Gold in the Age of COVID 19

Gold in the Age of COVID 19

So, you might be thinking: why gold?
First, let’s briefly go through the fundamentals:

  • Why do people buy gold?
  • Gold as an investment tool.

Gold as an Investment

#1 Intrinsic Value

Gold has been part of our civilization since the dawn of humanity. 

Gold has been associated with wealth and status, especially for millennials. 

Whether as the Oscar statues or the Olympic medals, gold has really been part of who we are as a species for the last 4,000 years. We believe it is safe to assume that it will remain this way for the foreseeable future. 

When there’s a crisis, people feel the importance of financial security. They feel safer when they have gold bars in their possession. They want to buy gold. They want to buy precious metals.

#2 Portfolio Diversification

The idea of gold as a diversifier is that it has a relatively strong negative correlation to the financial markets and perseveres in times of crisis. If you have a component of gold in your portfolio, you increase the returns on that portfolio. 

Anything between 2% to 10% will enhance your returns on your portfolio.

#3 Returns Over Time

The longer we keep gold, the better it performs. 

As a reminder, until 1971, gold was backed to the US dollar, as well as vice versa. Since 1971, gold has appreciated in price an average of 10% a year so it does provide returns over time. Although nothing is guaranteed, looking at the longer-term, it provides good returns, which are on par with other markets such as the fixed asset markets and the financial markets.

#4 Maintained Purchasing Power

As we look at gold as a wealth preservation tool and compare it, for example, the number of coffee cups we could buy with an ounce of gold in the 70s, we discover that that same ounce would today buy us four times more. 

While buying gold may not make you rich, it will definitely ensure your wealth is maintained because over time it will allow you stronger purchasing power than what you’d get from fiat money. 

#5 Consistent Demand

The demand for gold is relatively consistent. Thanks to the jewelry, investment, and technology sectors, not to mention central banks, gold has constant demand and secured supply. However, supply and demand in this market are subject to mines being open and able to extract gold, which keeps its availability relatively scarce. 

#6 Highly Liquid

The last reason we’ll cover here for why gold makes a good investment relates to the fact that it’s highly liquid. We like to call it a global currency. Gold is in a way a decentralized means of exchange – There’s no government issuing it, but you can hold a bar of gold, and sell it in Hong Kong or Singapore or anywhere else, and get hard cash money against it. This is crucial especially in times of trouble or when there’s turbulence in the market.

Bullish Bullion

Even in the pre-Coronavirus world, we had good reasons to be bullish on gold:

#1 Interest rate cuts

Looking at what happened during 2019, we were dealing with the interest rates and we saw what the Federal Reserve was doing in the U.S. We saw them taking down the rate from 2.5 back in May 2019 to 1.75 in March 2020, and then down to zero. And lately, we’ve been looking at the UK, with 0.75 percent down to almost zero. So, when interest rates are low, gold is more attractive simply because people don’t have a reason to save their money in other assets, and so they put it in gold.

#2 Negative yield bonds

Negative yield bonds mean that investors are willing to pay money for the issuers of the bonds to keep their money; usually, it’s the other way around… 

Say the government needs our money. They issue bonds, and they pay us dividends and/or interests on this bond. This year, 18% of the global bond market is actually a negative yield debt, which means that investors are feeling at risk. They are concerned and they are willing to pay for stable institutions just to keep their money.

#3 Fear of recession and the global debt

In 2019, we had a trade war between China and the U.S., which put pressure on economies both in China, the U.S., and other countries. We had fears of recession and collapsing the equity market, which was not even related to the Coronavirus yet. 

As we know, the economy was looking like we were moving out after 2008. And the question was not: Is there going to be a new financial crisis? But instead: How much sooner will the financial crisis happen? Again, back then there was no pandemic insight. 

Looking at the level of debts in 2019, the records were high in terms of debt. And that shows major concerns with investors on the ability of the government and other entities to pay their debt. We have the same problem here in China. Questions about the sustainability of both households and corporations are yet to be solved even as we move forward out of this Coronavirus situation. 

#4 Looking at central banks

The last thing that encouraged us and peers to look at gold in a favorable way, even before the Coronavirus, is what central banks did during the last few years. 

