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Disruptions to the Global Gold Supply Chain and its Implications for Singapore

By Albert Cheng, CEO, SBMA

As the Covid-19 outbreak continues to wreak havoc on global economies, investors are seeking safe haven investments such as gold to weather the economic impact due to lockdown. Expectations for a quick V-shaped recovery have been tempered, and now a slower U-shaped, or more likely an uneven W-shaped recovery is more likely.

As the virus neared its peak, the U.S. Federal Reserve Bank took dramatic action to stabilise financial markets and cut interest rates by 50 basis points in early March, and it is planning to keep the FF-rate near zero for as long as possible. In all likelihood, it will also adopt caps on medium and long-term rates soon. Meanwhile, Congress and the Trump administration are planning to release another stimulus bill.

Governments around the world have launched massive stimulus programmes to stave off recession fears and to buffer their economies has also been a boon to gold, as it is considered to be a hedge against inflation and debasement to currencies.

In precious metals, gold has been the clear winner – as of September 3, gold is up 25.40%, silver is up 42.02%, platinum down 4.93% and palladium up 46.06% year-to-date. The yellow metal has significantly outperformed all major assets in U.S. dollar terms, with even more impressive performance in other currencies.

Global Gold Market

There were both pricing and delivery issues tied to the shutdowns of gold operations aimed at preventing the spread of the Covid-19 pandemic. The increased demand for gold, in addition to supply chain disruption, has greatly affected its four primary markets.

  1. Comex Futures Contract. Gold futures spiked to reach a high of US$70 above the spot price of gold at the start of the pandemic, compared to the typical $1.5 premium. The wide dislocation between the two largest global gold markets is unprecedented.
  2. ETFs. Coronavirus worries have also driven gold exchange traded funds (ETFs) to new highs, recording a seventh consecutive month of inflows in June, when it added 104 tonnes – equivalent to $5.6 billion or 2.7% of assets under management (AUM). Inflows in the first half of the year, at 734 tonnes, are higher than the multi-decade record level of central bank purchases seen in 2018 and 2019, according to the World Gold Council.
  3. Physical gold. The London Bullion Market Association (LBMA) recorded 6,573 transfers of gold amounting to 29.2 million ounces of gold worth $46.4 billion in March 2020 – the largest amount of transfer since 1996.
  4. Coins and small bars. The price premium of 1 oz. American Gold Eagle bars spiked up to $100 during the early stages of the lockdown.

At the same time, lockdowns globally have weighed down discretionary buying, including in major gold consumer markets such as China and India. There was a sharp fall in jewellery demand in the first quarter of the year – 39% compared to the first quarter of 2019, with China and India – the two largest consumer markets – down 65% and 41% respectively, according to the World Gold Council. Consumer demand is also likely to remain weak for the rest of the year.

Value of gold imports and exports, H1 2017-2020 (SGD million)

Source: Enterprise Singapore

Volume of gold imports and exports, H1 2017-2020 (‘000 tonnes)

Source: Enterprise Singapore

LBMA average PM gold price (USD)

Source: LBMA
HS Code:
HS71081210: Non-monetary gold in lumps ingots or cast bars
HS71081290: Non-monetary gold in other unwrought forms
HS 71081300: Non-monetary gold in semi-manufactured forms

Singapore Market Update

In Singapore, lessons learnt from the SARS outbreak in 2003 were put to the test as government agencies rolled out health advisories and business continuity guides to industry bodies and players to guide them on best practices. The second quarter of the year has been devastating for the economy, with GDP plunging 41.2% on a quarter-on-quarter basis, as a result of a circuit breaker that lasted from April 7 to June 1.

An escalation in the Covid-19 pandemic is a key downside risk to Singapore’s growth outlook. While the worst is likely over, the coming months are going to be challenging for Singapore’s export-reliant economy, as external demand continues to be weak and countries battle the second and third waves of outbreaks by reinstating localised lockdowns or stricter safe distancing measures.

