The Chinese love gold. The yellow metal in China has historically traded at a premium to global prices close to the lunar new year, a peak season for retail demand. This year, the world’s biggest gold consumer has been too busy battling a deadly coronavirus outbreak to keep with tradition. This is more than offset, however, by increased demand from global investors spurred by fears of the same virus.
The price of the gleaming stuff has gone on rising this month, adding to a rally of almost a fifth last year. Goldbugs aside, $1,560 an ounce might look pricey. But a lasting reversal requires a brighter economic outlook and moves to normalise global monetary policy.
Now it seems that those may not come for some time. The unpredictability of the new virus should weigh on sentiment, making haven assets such as gold more attractive. China might have to deal with the resulting economic slowdown with expansionary monetary policy. Rising inflation from high food prices in China will boost demand for the metal from those who regard it as a hedge.
Similar situations exist elsewhere. The US Federal Reserve’s reluctance to raise interest rates makes holding gold an easier choice. Additionally, global central banks are likely to continue hoovering up ingots. Purchases were up 12 per cent in the first three quarters last year, according to the World Gold Council.
Along with investors in the precious metal, miners stand to gain from higher margins. Recent declines in oil prices and emerging markets currencies following the outbreak should mean lower expenses and wage costs. Production costs for the largest producers are expected to be about $975 an ounce this year, well below gold prices today.
As uncertainty grows over whether the outbreak will turn into a pandemic, so should demand for havens. Inflows to gold exchange traded funds this month are a third higher than last year’s average. Any correction to prices — and that of the lustrous metal itself — should be shortlived.
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Source: Economy - ft.com
