Author: Khazar AKHUNDOV
The upward trend in gold prices observed since the beginning of 2020 confirms that this most important reserve asset remains an object of high interest. According to a number of analysts, the ongoing rush in the precious metals market is caused by the global consequences of the coronavirus pandemic, including the collapse of the oil market and economic recession in the US and Europe. Moreover, the policy of central banks promoting the emission of fiat money further complicated the situation, as it reduces the cost of dollar treasury bonds, as well as the Euro assets. Add to this the unresolved financial problems, including the legacy of two previous economic crises, as well as the ongoing trade wars, economic slowdown in China and the countries of Southeast Asia to get a complete picture. Therefore, experts predict that investor interest in gold as a safe asset will continue until at least 2022.
COVID-19 as a market driver
The sharp rise in prices for precious metals in 2020 turned out to be a completely predictable event, since, based on the experience of previous global crises, geopolitical and economic problems usually push the price of gold higher. This trend was observed in a relatively mild form already in 2019, resulting in a 15%-rise in gold prices, which reached $1,500 per troy ounce by the beginning of 2020.
In the last autumn, experts of the French bank Natixis noted high medium-term prospects for growth in prices for precious metals, taking into account the growing scope of the economic crisis. World Gold Council's review published at the same time also noted the growing interest of investors in gold as the most important instrument for hedging risks during periods of instability.
In fact, the expected rise in prices for precious metals in 2020 has become explosive due to the rapid spread of COVID-19, which accelerated and intensified the emerging crisis phenomena significantly. Growing rapidly in the spring and summer of this year, gold prices peaked at $2,078 an ounce at the New York Commodity Exchange (COMEX) on August 6. Despite a slight decline by the end of the month (to $1919), there is still a steady upward trend. The last time a comparable record gold price of $1920 per troy ounce was set in 2011 amid the global financial crisis.
In general, experts confirm the preservation of the current price trend in the medium term based on the basic indicators of the world economy and the situation on the stock markets. “The next global crisis can become much more complex and protracted. Financial markets see an increase in assets as some governments have printed huge amounts of money not backed by anything. This financial assistance helped save the US and European markets from collapse in the short term, but the increase in debt will have a negative impact on the global economy in the long term,” Jim Rogers, a well-known analyst on the precious metals market, said. In his opinion, in the current situation, the prospects for investing in gold are very high, and the gold market still has a noticeable potential for growth. “I think the price of gold will continue to rise for a very long time before the growth ends. There is a possibility of a bubble, but I hope it will not happen in the next couple of years," Rogers said.
Central banks and sovereign wealth funds in a number of countries are increasing the volume of their gold reserves, which also confirms the upward trend in the precious metals market. Thus, gold imports to Turkey have tripled since the beginning of 2020, having increased in January-July by 137 tons (583 tons in total), despite the record growth in world prices for precious metals and the collapse of the Turkish lira.
The US, Singapore, India and a number of Arab states reserved considerable volumes of gold this year too. Among the post-Soviet countries, Kazakhstan is in the lead: the National Bank of the country plans to purchase 60 tons of gold on the local market in addition to existing 378.5 tons. Hence, Kazakhstan ranks second after Russia (2,290 tons) in terms of the volume of gold reserves, followed by Uzbekistan (342.8 tons), which is also dynamically increasing its gold reserves.
Noticeable increase in the purchase of gold by small investors and the population in the US and Germany also adds pressure on the gold market. The increase in market prices for shares of gold mining companies confirms the stability of this trend too. For example, billionaire Warren Buffett has recently purchased a large portion of shares worth more than half a billion dollars of the Canadian gold mining company Barrick Gold. The deal is remarkable in that until recently Buffett was very skeptical about investments in the gold market, but now he has radically changed his views. According to experts, today many representatives of large business share similar approaches.
Demand will remain
Experts' opinions on the period of the gold rush and the price ceiling for precious metals are very different. However, most analysts limit their optimistic forecasts to 2022. They note that the price of a troy ounce in the next two years may reach $3,000-3,500 and even more, although the position of Goldman Sachs analysts looks more realistic ($2,300 over the next 12 months). Fitch Solutions has made even more cautious forecast. They believe that the peak of price growth this year will not exceed $2,130 per troy ounce, and prices will begin to stabilise in 2021, averaging $1,850 per troy ounce. During 2021-2024, prices will average $1705/tr.oz as the balance of risks reaches equilibrium. Fitch Solutions experts attribute this to the weakening of political uncertainty after the US elections, as well as the development and implementation of an effective coronavirus vaccine, which will reduce investor interest in using precious metals as a defensive asset.
