Carsten Menke (Julius Baer) | According to news over the weekend, the full closure of some of the world’s largest gold refineries in Switzerland is about to end after two weeks. The refineries are located in the southern-most canton of Ticino, which, due to its proximity to Italy and a big number of cross-border commuters, is most strongly affected by the coronavirus. Starting on Monday, operations are resuming, but at less than half of capacity. This should ease some of the supply shortages that have materialised in the gold market during the past two weeks, pushing up price premiums for bars and coins. However, because of globally constrained air travel and reduced refinery operations in other countries, gold is still not flowing freely from sellers to buyers.
Adding in strong investment demand, this should keep product premiums elevated. A case in point are American Eagle gold coins. Sales have surged from an average of 16.5 thousand ounces during the past two years to 150 thousand ounces in March, pushing the premium over the spot gold price to more than 6%. By comparison, during the Great Financial Crisis, sales averaged around 120 thousand ounces a month, also at a premium of more than 6%. That said, we are not experiencing a general shortage of gold.
Overall, we still see a favourable fundamental backdrop. As the global recession unfolds and uncertainties remain very high in financial markets, we believe there is more upside than downside for gold and thus maintain our Constructive view. However, gold’s all-time high could only come into reach if the situation gets out of hand and the expected short and sharp recession turns into a longer-lasting depression.