This year’s global gold supply will fall because of the Covid-19 pandemic, which has forced mine closures in major centres such as SA and Mexico. However, with prices forecast to test fresh highs, demand is expected to come under pressure.
SA and Mexico rank eighth and ninth in global gold production, respectively, with output of 118 tonnes and 111 tonnes. Metals Focus, a UK-based precious metals consultancy, said in its Gold Focus 2020 report that these two countries would be hardest hit by decisions by their governments to curtail the spread of the coronavirus.
Combined with other disruptions to global production, world production is forecast to fall 5% year on year in 2020 to 3,359 tonnes, a five-year low, Metals Focus said. “We are forecasting 16% lower output from SA and Mexico as a result of these mine closures,” it said.
For SA, which is already one of the highest-cost gold production jurisdictions, the disruption is likely to further lift mining costs. All-in sustaining costs increased for a fourth year in 2019, rising 4% to $1,364/oz, which was $29 below the average gold price for the year. Globally, the cost increased 2% to $941/oz.
The temporary closure of mines will have pushed up costs.
“These operations will have higher operating costs this year as a result of care and maintenance costs, lower production and reduced efficiency. Unit costs will only stabilise when these mines are able to return to full production rates,” Metals Focus said.
The gold price will benefit from its safe-haven appeal in times of crisis as governments scramble to save their economies and investors deal with uncertainty about the duration and severity of the pandemic, which flared up at the start of the year.
“Even under the most optimistic scenarios for an economic recovery, risks will abound and ultra-loose monetary and fiscal policy will continue. We thus expect professional investors will remain buyers,” Metals Focus said.
“This is the main assumption behind our forecast that the price will test all-time highs before the end of the year and the average for 2020 will be 22% higher year on year at $1,700/oz,” it said. The high was $1,921/oz reached in 2011.
In May, gold hit its highest price since October 2012, topping $1,765/oz.
“We believe this backdrop will drive further inflows of institutional money into gold over the rest of the year and beyond. Importantly, we expect that much of this positioning will be strategic and therefore sticky,” Metals Focus said, alluding to investors holding on to their positions.
The consequences of these high prices will be severe for the demand side of the market, with jewellery, by far the largest source of offtake for the metal, forecast to plunge by a quarter to 1,596 tonnes, a level last seen 33 years ago.
Central bank gold purchases for their reserves are expected to fall 46% to 350 tonnes as governments slow their buying to focus on rising national debt, shrinking tax bases and spending to prop up their economies.
The volatile nature of the gold market on both the supply and demand sides should lead to an excess of gold.
“Overall, the market is expected to see a massive surplus, which, as noted above, institutional investors should be all too happy to absorb,” Metals Focus said.
For SA, there was one little ray of light in the report.
“SA retained its position as comfortably the largest gold bullion coin fabricator last year, with a 20% rise to 81.1 tonnes,” it said. The next biggest fabricator was Turkey with nearly 40 tonnes of gold coins.
“In a similar fashion to 2018, the growth last year reflected increased retail demand for the Krugerrand in the local market, due to growing political uncertainty, and also in key overseas markets,” the report said.
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