To help businesses and households manage the economic impact of the coronavirus, Singapore has announced four stimulus packages totalling more than S$100 billion – almost 20% of the country’s GDP. Singapore’s economy is expected to contract by between 4% and 7% in 2020, according to the Monetary Authority of Singapore. Sectors that have been badly hit by the global pandemic include wholesale and retail trade, accommodation and food services and private consumption.

Despite the challenges faced due to Covid-19 prevention, providing liquidity for physical gold is still key for a properly functioning physical wholesale and retail gold market in Singapore. The reduction in passenger air travel early in the year put a squeeze on space, and competition for that space between the various type of cargo that normally utilise it has become fierce, with freight prices on some airlines increasing by over 400%. Space can still be secured, but the decision to move gold becomes simply a profitability test – can higher logistics costs be reasonably absorbed by potential profits? Our logistics providers in Singapore managed to fulfil their transportation requests and had their busiest months in years.

The increase in physical holdings by funds, HNW investors and bullion traders, who kept their gold in Singapore, translated into demand for the precious metal held in Singapore vaults. At the same time, Enterprise Singapore said non-monetary gold exports accounted for about 70% of the growth in March’s non-oil domestic exports. Higher gold demand in the region going forward may also further boost bullion exports from Singapore.

The increased attention to gold has also helped the local stock market, with the cross-listed SPDR Gold Shares ETF recording its highest average monthly turnover value – S$156.9 million – ETFs listed on the Singapore Exchange (SGX) during the first six months of this year, making it one of the most traded ETFs on the bourse.

Data as of 30 June, 2020
Sources: Bloomberg, Company Fillings, ICE Benchmark Administration, World Gold Council
Looking Ahead

The uncertain economic outlook and the potential for a second wave mean a low-interest environment is here to stay for the foreseeable future. Deepening tensions between Washington and Beijing is also boosting investor appetite for safe havens.

In this environment, investment interest in liquid, wealth-preserving safe-haven assets like gold will grow in demand in the second half of 2020, especially with the unexpectedly sharp rally in stocks without underlying fundamentals that could lead to pullbacks, and the low returns and limited risk protection from bonds, World Gold Council said in its mid-year outlook.



SBMA Member Views

Our production capacity has been largely compromised (at least by 40% compared to our normal operation) largely due to safe distancing measures (staggered/shorter working hours/split team arrangement). We foresee an overall rise in our operating costs for next 6 months or beyond 2021, based on the current mode of operation.

At the same time, business volume grew significantly in Q2 2020, with more than 200% increase in gold scraps intake and output year-on-year. We have also seen very strong gold scraps intake in 1st two weeks of July at the current gold price level above $1,800/oz. We are optimistic at the current stage that business volume will continue to increase if the gold price continues to climb in the second half of the year.

KL Yap, General Manager, Refining Business Unit, Metalor

Business in region has significantly grown year-on-year in the first and second quarters of 2020. Covid-19 predominantly disrupted logistics due to the initial airport/air hub shut down. Our warehouse stocks depleted rapidly but we found workarounds via Australia and Istanbul supply and routing. We anticipate a continuous barrage of ever-changing Covid-19 impairments, but DG is well-positioned in its diverse storage and logistics infrastructure.

Our own refining capacity is an advantage as well as no single point of supply risk. In my opinion, gold will be a very strategic investment for portfolios going forward. Dollar depreciation is a given coming out of the pandemic. Location and assurance of available stocks are of concern, and both political and logistic constraints are very much at the forefront.

Thomas McMahon, CEO, Dillon Gage Asia

Overall, we have seen volumes increase and a steady movement of physical metal. With the huge uncertainty and unknown, our initial focus was to reduce/minimise risk to protect and ensure the highest possible levels of liquidity and allowing us to provide continued uninterrupted service to our clients. At the same time, we worked closely with them; advising and educating, and ensuring they had a full appreciation of their own risk and like us, consider reducing this appropriately. Such approach proved very successful.

