No seasoned investor would ever ask for proof of gold’s credibility as the safe haven asset in times of crises. In fact, gold prices during 2020—an otherwise turbulent year for the economy— further buttress its safe haven status. In 2020 gold prices rose by an annual 25%, and even hit a historical high of $2,067.15 per ounce on August 6.
According to London headquartered World Gold Council (WGC), despite dropping 12% in March last year, when markets were rocked by the onset of the Covid-19 pandemic, gold recovered to finish the year among the best-performing assets, despite many stock indices reaching or surpassing all-time highs.
Like its price, gold’s volatility was also higher during 2020, with annualised volatility at 20%, the highest level since 2013, and significantly above the longer-term average of around 16%. However, as per WGC, the increase in gold’s volatility should be viewed in the context of the volatility of other assets, as most saw volatility rise last year. For example, WGC highlights that the volatility of the S&P 500 climbed to a whopping 32%, almost double its long-term average of 18% (since 2000).
As 2020 was seen as the year of uncertainties, this was reflected in increased trading volumes of gold. According to WGC, the 2020 daily volume average of $182.7 billion a day was significantly above the 2019 average of $145.7 billion. Even gold’s lowest trading volumes for the year—which occurred during April or the relatively muted December—were still quite robust, trading on average $139.9 billion and $143.2 billion respectively.
Also, in its latest monthly report focused on gold exchange traded funds (ETFs), WGC highlighted that by any measure, gold-backed ETFs and similar products (gold ETFs) had a remarkable year in 2020. “Globally, gold ETFs had record annual net inflows of $47.9 billion, or 877 tonnes, collectively increasing their gold holdings by over a third, reaching all-time highs in tonnage (3,752 tonnes),” WGC argued in the report.
WGC—the market development organisation for the gold industry—also noted that all regions registered significant growth in assets under management (AUM), more than the foreign reserve holdings of any central banks except for the U.S., and only 15% below the portion of reserves that the U.S. stores at Fort Knox, where 4,582 tonnes off the approximate 8,133 tonnes of gold is held by the American government.
Generally, while uncertainty drives the lure to invest in gold, during 2020, the ultra-low interest rate environment drove inflows in January and February, and the global spread and severity of the Covid-19 pandemic, from March onwards, boosted interest in gold. WGC noted that the heightened risk environment, fiscal, and monetary responses to the economic impact of the pandemic, and gold price momentum continued to drive inflows well into second half of 2020. “The pace of inflows slowed after the gold price hit a new record high—above $2,000 per ounce in early August—before correcting to the $1,900 per ounce level,” WGC highlighted.
Also, during 2020, the strength in demand for gold ETFs was further underscored when compared against other forms of physical gold investment. According to WGC, in response to the pandemic, demand for bars and coins was mixed: strong in western markets and weak in eastern markets before recovering in third quarter of 2020. “As a result, over the first three quarters of 2020, gold ETFs accounted for almost two-thirds of total investment demand,” WGC said. “This is significantly higher than any previous full year.”
However, as investors reduced hedges and increased risk-asset exposure amid positive sentiment following the U.S. Presidential election and the announcement of successful Covid-19 vaccines, there were sizeable outflows of 109 tonnes in November. And while outflows continued into December, they slowed considerably and were modest by comparison, at 40 tonnes.
In contrast to the first three quarters of 2020, which saw a cumulative 1,007 tonnes added to the global AUM, the fourth quarter (Q4) had net outflows of 130 tonnes. In terms of geography, during Q4, funds listed in North America and Europe recorded outflows of 86 tonnes (– $5.0 billion) and 35 tonnes (– $2.3 billion) respectively, which accounted for the bulk of the outflows. Funds in Asia lost 4.7 tonnes (– $255 million), while outflows from funds listed in other regions was recorded at 4.4 tonnes (– $257 million).
Particularly during December, where 40 tonnes (– $2.2 billion) of outflows were recorded, the outflows slowed considerably with North American (-1.2%) and European (-0.8%) funds witnessing respective declines of 1.2% and 0.8%, while Asian funds experienced the largest decline relative to their size at 1.7%.
The lure for gold was seen in India as well, where gold ETFs attracted net inflows of nearly ₹431 crore, reversing November’s net outflows of ₹141 crore, as investors looked to take advantage of rising gold prices. According to CRISIL Research, gold ETFs in India surpassed over ₹6,600 crore during 2020, and their AUM touched ₹14,000 crore.
According to Ravindra Rao, vice president and head of commodity research at Kotak Securities, gold had been on a rise for the last few years, and the rally increased in 2020 owing to Covid-19 pandemic. At the end of 2020, Rao said that the then recent sell-off had been mainly due to profit taking amid hopes of a Covid -19 vaccine and year-end position squaring. “Although it has slightly dented market sentiment overall outlook for gold is still upbeat,” Rao says.
Also, in Rao’s view, while the Covid-19 situation is proving to be a challenge for the global economic recovery, the lower interest rates prevailing worldwide and U.S. dollar's downtrend might prove positive for the yellow metal. “A sustained break might be seen in 2021 which might push the prices to $1980 per ounce and then $2050,” Rao adds.
And WGC is also bullish on gold demand in 2021. “In 2021, many of the same drivers of gold demand should continue, such as lower rates and improved opportunity costs, fiscal stimulus, lofty stock valuations, and the economic effects of Covid-19,” WGC pointed out. As far as gold prices and AUMs of gold ETF are concerned, the volatility fuelled by uncertainties while ensure that gold does not lose its sheen during 2021, though the year may not see a repeat of 2020.