The biggest purchases of gold by central banks since 1971 and the biggest buyers of gold would have been China, Russia, Turkey, Kazakhstan, with a very interesting case of Poland buying a lot of gold in 2019 as well (more than doubling its gold reserves). 

These activities signaled the market that if the central banks are buying gold, they might know something the investors don’t. They know why’d you accumulate gold because they’re concerned with something. 

China and Russia have political motivations – They’re looking to “de-dollarize” their economy. And one of the best ways to do so is to replace dollars with gold and to stabilize their currency and give it value. 

Poland is an interesting case because it almost doubled its gold holdings. Their Central Bank governor mentioned the reason was financial stability. 

Banks have been bullish on gold

The year 2019 was associated with the debt, the trade war, and other geopolitical tensions. And observing what the central banks were obviously doing, we were very bullish on gold even before the current crisis.

Buying and Selling Gold Amidst the Pandemic

Looking at the current COVID-19/Coronavirus pandemic, we saw it sweep through China; from Wuhan in December, to later affecting other regions. By late January, Hong Kong shut down; the education system, government offices, and more shut down. All government activities were paused unless they’re truly essential. Recommending staying at home was the rule. The immediate financial effect is just unimaginable. And, it did spread globally. 

No matter where you are, you’ve experienced the same thing roughly at the same time. 

From a financial point of view, the world has been put on hold. Everything is frozen. 

Being here in Hong Kong, you feel like you’re in a car and someone turned the switch to idle. Everything is hibernating. This is where we are now. Things did seem to improve. But there were unpleasant surprises in Hong Kong when the 2nd wave came on the scene. 

Singapore’s experience is a massive increase in new infections and it literally shut down, so it’s far from being over. In the UK, Boris Johnson said that this is the most dangerous part of the crisis because it will decide if you will get to leave this easily or not. 

COVID Impacts on the Gold Industry

Let’s look at the three major effects this crisis had, especially on the gold industry.

Supply Chain Disruption

Refiners and mines have been shut down for months, from the Perth Mint in Australia to the New Zealand vault where we store some of our clients’ gold, all the way through Singapore, Hong Kong, and Switzerland. Many more may be affected: the Royal Canadian Mint, the US Mint, etc.. On the refinery side, we see either a total shutdown or working below the full capacity because employees are sick, can’t get to work, and various other reasons. 

The same applies to transportation and logistics. 

Usually, gold is shipped using commercial flights. The moment air traffic came to a halt spelled trouble for the precious metals logistics – If you’re a mine in Africa and you need to get your material out, there’s no way of doing it. And if you are going to ship gold, it becomes increasingly difficult. 

For example, the minimum quantity of gold that a logistics company can ship is 800 kilograms. That’s a lot of physical gold to be moving around, especially for investors. This in itself puts working in our sector under very stressful limitations insofar as our access to material is concerned. 

On the supply side, for example, we’ve had a mine send us gold for sale which had accumulated to a point where their volume was 5x  what they usually sell, simply because they couldn’t get the gold shipped earlier. Shipping availability is a major issue the industry is facing now. 

Huge Gap Between COMEX Futures Contracts and Spot Prices

The spot price is what you can see on Bloomberg or Reuters. It’s a financial term that relates primarily to the price of paper gold in London, with inputs from other price discovery mechanisms. Usually, there are a few dollars spread between the spot price and purchase prices.

At the moment, however, we’re seeing some very big spreads between the COMEX and the spot price – Up to 70 points, which means up to $70 gap between the spot price and the futures market. 

The reason is a big demand for physical gold by investors that puts delivery pressures due to fears of lack of supply on the COMEX, which sell future contracts.

Gold Price

We live in extremely uncertain circumstances, and gold normally flourishes in these conditions.

It’s this uncertainty in the markets that led us to be bullish on gold in 2019. With uncertainty now enhanced even further the answers to questions like “When and how do we get out of all this?” becomes much less clear. Rather than looking at a return to previous status quos, we’re now seeing a rise in voices asking “Is the great lockdown here to stay?”

