Investment Update: COVID-19: potential impact on the global economy and gold performance

Sectors: Investment

The COVID-19 pandemic and ensuing economic lockdowns have slashed global growth forecasts for 2020. 

With varied expectations around the speed of the economic recovery, we analyse the potential performance of gold across four hypothetical scenarios provided by Oxford Economics:1

1) swift recovery

2) US corporate crisis

3) emerging markets downturn

4) deep recession.

Our analysis shows that higher risk and uncertainty combined with lower opportunity cost will likely be supportive of gold investment demand in 2020. This could offset the negative effect of lower consumer demand on gold performance as economic activity contracts.

Gold’s behaviour thereafter may depend on the speed of the recovery and the duration of monetary policy and fiscal stimuli.. 

 

Gold valuation made easy

Gold does not fit within traditional valuation models. Without a coupon or dividend, typical discounted cash flow models fail, and there are no expected earnings or book-to-value ratios either. But our analysis shows that valuing gold is intuitive. Its equilibrium price is determined by the intersection of demand and supply. Understanding the underlying drivers and interactions of gold demand and supply gives investors a robust framework upon which to determine gold’s performance (Focus 1).

In particular, gold's behaviour can be explained by four broad sets of drivers:

  • Economic expansion: periods of growth are very supportive of jewellery, technology and long-term savings
  • Risk and uncertainty: market downturns often boost investment demand for gold as a safe haven
  • Opportunity cost: levels of interest rates and strength of currencies influence investor attitudes towards gold
  • Momentum: capital flows, positioning and price trends can ignite or dampen gold's performance.
Focus 1 - Diagram

 

1Oxford Economics (OE) is a leader in global forecasting and quantitative analysis and a specialist in modelling. Headquartered in Oxford, with offices around the world, OE employs 400 staff, including over 250 economists and analysts – making it the largest, independent forecaster.

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This information is for educational purposes only and by receiving this information, you agree with its intended purpose. Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person. 

Diversification does not guarantee any investment returns and does not eliminate the risk of loss. The resulting performance of various investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. WGC does not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.

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Information regarding QaurumSM and the Gold Valuation Framework

Note that the resulting performance of various investment outcomes that can generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither WGC nor Oxford Economics provide any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.