Those who believe in the increase of gold prices justify their arguments by the uneven and slow recovery of the world economy, low bond yields and growing geopolitical tensions. Among other fundamental reasons, they show the depletion of existing deposits, as well as the increasing cost of exploration and production of gold every year. In fact, gold is one of the rarest metals in the earth's crust, as most of the volume has already been mined. Gold miners have to dig deeper into remote areas in search of untouched deposits, which increases the cost of production.
Consulting agency Minex characterises the current situation even more accurately. Thus, the average cost of search for an ounce of gold in 2009-2018 was $62, which is twice more than in the previous ten years. According to the analytical and consulting company Refinitiv, the average cost of production for the same weight of gold, given the total cash and capital costs, has grown from $253 to $705 since 1990.
The quality of mining (the amount of gold per ton of ore mined) is also deteriorating. According to Metals Focus, approximately 1.46 grams of gold per tonne were mined in 2019, compared to more than 10 grams in the early 1970s.
Based on expert estimates, due to the problems caused by the pandemic and the economic recession in the developed countries, the global demand for gold in the next year and a half will remain at a relatively high level. In the longer term, high prices will be supported due to the production reduction and an increase in the cost of production.
Azerbaijan is a beneficiary
All the above circumstances generally favour Azerbaijan, which has been engaged in industrial gold mining for more than 11 years. Part of the extracted gold is reserved by the Central Bank, while the rest is exported. In the short term, the growth in gold revenues observed this year is a very important factor amidst a tangible decline in oil and gas revenues. According to the Export Review, published in July by the Centre for Analysis of Economic Reforms and Communications, gold ranks second in the export of non-oil products, after tomato supplies.
In the first half of 2020, Azerbaijan exported over 2.147 tons of gold ($85.8 million), which is 21.8% more compared to the same period last year. The growth is based on the rise in world prices for precious metals. The profit could have been even greater if it were not for the decline in production (1.2%) and exports (6.6%). It is an unpleasant fact, but probably inevitable due to quarantine restrictions, as well as due to a number of objective reasons during the development of new areas in mining fields.
According to the State Statistics Committee, over the seven months of 2020, silver mining in Azerbaijan increased by 15.5% (2.475 tons). This is a remarkable fact, as world prices for silver have increased by 46 % since the beginning of 2020, reaching in early August a record level over the past six years ($26/tr. oz.). For comparison, gold added just over 30% in price. According to Deutsche Bank, such a significant rise in silver prices in a relatively short period was last recorded only in December 1979.
In addition to the growing profits of local gold mining companies and tax revenues to the budget, the State Oil Fund of Azerbaijan (SOFAZ) is another beneficiary of the global rise in prices for precious metals. The share of physical gold in the assets of SOFAZ by the middle of this year reached 101.8 tons, or 13.6% of the total portfolio of the fund. Since the beginning of 2020, SOFAZ has purchased about 0.6 tons of gold from local gold mining companies, and at the beginning of July its gold reserves were estimated at about $5.9 billion. Even excluding new purchases, the value of fund’s gold reserves increased by more than 25% due to the gold rush in global markets.
Gold miners develop new deposits
AzerGold CJSC and Azerbaijan International Mining Company Ltd (AAM) are the two companies mining precious metals and copper in Azerbaijan. The global rise in gold and silver prices since the beginning of 2020 certainly had a positive effect on their turnover. Thus, in 1H2020, the total export of precious and non-ferrous metals produced by AzerGold is estimated at $43.1 million with an increase of 41.8%. In turn, foreign supplies by Azerbaijan International Mining Company Ltd reached $51.7 million, which is 10% higher than the indicators of the corresponding period last year.
High prices for precious metals encourage gold miners to increase the scope of exploration works and the development of additional areas in the developed deposits.
Today, AAM is working to identify reserves in five new areas where gold and copper deposits have been discovered.
AzerGold CJSC continues the development, geological exploration and appraisal of new fields at seven sites. In subsequent years, with the commissioning of these fields, AzerGold will attract several billion manats to the national economy and create conditions for opening many hundreds of new jobs.