One thing is clear – There’s no doubt this uncertainty is causing increases in gold prices. 

In the last few months, we’ve reached seven years high. We’ve seen it subside a little since, but the peak at 1730 an ounce, was extremely high.

Gold in the Age of COVID 19 - J.Rotbart & Co

High Volatility

One more thing we haven’t mentioned here is the high volatility. Gold became quite volatile in the last few months – As you can see on the graphs for the ups and downs of the gold price, you’ll note a drop as well, which was quite surprising. Gold is among the few green lights in the big sea of red. In every crisis, you have gold that suddenly stands out. 

Some people think gold is a relic. That doesn’t change how the data speaks for itself. 

The result of all these phenomena is a shortage in supply of silver and gold. Because on one hand, we have a high demand. And people freak out; people run for safety. On the other hand, we have major difficulties to source gold and move it around. The result is a shortage and the premiums have gone rocket high, up to 10% of the regular premiums. 

Spot Price and Futures Price

To emphasize, the spot price that we see is the price of paper gold. When we move to physical (the real premium which reflects supply and demand), it reflects the cost of manufacturing the physical product as well as the cost of transportation. Lately, for the premiums, they get to the point of a silver offering being at the premium of 60 percent of the actual price of silver. 

Paper vs. Physical

We may look at this as a premium, or perhaps a deviation between the paper market and the physical market. In the physical market we have two components, spot plus premium, while on the paper market, we have one component. But if you combine the physical price to one component, the price of silver today is not 15.5-15.3 s an ounce, it’s actually 20-22 dollars an ounce. 

We sold gold coins earlier today at $1,850 per gold coin, although the spot is at $1,720. That reflects a $130 premium on the coin value. These are the type of results we’re seeing in all these major disruptions in the market out of this phenomenon. Price discoveries are also quite difficult these days. 

Hedging Risk

If we look at a few retailers in Singapore, their spot price could be 20% and 30% more expensive or higher of a spot than the one we’re seeing. Why? Because if you’re selling gold and you’re hedging your risk, you’re actually going to the future market. If the future market is 20, 30 dollars more expensive, then actually, you need to pay more to hedge your risk. So if you’re relying on hedging, this gap between the COMEX and the spot is quite significant. Some investors end up paying more not only in the premium but on the spot price as well. 

Silver Price

The last thing to mention is what other metals did this year. 

They weren’t so lucky. We had silver going down 15%, which surprisingly is one of the reasons clients buy silver because investors believe silver now is under-priced compared to gold. Silver is an industrial metal apart from its investment purpose. When there’s a recession, there’s less demand for silver, which means the price will go down. On the other hand, that means investors want to buy more silver, but there is less silver to buy and whatever you could buy is more expensive. 

Just as information, we’re taking orders now for silver, which will not be fulfilled in physical metal at least in the next six to eight weeks. So our clients plan to buy silver now. Most of them expect delivery sometime in the summer. They fixed the price now, and they’ll get the actual metal in the vault under their name in a few weeks because the refineries cannot meet the demand.

Platinum Price and Palladium Price

Also after being shut for weeks, refiners will prefer to work on gold products, and their gold financing costs are heavier than on silver products. 

Platinum is 20% down. Platinum is a metal used for a lot of diesel engines. As there was less demand for diesel engines, we saw a slow decline in the price of platinum over the last few years. And in a total lockdown, nobody’s buying anything they don’t need, such as platinum. 

The same goes for palladium: a very modest, declining price. Palladium is also used for hybrid cars. So there is some actual demand, which is doing very well in the last few years. 

What we may expect is some type of a bubble, for which there was a correction in 2019, but so far it’s holding this year with no big corrections yet. 

Next: What can we expect in the short term and the long term? These are some general assumptions.

  • The good news is that country by country we’re moving away from this crisis. 
  • The bad news is we don’t know yet what the long term effects will be:
    • Businesses shutting, unemployment rates and fiscal deficits. 
    • Voters/ electorates unhappy over unemployment, and reduced finances. 
    • Political fallout due to financial pain. 

Ballooning Debt

When you look at the U.S. and its ballooning debt, you quickly realize one of the reasons gold is relevant. 

