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Precious metals

Precious Metals Market

Performance of Gold

The average gold price in Q1 2020 was $ 1.583 per troy ounce, although in 2019, the annual average gold price amounted to $ 1 392.6. Skyrocketing price for gold is driven by the world recession caused by the coronavirus pandemic.

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This year, one of the main trends of 2019 is expected to continue. It is that ETF funds, which have become the most important alternative to other assets depreciating amid the soft monetary policy of the US Federal Reserve, show great activity. Investment takes place through the stocks of ETF funds. The World Gold Council notes that consumer demand in Q1 2020 fell by almost a third compared with the same period of the last year, but despite this, overall demand was offset by significant growth of demand from the investment sector. While the consumer demand (jewelry industry, etc.) stood at 567 t (-28%), the investment demand amounted to 540 t (+ 80%), which indicates a balance in the market, considering the supply at the level of 1.1 kt. At the same time, investors are not repelled by high gold price and its periodic downward corrections. One should not forget that over the past few years, gold has also been highly sensitive to foreign policy conditions, so any aggravation of the international situation will make the gold price rise again. 

On top of that, prices will receive some support due to the emerging reduction in metal supply. Already at the end of 2019, there was a decrease in metal production in some key metal producing countries. For instance, according to the US Geological Survey (USGS), in 2019, a drop in gold production in the country totalled up 11% compared with the level of 2018. Considering that restrictions on mining companies’ operations may affect other producing countries in the future, gold mining in 2020 may fall on a large scale, which, coupled with logistical difficulties amid increased demand for physical metal, may provide additional support for the prices. However, after restrictions lifting, it is worth waiting for prices to be backed inter alia by regaining production volumes by the major countries-producers. China reported a drop in gold production in Q1 by 11%, with the green shoots of production recovery to the pre-crisis volumes in March and in April-March the industry is expected to reach full capacity contributing to a rise in the global supply amid the unstable demand. 

However, over the considered time horizon there will be other obstacles for growth. The key one is a decline in purchasing power in major countries-producers. According to the projections of Commerzbank, it sees gold prices in India (major consumer) dropping by 30% at the end of 2020. Such estimates are based on the analysis of the economy wrecked by brutal quarantine crackdowns, which, having a direct negative impact on the country’s economy, are likely to cause reduction in real income of the population. Since March 2020, gold import to India has practically stopped.

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Silver Market

Average silver price in Q1 2020 was $16.9 per troy ounce, which exceeds the average annual value of 2019 ($16.07). Like gold prices, silver quotes fell in March is driven by global oil market conditions.

The ongoing market environment emerged in 2019 when silver notably eased dependence on industrial demand to strengthen as an investment asset. According to World Silver Survey 2020, silver physical demand jumped (as an investment instrument) (+12%) as well as its stock exchange equivalent (+47%). 

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The general trend turned out to be nearly identical to that typical of the global gold market, which is no surprise, given the close connection of two metals. However, the silver prices growth in the second half of 2019 evidenced that now silver prices are mostly fueled by investment demand than by industrial demand as it was before.

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Given that 50% of silver is consumed by industry, industrial demand is likely to be hardest hit by the world economic crisis. Though demand in this sector is forecast to fall by 7% by the end of 2020 being equal to 1 000 t, as investors focus their attention on silver, the physical demand with a projected 16% rise is expected to almost fully set off decline in industrial demand. Together with the anticipated reduction in metal supply due to shutdown of 4-5% mining operations, the market is likely to cut down on metal surplus to 460 t to serve a good ground for price growth amid global economy rebound.