After gold's meteoric rise over the past two years, investors are left questioning the outlook for precious metals following the announced Pfizer and Moderna vaccines.
Demand data provided by the World Gold Council shows how jewellery demand dropped by 29% in Q3 2020 compared to Q3 2019, due to higher gold prices and weaker emerging market currencies affecting affordability, while many jewellery stores were shut due to the pandemic.
In Asia, the primary driver of demand, we are already seeing demand recover supported by the strong Chinese yuan.
ETF additions have slowed, adding an area for concern, but the macro backdrop described above does not suggest an aggressive unwind is likely.
With $17trn of negative yielding debt globally, an all-time high, wealth preservation is key, with gold continuing to offer wealth preservation in real terms, as a currency with no counterparty risk.
In a world where ever-greater money printing exists, the question of fiat currencies' worth and how ballooning debt will be unwound, gold differentiates as a currency that cannot be printed ad infinitum.
Gold continues to show a close correlation with real yields, which are calculated as nominal interest rates minus inflation.
While we sit in the camp of low interest rates are generally deflationary, there is scope for an upside surprise in inflation expectations when economies reopen next year, as pent up demand is released and supply chains restock more meaningfully.
We believe precious metal mining equites offer the best exposure, as they have lagged the gold price, with the sector overall trading at a lower P/NAV ratio than 18 months ago, due to the stronger gold price. This is especially the case in those miners valued at below $1bn.
It is easy to focus on Covid-19 as the driver of gold, but this move was well under way before it struck and all it has done is accelerate government borrowing, which further supports the thesis behind holding an allocation for its defensive qualities.
Rob Crayfourd is portfolio manager of the CQS New City Golden Prospect Precious Metals fund