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The Effects of Covid-19 on Australia’s Precious Metals Market

By Bron Suchecki, Senior Precious Metals Project Analyst, Pallion

As the world’s number two gold producer (and forecast to overtake China in 2021),1 Australia has been crucial in supporting global precious metals markets as Covid-19 has upended the industry’s established financial and logistics networks.

Australia’s Precious Metals Market

Australia produced 326 tonnes of gold in 2019, and its output is forecast to rise to 383 tonnes by 2021. In addition, Australia also imports around 100 tonnes of doré and scrap from neighbouring countries such as Papua New Guinea, Thailand, Japan and New Zealand.

The Australasian refining market is serviced by two London Bullion Market Association (LBMA) and Shanghai Gold Exchange-accredited refiners, with ABC Refinery holding a 43% market share of gold and silver doré total combined throughput of 12.6 Moz and Perth Mint with the remaining 16.7 Moz.2

With a population of only 25 million, almost all of the approximately 450 tonnes of gold refined in Australia is exported. While there is a healthy domestic precious metal market anchored by the two internationally recognised refining brands and serviced by a group of around 25 smaller bullion retailers, Australia’s stable political history, geographical isolation and solid economy works against more widespread appreciation of gold’s benefits compared to countries like Germany or the United States (US), which have a much higher awareness of precious metals among their populations.

Given Australia’s geographical proximity to India and China, most of its gold output has historically flowed to those countries (fig.1).

An interesting feature of the data is the shift from Singapore and Korea towards India from 2003 to 2011. Increasing hostility by the Indian government towards gold, via increased duties and other measures, as well as more aggressive sourcing by Indian refineries of gold direct from miners, has resulted in the decline of India as an export destination and for China to emerge as the major consumer.

As a major gold trading location, any faltering in Asian demand (as has occurred recently) results in an increase in shipments to the United Kingdom (UK) and future export figures will show both the UK and US as destinations for Australia’s gold output.

Figure 1 : Gold exports to key countries

Source: Australian Bureau of Statistics

Impact of Covid-19

The disruption caused by Covid-19 to gold’s supply chain has been significant, resulting in:

  • A reduction in mine output
  • Closure of key refineries in Switzerland
  • Transport/logistics impacts
  • Reduction in trading desk risk appetite
The divergence in the gold price between New York and London is the most visible manifestation of the friction the coronavirus has created in the gold market’s financial and LOGISTICS networks.

The divergence in the gold price between New York and London is the most visible manifestation of the friction the coronavirus has created in the gold market’s financial and logistics networks.

With Australia having taken decisive action in response to Covid-19, Australian producers and refineries have been open for business. ABC Refinery has experienced more enquiries for refining work by those looking to take advantage of our per annum capacity of over 400 tonnes of gold and 750 tonnes of silver to substitute for closures elsewhere.

ABC Refinery has also experienced increased sales from firms able to take advantage of the large New York-London exchange for physical as well as having the ability to consume and value add metal through its mine-to-market approach via the ABC Bullion range of bullion products and trading facilities, as well as jewellery, industrial products and vaulting services in associated group companies.

Freight and logistics were classified as essential services in Australia and domestic producers have continued to operate with minimal interruption due to:

  • Implementation of longer rosters to help limit the number of people on site and allow separation of workforce for business continuity.
  • Producers strategically positioned near regional workforces not affected by limitations on fly-in fly-out (FIFO) workforces.

ABC Refinery has implemented strict business continuity measures to ensure operations are not impacted. While freight and logistics have been impacted, ABC Refinery’s strategic location in Sydney (a major freight forwarding hub) means we have not encountered any roadblocks to date in supplying bullion to the Asian market as well as London and New York. We have also been working on innovative solutions by offering delivery loco-Sydney or even storage solutions at our independent vaulting service Custodian Vaults.

In addition, ABC Refinery has recently opened a trading office in Perth to service the growing demand for its refining and trading services in Western Australia. Former deputy CEO Joe Metcalfe, deputy treasurer Nishan Kodituwakku and senior trader Michael Dymock from the Perth Mint have been a welcome addition to our team.

Outlook

Equity and bond markets have shown huge volatility and investors have lost a lot of value in equities worldwide. The addition of some wild and very painful swings in bond markets, just when bonds would normally be expected to protect investors from weakness in equities, has focused investors on gold’s safe haven attributes.

Investors are worried about indebtedness on two fronts:

  • Corporate leverage will amplify the pain felt by those companies most exposed to the economic impact of the coronavirus; and
  • Deterioration in government finances as they respond to the coronavirus.

The supply of government debt coming to the market will likely have to be dramatically increased, weakening the bond market, and unconventional monetary policies will continue to drive down interest rates for longer, making gold a natural choice for investors both large and small.

As countries contain Covid-19 and lockdown restrictions ease, ABC Bullion feels that the outlook for gold remains strong based on two key demand drivers:

  1. The rise of middle market demand. There have always been two keen followers of gold: the retail side of the market and commodity trading advisors who come in and out of the market. Covid-19 will result in growing awareness of the role of gold in the great “middle”, who have either bypassed the gold market, or whose advisors have bypassed gold on their behalf.
  2. Official and government demand. There has been a trend for central banks in the east to accumulate gold and this will be spurred on by the stresses caused by Covid-19. The US was all for a trade war with China in the months before the coronavirus appearing, and the official sector will be additionally cautious about the diversification of their portfolio in a post-Covid-19 world.

Given the above, ABC Bullion is bullish on gold demand and therefore price. Before Covid-19, gold had experienced increasing institutional interest and a return of retail investors. The coronavirus will accelerate that interest as it underscores the diversification benefits that gold provides to investor portfolios.



Notes
1 Australian Government Department of Industry, Science, Energy and Resources – Resources and Energy Quarterly, March 2020. https://www.industry.gov.au/data-and-publications/resources-and-energy-quarterly-march-2020
2 Refinitiv – ABC Refinery: A new emerging force in the Australian precious metal refining landscape, 26 November 2019. https://www.linkedin.com/pulse/abc-refinery-new-emerging-force-australian-precious-metal-alexander/



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