the fourth quarter, posted a record year-on-year gold inflow - highlighting gold's role as a safe haven for assets."

According to the expert, a number of factors that contributed to the growth in demand for gold from investors in 2020 will be observed in 2021. "Overall, we expect the effects of the pandemic to likely persist in the first quarter of 2021, and possibly longer." We proceed from the assumption that there will be a great need for hedging in the future, and the continued growth of the money supply in an environment with low interest rates will lead to inflationary pressure. In addition, strong fluctuations and significant rebounds are possible due to high performance on exchanges.

“Historically, gold has performed just as well during pullbacks in the stock market as it did during inflation,” says Street. “Therefore, we believe that in 2021 gold will have a positive, albeit somewhat smoothed, development in terms of value.”

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