ETFs providing exposure to gold and other precious metals are staging a rally as the coronavirus pandemic boosts demand for safe-haven assets and threatens commodity supply shortages.
ETFs providing exposure to precious metals baskets are up by around 18% in the past four days.
Gold ETCs such as the SPDR Gold Shares (GLD US) and iShares Physical Gold ETC (IGLN LN) have gained 9% over the past four days.
Precious metals ETCs have performed even better.
ETP baskets such as the Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR US) and WisdomTree Physical Precious Metals ETC (PHPP LN), which provide exposure to gold, silver, platinum, and palladium, have soared around 17-20% over the same period.
Market meltdown
The extent of the coronavirus’s economic impact has wreaked havoc across financial markets in recent weeks with the S&P 500 Index down 27% from its February high.
Corporate bond markets have similarly been in freefall as the crisis casts doubt on the financing ability of even the most creditworthy issuers.
Gold and precious metals were not immune to the turmoil, with the price of the yellow metal dropping 10.9% between 11 March and 19 March 2020. However, market commentators attributed the sell-off to forced selling from investors urgently requiring liquidity to meet redemptions or settle margin calls arising from loss-making equity and credit positions.
With these immediate liquidity issues mostly resolved, precious metals are now benefitting from a number of tailwinds.
Firstly, financial markets continue to be plagued by uncertainty, and investors are turning to safe havens such as US Treasuries and gold to buffer their portfolios against potential future sell-offs in equity and credit markets.
Secondly, gold is also benefitting from the inflationary policies adopted by Central Banks as they take unprecedented steps to mitigate the negative impact of the coronavirus. The Federal Reserve, for example, has announced that it will pursue unlimited purchases of Treasuries and agency mortgage-backed securities while also supporting US credit markets by buying corporate bond ETFs, a first for the institution.
The European Central Bank and Bank of England have made similarly expansionary monetary commitments.
Thirdly, the greenback’s rally has halted and begun to reverse, making precious metals, which trade in US dollars, relatively cheaper to foreign investors. While the US Dollar Index charged higher during the initial phase of the market’s meltdown as investors flocked to US Treasuries, it has since fallen 6.2% so far this week.
Finally, platinum and palladium, two commodities that have experienced a structural undersupply for years, are now facing further deficits due to a coronavirus-induced shutdown of the mining industry in South Africa, a key producer of the two metals.
On Monday, South African President Cyril Ramaphosa declared a 21-day lockdown for the country starting from midnight on Thursday. While mining companies may apply on a case by case basis to maintain limited operations, it is clear that major uncertainty is facing the industry. Following the announcement, platinum prices gained 11% while palladium soared by 15%.