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Geopolitical uncertainty in wake of COVID-19 may give gold time to shine

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

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Geopolitical uncertainty in wake of COVID-19 may give gold time to shine

The world is entering a period of deep geopolitical uncertainty, but that could be good for gold prices, industry observers said in presentations to the World Gold Forum.

Presenters and attendees logged on to the virtual conference starting April 20 to discuss the gold industry and the COVID-19 outbreak that has roiled global markets and drove the event online. While gold has largely proved its ability to store value through the turbulent market conditions created by the coronavirus, there remain a lot of unknown risks to the sector.

"There's a potential scenario that the COVID crisis ... brings countries together and there's more collaboration. We think that, unfortunately, the more likely scenario is that the crisis accentuates this trend of division given the temptation, particularly of populist and nationalist leaders, to blame the foreigner, to blame others, and particularly if the economic crisis deepens in different countries," said Daniel Litvin, founder and managing director of Critical Resource, a consulting firm specializing in political, stakeholder and sustainability challenges for the mining sector.

There could be a temptation for global economies to erect more trade barriers to international business in the wake of the pandemic, a factor that may depend heavily on the U.S. presidential election, Litvin said during his presentation to the forum.

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"Even if a more internationally minded president is elected in the United States, we do not think the world is likely to revert to its previous, more benign situation of international collaboration," Litvin said. "So this hypothesis, clearly if it's true, is not good for the world, but it is good probably for gold prices to the extent that gold is often a safe haven at times of not just economic, but also geopolitical, uncertainty."

Gold prices have performed pretty well so far despite a bleaker outlook for much of the rest of the economy. COMEX gold futures dipped in March, primarily attributed to investors looking for sources of liquidity during a major equity sell-off, before continuing a general upward trend and hitting a recent peak of more than US$1,768/oz.

However, the sector still faces some market risks.

"We are still expecting to see good support for gold certainly over the second quarter and into the back half of this year," said Colin Hamilton, managing director of commodities research at BMO Capital Markets. "Obviously, as China policy on the monetary side starts to kick in, that's when we have a potential for some overheating. That will be the next challenge, perhaps for the gold market, but I think that's still six months away."

In the near term, gold prices are expected to continue to move higher, said Suki Cooper, precious metals analyst at Standard Chartered Bank. That is particularly true given unprecedented levels of fiscal stimulus and monetary easing, Cooper said.

"It creates a very positive backdrop to the gold market. While gold has rallied during risk-off periods and the aftermath of the financial crisis, gold proved it could extend its gains during response periods as well," Cooper said. "Potentially as a diversifier, gold is likely to attract a flight to quality as well as a flight to safety."

Cooper said Standard Chartered Bank's economists expect a strong policy response to offset the drag on the economy created by the coronavirus. They also project that the worst of the impacts will be over by the first half.

While a lot of countries and localities talk about "flattening the curve" when it comes to mitigating the effects of COVID-19, Litvin said gold companies should be thinking in the same way to protect themselves.

"Early action and strong real strong action will pay dividends, both in managing the potential negative health impacts among employees and communities and also in positioning the organization for the manage phase and then the recovery phase once the immediate crisis begins to abate," Litvin said.

Top gold producers by 2019 attributable production included Newmont Corp., Barrick Gold Corp. and AngloGold Ashanti Ltd.