The pandemic’s influence on the price of precious metals

“We expect that economic data over the next two to three months will get worse before it gets better.”

When David Donabedian, chief investment officer of CIBC Private Wealth Management, told reporters that statement in early March, he had no clue how bad it would eventually get. Since March, markets have tanked due to the pandemic, and businesses around the world have had to adapt and pivot extremely quickly, if they were lucky enough to survive.

What has consistently remained strong through the pandemic is the rising price of gold, silver and other precious metals.

When gold reached a seven-year high of $1,690 US on March 3, it was just the beginning. The price of gold hovered around $1,730 for the better part of May and early June, and only recently has gold fell slightly due to positive employment numbers coming from the U.S. on June 5. 

Silver traded as high as $18.165 an ounce in early June, which was its most impressive level since Feb. 27. Kitco quoted a financial researcher who noted silver is “relatively undervalued” compared to gold.

“You have some concerns about a second wave of infections and how long the economic recovery will take. So you’ve got silver benefiting from both sides,” he said, pointing to both positive and negative COVID-19 outcomes.

Silver was already enjoying a nice run. Silver investment demand jumped 12% in 2019, and some experts predict “silver physical investment to extend its gains this year, with a projected 16% rise to a five-year high as investors rotate out of equities in search of safe haven vehicles.”

So how does the pandemic influence the price of these precious metals? Focusing on the major target in metals markets, the reason gold often is so resilient during stock market crashes is that the metal and the market are negatively correlated. So, when one goes up, the other tends to go down.

This makes sense when you realize that stocks benefit from economic growth and stability while gold shines during economic distress and crisis. If the stock market falls, panic often sets in, and investors typically seek out the safe haven of gold. If stocks are enjoying a great era, the perceived need for gold from mainstream investors is low.

A CNBC article explains that as the world’s earliest form of currency, gold’s physical properties have given it the idea of being a reliable store of value. It is widely available enough to trade but is in finite supply, making it more attractive since its rarity is considered valuable, and it’s also durable and not corrosive.

The report goes on to say:

Gold is also considered a good hedge against the risk of inflation because the rising cost of goods and services tends to erode the value of the dollar. 

And as central banks print more money as part of attempts to stimulate economies, Global head of Asset Allocation at investment group Invesco Paul Jackson said some may fear this could result in inflation.

If this were the case this could impact the value of other assets. Meanwhile, “gold over a long period of time tends to hold its value in real terms” so can be considered as a “refuge” against this risk.

Adding to the mix is how the pandemic has brought on a round of panic-buying and gold bullion is as scarce as it’s ever been in modern history. The pandemic also affected the logistics of transporting bullion, because commercial flights, which carry most of it, were largely grounded, and refineries in China and Switzerland shut down.

The global lockdown only quickened what may have happened anyway, since some countries gobbled up as much as gold as possible, making the metal even scarcer.

Fear-driven purchases have also inspired some insiders to praise gold’s benefits, and they envision the price soaring even higher. It can’t hurt gold’s value when major players such as Goldman Sachs tell media: “Both the near-term and long-term gold outlook are looking far more constructive, and we are increasingly confident in our 12-month target of $1,800/toz.”

There have also been papers analyzing what influences metals prices, and a highly recommended study looked at how prices can be influenced by the level of inventories of commodities, meaning how much is being held in storage, and the extent to which people are hedging against their prices going up or down.

What’s also worth noting is how the pandemic has brought chaos to the mining industry. Some operations are severely restricted as part of government efforts to control the pandemic, and outbreaks at specific mine sites in locations around the world have also caused those operations to be closed.

A recent report from MiningWatch Canada found that almost 4,000 positive cases of COVID-19 were identified within the 61 mines in 18 countries covered in the report, and 247 additional cases of COVID-19 could be linked to community spread from workers in the mines, as CTV News writes.

Canadian companies manage more than one-third of these mining facilities. Out of the 61 operations included in the report, 24 were owned or partially-owned by Canadian companies.

To learn more about how precious metals are sourced, read this post published on our site.

You might also be wondering if now is an ideal time to sell your gold, coins and jewellery, considering how high the price of gold has been recently. First, ensure you research how to avoid shady gold buyers, and if you’re interested in learning more about how Muzeum’s precious-metals specialists can evaluate your items with a free assessment, contact us anytime.