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COVID-19 impact on precious metals

Gold09.07

Ensuing the recent economic downturn, intensified by the unprecedented COVID-19 pandemic, investor demand for precious metals, those not solely reliant to industrial applications, has significantly increased to safeguard the invested capital, this portrayed in the noteworthy increase in prices.

The four industry-standard precious metals, used for both investing and hedging include; gold, silver, platinum, and palladium.

Notably, gold and silver, the two outperformers on a year-to-date basis within the precious metals segment experienced a 19 and 5.1 per cent increase respectively. Meanwhile, metals which are heavily dependent on industrial demand, hampered by the COVID-19 pandemic, have largely remained flat or experienced declines, in-line with the fall in demand. Palladium has on a year-to-date basis registered a marginal increase.

Gold, supported by unprecedented monetary stimulus and interest rate cuts by major central banks around the globe to cushion the economic impact posed by the COVID-19 pandemic, has been the haven of choice for investors, since the COVID-19 outbreak in the capital of central China’s Hubei province, struck. Now, surpassing levels previously witnessed in 2011, amid the resurgence in COVID-19 cases in some parts of the world – heightening concerns about a fresh wave of cases and decline in demand for the US dollar.

Albeit, well placed to extend gains in the second half of the year, as real yields slump to the lowest levels in at least a generation, the market consensus seems to favour silver over gold. After the gap between the two outperformers on a year-to-date basis soared to its widest level in more than thirty years at the peak of the COVID-19 pandemic, commodity investors are now betting on a recovery for the white metal. This, possibly leading to an outperformance, albeit doubts of weaker demand from the industrial sector.

On the contrary to the gains experienced by both gold and silver on a year-to-date basis, palladium; the star performer within the commodities market for 2019, remained flat, realizing marginal gains. After rallying and posting substantial increases in the first two months of the year, palladium, conditioned by the demand for motor vehicles slumped, wiping-out gains realized in the preceding months.

To clarify thoughts, the growing value of palladium, witnessed in recent years is mainly attributed to an increase in demand as a result of most car manufacturers, shunning the use of platinum and preferring to use palladium, in vehicle catalytic converters, designed to reduce harmful emissions for engines running on petroleum.

In a bid to reduce the said harmful emissions, governments, especially China’s, tightened its regulations vis-à-vis the emissions released, forcing automakers to increase demand further, resulting in a global shortage, instigating palladium prices to hit successive records.

Consequent to the lockdown measures introduced to reduce contagion, thus impeding car manufacturers from resuming their operations and the decline in automotive sales globally, reducing the supply-demand imbalance, the price of palladium significantly declined, slowing down its upbeat trend witnessed in recent months.

Lastly, platinum; a metal that historically offered significant value compared to the prices of all of the other precious metals, in the first quarter tanked, falling to the lowest price in almost two decades, underperforming gold, silver, and palladium. Despite posting double-digit percentage gains in the second quarter, the metal remains a laggard, with possibly a compelling case for significant price recovery.

Going forward, we believe that despite the huge rally in tech stocks and the broader market, investors, aware of a potential market pullback, should COVID-19 cases continue to rise, may indeed continue to flock precious metals, particularly gold.

This article was issued by Christopher Cutajar, credit analyst at Calamatta Cuschieri. For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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