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Central banks still bullish on gold as US Fed flags more pain from coronavirus

The World Gold Council revealed that central banks are still positive on gold amid COVID-19 risks, while the precious metal dipped below the psychological US$1,700-per-ounce level again before recovering strongly during the week ended June 12 as the U.S. Federal Reserve painted a picture of a recovery that will be slower than expected.

The World Gold Council's 2020 Central Bank Gold Reserves Survey of 51 banks revealed that 88% chose "negative interest rates" as a relevant factor, which the council said would likely be reinforced in the post-COVID-19 era as "continued monetary expansion will keep global rates low or negative for the foreseeable future, a situation that increases gold's attractiveness relative to fixed income."

Gold's "performance during times of crisis" rose to be the third most relevant factor at 79%, up from fifth place in 2019, while factors including "no default risk," "effective portfolio diversifier" and "highly liquid asset" rose significantly in relevance, which the World Gold Council said suggests COVID-19 "may have reshaped thinking towards risk management and the need for portfolio diversification," leading to those factors gaining influence on gold holdings.

The survey was released during the same week the Fed's semiannual "Monetary Policy Report" cautioned that the coronavirus pandemic could have "longer-lasting repercussions" on the economy if enough small businesses and heavily indebted companies shut down or declare bankruptcy.

The report detailed the Fed's actions since the pandemic hit, including cutting interest rates to near zero, purchasing trillions of dollars of Treasurys and mortgage-backed securities, and announcing nine emergency lending facilities including the Main Street program.

Price ring

London Metal Exchange-traded gold fell below US$1,700/oz, to US$1,680.40/oz on June 5, its lowest point since late April, before recovering strongly to close the week at US$1,730.20/oz as of June 12. Silver was broadly flat, increasing slightly from US$17.38/oz to US$17.46/oz.

Base metals were a mixed bag, despite fears of a second wave of coronavirus cases, the Fed's glum economic outlook and another dismal labor report pushing U.S. equities June 11 to their biggest losses since mid-March.

Copper rose from US$5,588/tonne to US$5,785.50/t over the week ended June 12, aluminum increased from US$1,553.50/t to US$1,560/t, and tin jumped from US$16,425/t to US$17,200/t. Zinc fell from US$2,038.50/t, its highest point since February, to US$1,991/t, and lead decreased from US$1,749.50, its highest point since March, to US$1,739.50/t.

Nickel decreased from US$12,785/t to US$12,733/t after a June 4 Reuters report quoted the minerals director of Indonesia's energy and minerals ministry as saying the exporting of nickel ore will stay banned despite the government easing some restrictions on exports of some other minerals.

The S&P Global Platts IODEX 62% iron ore fines CFR North China price rose from US$100.95/t to US$105.35/t.

Talking points

Fed Chairman Jerome Powell told reporters after the Federal Open Market Committee's June 10 meeting that the central bank will do "whatever we can, and for as long as it takes" to stabilize the economy and help it recover quickly, a policy attitude the bank has previously flagged.

Australian independent analyst Gavin Wendt said in a June 8 note that this approach makes the Fed "buyer of first resort, last resort and every other resort in-between."

"The 'Fed put' that created a floor under stocks following the 2008/2009 recession has morphed into an 'everything' put, creating floors under everything. As a result, money has surged back into equities, as investors see the Fed backing markets," Wendt wrote.

Wendt said gold has not only provided a hedge during COVID-19 but has outperformed all major U.S. stock indexes, also noting that even silver has performed better than the Dow and S&P 500.

"And it isn't just stocks — gold has outperformed real estate, the U.S. dollar, and even Treasuries," Wendt said. "Through May of this year, gold had risen more than all major asset classes."

Financings

Nippon Steel Corp. launched an offering of unsecured straight bonds due 2023, 2025 and 2030 worth a total of ¥80 billion.

New Gold Inc. initiated an offering of US$400 million of senior notes due 2027.

Steel Dynamics Inc. completed the sale of 2.400% notes due 2025 for an aggregate principal amount of US$400 million and 3.250% notes due 2031 for US$500 million.

Artemis Gold Inc. outlined plans to raise up to C$155 million in aggregate and increased the target to C$175 million the same day, aiming to fund part of its acquisition of the Blackwater gold project in British Columbia.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.