The first half of the year saw record investment demand for gold and the World Gold Council (WGC) said they expect that insatiable appetite to remain a dominant theme in the second half of the year.
Although investment demand is likely to remain strong, the WGC noted that jewelry demand is expected to remain weak.
“An economic contraction will likely result in lower demand for gold in the form of jewelry, technology or long-term savings. This is particularly evident in key gold markets such as China or India,” the analysts said.
Tuesday, in its mid-year outlook the WGC said that the COVID-19 pandemic has reshaped the long-term investment landscape. The analysts added that in an environment with massive uncertainty and low interest rates, gold will continue to shine as a safe-haven asset.
The analysts said that expectations for the global economy to quickly recover from the devastating effects of the coronavirus are starting fade. The virus, particularly in the U.S., continues to spread, forcing some state and local governments to reintroduce lockdown measures.
“Against this backdrop, we believe that gold can be a valuable asset: it can help investors diversify risks and may positively contribute to improving risk-adjusted returns,” the WGC said.
Investors are paying more attention to gold as a safe-haven hedge as renewed worries of weak economic growth weighs on equity markets, the WGC said. Global equity markets have seen unprecedented gains since the COVID-19-induced selloff in March. However, the WGC noted that equity valuations don ’t reflect the true state of the economy.
“While many investors are looking to take advantage of the positive price trend, there is growing concern that such frothy valuations may result in a significant pullback, especially if the economy experiences a setback from the second wave of infections,” the analysts said. “Gold ’s effectiveness as a hedge may help mitigate risks associated with equity volatility.”
While the need for diversification rises every day, the WGC said that the list of perceived safe-haven assets continues to dwindle. Since March, governments and central banks around the world have cut interest rates and pumped massive amounts of liquidity into financial markets in an attempt to stabilize the global economy.
The WGC noted that the current low-interest rate environment is forcing investors, particularly pension funds to take more risk for higher yielding assets.
“Lower rates increase pressure on the ability to match their liabilities and limit the effectiveness of bonds in reducing risk. In this context, investors may consider gold as a viable substitute for part of their bond exposure,” the analysts said.
Along with trying to anticipate the shape of the global recovery, the WGC said that there is growing speculation on the price pressures consumers will see. The analysts noted that gold will do well in extreme inflationary and deflationary environments.
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