People are afraid of debt, especially when we see that the previously unsustainable levels have been further burdened by the US spending another 2-4 trillion dollars to handle this latest crisis, and European Central Bank the following suit soon after. 

They’re all basically printing money for which there is no real coverage in the financial systems but which will eventually have to come from somewhere.

How will governments solve their debt problems and the depreciation of their fiat currencies? 

In the longer-term, these devaluations spike fears for inflation because. Cheap money available for investors to spend may cause property prices to go up and other assets to go up, ballooning some of the financial markets even further.

Reasonable Premiums

For our industry, premiums are already getting more reasonable. So, assuming no major second or third waves, you’ll gradually see a bit more supply of metals. Their premiums are a bit more reasonable. It’s still high, especially for products coming from North America, but Hong Kong is almost back to full refining capacity. The same goes for Switzerland, which is slowly coming back to work. We had some gold deliveries leaving the refineries from both countries this week to our clients. The physical and its premium are going down, which is good.

Average Pricing

In terms of pricing, everything 25 is an average. It’s basically around that already and Bank of America says they expect gold to reach $3,000 by October 2021. This is a major question that hasn’t been answered yet. Our assumptions are more conservative.

Looking at our history, we’re saying that gold is doing an average of 6 – 12 % a year. Of course, it’s doing more this year, but it really depends on how we’re going to leave this crisis and what the governments are going to do. Look at the tourism industry, for example – Is the recovery going to be fast or slow? Are the financial markets going to recover fast or slow? We don’t know yet. 

We look at it like a hurricane that passed through a village; you don’t know how much debris there is until the storm is over and until the rescue team can see what’s going on. Everything now is a kind of a guessing game. We’ll have to wait and see. But at least I’m definitely thinking about the price of gold, going major high this year; it has done well enough. The problem is investors are concerned with what the government will do and with all this printing of money. 

Safety

To answer our clients with various different questions and concerns, let’s start with this: the main question is whether the ETF or other unallocated holdings or paper, COMEX futures, and so on, are safe enough. Definitely, our answer is negative. 

If a client’s looking for security, the physical is the best way to go. There are two main reasons. The first reason is that physical gold has no counterparty risk. You hold the bar. It’s yours. You’re not subject to any third party issuing it and questioning their good standing and so on. We don’t know what’s gonna happen, and EFTS at the end of the day, or future contracts, mostly are promissory notes which rely on the third parties to honor commitments. 

The second reason is having 100 % of the underlying assets allocated under your name, which is extremely important especially in times like this. If a client’s looking for short-term exposure then there’s nothing wrong with ETFs or futures. But if you read the fine print, and see there’s no gold, then you should realize that there’s no liability either. If you lose your money, you’re doing it at your own risk. So, for security reasons: buy physical gold. The eternal question is how much? 

Enhancing Portfolio

The World Gold Council checked analytically and found that anything between 2% to even 15% can enhance the result that you returned on your portfolio in the long run. For those who don’t know what a physical gold bar looks like, we can make sure you know what it looks like. This is important because it’s how clients get the assurance that the asset is there. You have the refinery hallmark, we have the purity, we have the unique serial number that makes sure you are getting your own gold bar and not fractured ownership or unallocated holding. 

Making a Smart Decision

We think of choosing a solution, which means unallocated gold holdings; a kind of online exchange. These products are very good for the short term and when you think things are going to be fantastic. If you’re afraid of the systematic risk of the financial crisis, then you need to have your own allocation to your own gold bar. And of course keep it within the London Bullion Market Association, such as refiners, logistic companies, that are members of the Association. 

When you buy gold, don’t put it in a facility like this. This is a real photo from a facility in London that got robbed a few years ago, which was an old facility with no insurance. As you can see these were real safe deposit boxes that were opened and had 200 million pounds stolen from them. So make sure you have insurance coverage, make sure you have liability, and make sure you use a new vault. 

The next thing is to choose where to store your gold. This is a matter of risk perspective. We see clients want to take gold and silver products home because they’re afraid of total lockdown:, no ATMs, no cars, no public transport, which we did see in a few countries. Public transport was put on hold in some jurisdictions. Or they want to diversify, but when diversified, they want to put it in a few locations and share their holdings.

