As a safe haven, gold has served as a strategic asset that limited investors’ losses incurred during the pandemic in which it showed the least drawdowns of 2.7 % from its initial value in 2020 compared to other commodities and stocks; for example, total drawdowns of NASDAQ were 23.5 % of its 2020 initial value, and oil drawdowns were 28.1 % of its 2020 initial value1. At times of crisis with low-interest rates derived from quantitative easing by central banks to stimulate the economy, the low opportunity cost of holding gold and the accompanying high returns encourage investing in gold during great uncertainty and turmoil.
Gold’s strength lies within its nature of being a highly liquid asset, robust portfolio diversifier, and a long-term store of value. As inflation figures increased during the end of 2020, investors started to turn to invest in the stock market that provides higher returns believing that inflation is just temporary; thus, plummeting demand for gold as investment by Q3 2020 by almost 36 % from Q2 2020, with the outflows, concentrating in North America. Gold has shown a downward trend till early 2021 with a decline of 109.732% in Q3 2021 compared to Q3 2020, with the total global demand for gold falling by 9% y-o-y in Q3 2021. But as inflation persisted on a longer-term contrary to the earlier belief that inflation is transitory, investors tended to turn back to gold as a hedge against inflation. The 10-year yields decreased by almost 50 bps from their y-t-d high during the end of Q2 2021 served as a tailwind for gold pushing USD gold return to 3.65 % in July 2021 from -7.2% in June 2021[1]. As the fears of the pandemic diminish, the global supply of gold is facing fewer interruptions, mine production increased by 4% y-o-y in Q3 which is considered the highest in 2021, while the total supply is still falling, mainly driven by a decrease in gold recycling.
From looking at historical data and inflation figures in the US and globally, we can expect that there could possibly be an increase in global total demand as investors may keep on having gold as a mitigation against devaluation. Also, central banks in 2021 have increased their gold reserves, and it is expected that this trend will continue at a stable pace. Also, after the Federal Reserve Meeting in late January implying that interest rates will be raised during 2022, gold prices reacted and fell during its sideways movement, and the prices are expected to be under pressure during the next period.
[1] World Gold Council (2021). Gold Market Commentary.
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