COVID-19: Potential Impact on Gold Performance

Fiat Currencies Depreciate Against Gold 

For reference, this is how gold has appreciated against the eight most traded fiat currencies since the start of this year:

So far, so good, if you possess gold! The big losers here are the pound sterling, the Canadian dollar and the Australian dollar, which all have devalued by over a quarter against the precious metal in less than six months. The key question now is, how will gold fare as the global economic downturn starts to bite?   

WGC Forecast 

The coronavirus epidemic, alongside government-imposed shutdowns, has likely initiated a worldwide depression. How deep the economic damage will be is uncertain. 

The WGC, with assistance from Oxford Economics, have provided analysis as to how these changes in demand and supply could affect gold in the coming months. They provided four hypothetical situations: 

1) a swift recovery 
2) a US corporate crisis 
3) an emerging markets downturn 
4) a deep recession 

The modellers concluded that gold would very likely continue to have ‘positive returns’ for the rest of 2020, with a strong possibility that 'gains’ would continue into 2021 and 2022. While there were discrepancies as to which scenarios produced higher returns, all situations were forecasted to have a positive return overall over the next five years.  

In summary, the WGC stated:  

“Our analysis indicates that, across the hypothetical scenarios under consideration, higher risk and uncertainty combined with lower opportunity cost will likely be supportive of gold investment demand in 2020. This could offset the negative effect of lower consumer demand on gold performance as economic activity contracts. Gold’s behaviour thereafter may depend on the speed of the recovery and the duration of monetary policy and fiscal stimuli.” 

Gold Price in USD Since January

The WGC has stressed that it only examines demand and supply trends in this modelling, saying that it ‘does not forecast the price of gold’. Of course, nobody has a crystal ball and is able to tell accurately what will happen to the price of gold in the future, so it is probably wise for the WGC not to make such predictions. 

Is Gold Going Up? Or Are Fiat Currencies Weakening? 

The WGC seems to treat gold as a commodity, with analysis on ‘gold performance’ and ‘returns on gold’. This is disputable to those who see gold as money. Whilst it can be said that gold is 'gaining value’, as per the table above, it can also be said that gold is a constant and really it is the fiat currencies which are performing badly. It depends on what angle you look at it! It may come down to how much confidence each option has. So the question is, do investors have more confidence in gold, or government-issued fiat currencies? 

The WGC report can be found here.