Gold Dealers

Asia is probably the most functional in jurisdictions during this crisis, such as Hong Kong and Singapore in terms of access to metals and the ability to trade. In the U.S., we had big bullion dealers that shut down for a few weeks because they had to move their inventory away from New York. In comparison, now we consider Hong Kong and Singapore to be extremely safe. They’ve proven their capability and have a disciplined population that is capable of keeping in line with the government instructions and keep themselves safe. 

In case you don’t know us, we’re a family-owned bullion company based out of Hong Kong. We have offices in Singapore and in Manila. We provide five main services. One is the purchase and sale of precious metals. Of course, everything is physical. But we also arrange the logistics services surrounding it, the transportation, as well as the storage. 

We offer finance based on gold as collateral, which is very useful in times like these. We have clients, and they need cash. They need to close their margin calls on other financial products. They don’t want to sell their gold.

The easy way to do it is basically to collateralize the gold, keep it under their name, and then take the money and put it elsewhere. We are working very hard these days because every trade takes a long time. We work harder on every trade because we need to source the metal and find a way just to transfer it or to store it.

Gold is Gold

Does the age of a gold bar matter? No, because gold is gold. You can always melt it and liquidate it. What usually happens is that old gold bars are being refined and are being recast to new bars with certificates, something that is a bit easier and accepted. So there’s nothing wrong with old gold bars as long as they are refined by refiners that are currently members of the London Bullion Market Association. 

Again, the reason is that we want to be able to keep them liquid. So as long as the bars are recognizable and they’re in a vault that is recognizable in the London market, we can sell them very quickly. Otherwise, we need to meet them, but that will take longer. Talking about disruption in the supply chain, like melting gold bars, making sure they’re real gold bars, is a matter of a couple of days. 

We’re now looking at two weeks because the refiners are in full capacity. They don’t need gold. They’re sitting on mountains of gold that they financed so they need to refine their inventory before they can take actual inventory. So we saw refiners in Asia and in Switzerland not taking any new material lately.

Buy Big vs. Buy Small

Is it better to buy kilo bars or smaller bars and coins? It really depends on the amount and purpose. For example, 100g bars became quite a best-seller for our clients because they can sell in $5,000 batches rather than $50,000 batches.

A tip would be if you plan to have a sizable purchase, buy both. Put the bulk in 1 kg bars, which is safe money so don’t touch it. But have some coins or some smaller bars. If you’re looking at smaller transactions, buy the smaller bars, by all means, anything below $10,000, $15,000. Coins are good and very expensive now. So again, the U.S. Mint is shut down, the Royal Canadian Mint is shut down, so the premiums on coins are extremely high and you will not get those premiums back when you sell the coins.

If you’re buying now: gold coins for 7% or 8% premium, when you’re selling them, you will not get 8% over the spot price unless, again, it’s a very unique circumstance. You might get 1% more than you will get on the smaller bars. So if you’re thinking of a small investment or something that is easily liquidated, 100g and 50g are good enough. Or 250g is a good size of the transaction and coins are great if you want to keep them at home.

German, American, and Filipino clients, for example, would like to have coins at home because they are thinking of the rare scenario where they need to go where there are no ATMs. If they want to buy bread, they can have a coin that they can give if necessary.

Unique Circumstances of Today

What we see now are those major disruptions, which make our life difficult. But these are very unique and interesting circumstances. So bear in mind the gap, the bid and ask price, due to the fact that COMEX had futures contracts. Bear in mind the disruptions in the supply chains, which means don’t ship gold. Don’t move gold around now. It’s not safe. It’s expensive. If you need to move it, park it somewhere. That’s what we do with our clients, we park it, we wait for the storm to be over, and then we’ll move to wherever they want to. 

Of course, the major thing is to remember that, at the end of the day, we’re looking at an asset that will perform very well in the near future because we are heading into probably the worst financial crisis since the Great Depression. Governments are going to print a lot of money, which means your fiat money is going to be worth much less than it’s worth today.


J.Rotbart & Co