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Gold investors should get ready to face emerging developments

Demand for gold dropped to 892.3 tons in Q3 – its lowest quarterly total since Q3 2009 – as consumers and investors continued to battle the effects of COVID-19. At 2,972.1 tons year-to-date (ytd) demand is 10% below the same period of 2019.

Although, jewellery demand improved from the Q2 record low, the combination of continued social restrictions, economic slowdown and a strong gold price proved burdensome for many jewellery buyers, demand of 333 tons was 29% below an already relatively feeble Q3 2019 demand.

By contrast, bar and coin demand strengthened, gaining 49% YoY to 222.1 tons. Much of the growth was in official coins, due to continued strong safe-haven demand in Western markets and Turkey, where coins are the more prevalent form of gold investment. Q3 also saw continued inflows into gold-backed ETFs, although at a slower pace as compared to the first half. Investors globally added 272.5 tons to their holdings of these products, taking ytd flows to a record 1,003.3 tons.

Central banks generated small net sales of gold in Q3, the first quarter of net sales since Q4CY10. Sales were generated primarily by two central banks – Uzbekistan and Turkey – while a handful of central banks continued steady purchases, though in smaller quantities.

Demand for gold used in technology remained weak in Q3, down 6%YoY at 76.7 tons, but the sector saw a decent quarterly improvement as some key markets emerged from lockdown.

The total supply of gold fell 3%YoY in Q3 to 1,223.6 tons, despite 6% growth in gold recycling, with mine production still feeling the effects of the COVID-19 restrictions in 1HCY20.

Following the details from a recent release of gold demand trends report for Q3 2020, one of the questions being asked frequently is how much influence the US Election will have on gold demand and performance.

The simplest answer is that while, understandably, investors are closely following the US Election for many reasons, it is just one of the many factors that influence gold at a global level. Specifically with respect to this election cycle any of the possible outcomes – whether a clear win by either Republicans or Democrats, or a contested election, will likely support one or several of the key drivers of gold demand.

Looking back, gold performance has not significantly differed based on the party controlling the White House. Since 1971, gold returns were 11% on average per year during Democratic presidencies and 10% during Republican ones. Similarly, gold returns were only slightly higher in the year following a challenger party’s victory relative to an incumbent party’s victory (7.9% versus 6.5% respectively).

US gold demand

Gold has a global market; it is purchased by consumers and investors around the world for a myriad of reasons, but primarily as a means to preserve capital and diversify risk. The US is the third largest gold market, accounting for approximately 7% of global physical gold demand in the form of jewellery, technology, bar and coin, and ETFs. While activity in derivative markets, especially through COMEX generally represents positioning by US investors, there is still a large portion of physical gold demand that is influenced by global dynamics well beyond the US Election.

High risk and low interest rates

The stakes are clearly high in 2020 election. The political landscape has been increasingly divisive over the past several years in the US and around the world. Investors are bracing for a potential period of even greater volatility. Many economists have published views regarding how a Republican or Democrat win might impact various macroeconomic indicators. Any potential outcome will likely support gold investment demand, though for different reasons.

A Trump win will likely be seen as business friendly and constructive in terms of fiscal policy, supportive of the positive momentum the stock market has enjoyed for most of the past four years. On the flip side, trade tensions may resurface again and monetary policy will likely remain very accommodative for a long time

A Biden victory may create concerns of higher taxes and larger budget deficits, and result in corrections in the stock market, but it could be seen as more conciliatory in terms of trade. In this case analysts don’t believe that monetary policy will become more restrictive any time soon.

A contested election or unclear outcome for a period of time, viewed as a concern by many will likely result in a particularly uncertain period for financial markets. The combination of a high-risk, low-rate environment is expected to maintain gold investment demand for the foreseeable future. As such, investors should prepare for ongoing high volatility as market conditions adjust to emerging developments.

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