With ongoing uncertainties, changes in working practises, restrictions on travel, escalating new cases under a second wave, etc., we continue to take a “defensive” approach; based on the current operating environment remaining for an extended period. If this changes, and we all hope it will, our model and plans will transition seamlessly back to a “normal” environment. The dislocations, liquidity impacts, and other issues we have seen as a result of the pandemic do have the potential to [materially] change the way the precious metals markets trade and operate in the future. Given its proximity, well-established precious metal infrastructure and ecosystem, and stable environment, Singapore is well-placed to participate in any such changes should they occur.

Martin Huxley, Global Head, Precious Metals, StoneX Group

As a bullion dealer, our sales are very much dependent on prices of precious metals, the global outlook and interest rates. During the first half of the year, prices were volatile, and silver and platinum reached their lowest price since a decade ago. This spurred huge demand for these metals in March and April. Gold’s uptick in popularity led to a good first half of the year for us, and the first half of 2020 was definitely better than what we experienced a year ago.

During Singapore’s “circuit breaker”, we were not allowed to have walk-ins but thankfully, we had an e-commerce store with features like online chat and internal team communication, which allowed us to meet most of our clients’ needs, except those who were looking to sell us their precious metals. We need to physically authenticate bullion and many clients still prefer transact with us in person and receive payments for it on the spot. We have the basic tools and believe that we are positioned to deal with a prolonged crisis however, we are also making improvements on what we have and are working on projects so that we can better serve our clients utilising technology to increase transparency, ease of use and build trust.

Brian Lan, Managing Director, GoldSilver Central

Year-on-year comparisons do not paint a clear picture due to how random and volatile precious metals sales can be, owing to a lot of factors (geopolitical, economic, social). Having said that, when comparing top lines, our sales quintupled year-on-year from H1 2019. Like what most bullion dealers and vault operators experienced, flights being cancelled and refineries temporarily suspending operations affected us as delivery timelines got extended and less bullion products arrived in Singapore. Thankfully, Silver Bullion has gone through several cycles of outsized demand and the consequent diminished supply especially in silver, and we have established strong relationships with many refineries and suppliers, so we were able to continue offering precious metals to our clients.

The second half of the year will be interesting for us. Silver is especially strong, having more than doubled in value since March 24. Silver, when adjusting for inflation, is not even a fifth of the way in matching its all-time high, seen in 1980. The investment appetite for silver continues to rise among retail investors and high net worth individuals alike. Silver Bullion has enough “skin in the game” to take advantage of the upsurge in the value of precious metals, which bodes well for us. We trust Singapore’s economic policymakers to be able to guide us through this storm.

Vergel Villasoto, Director, Silver Bullion

Our sales in the first half of 2020 were significantly higher than in 2019 despite major logistical problems and difficulties in securing sufficient quantities of metal, especially silver. We are quite optimistic about the second half-year business and have established multiple counter-measures to alleviate the risk of repeated logistical issues or a supply shortage, should there be a second lockdown due to a second wave of Covid-19 infections.

We are rather hopeful that Singapore’s business environment will not change drastically and that the country will come out of the pandemic without experiencing serious economic turmoil. At the same time, we see the anxiety in the financial markets as an opportunity for the precious metals industry. We believe the investors will continue treating gold and silver as a safe haven in these trying times.

Jacek Baranowski, International Sales Manager, Metal Market

Pallion subsidiaries ABC Refinery and ABC Bullion have seen an extraordinary year so far, with business volume growing by about 25% in the first half of 2020. But without question, our top priority amid the Covid-19 pandemic has been the health and wellbeing of our employees, clients and the broader communities in which we operate. Our internal policies were amended to incorporate mandatory legislative requirements and international best practice.

Bucking international trends, ABC Refinery output and ABC Bullion sales have evidenced strong growth in line with rapidly increasing market share and reduced competitor output. During the ongoing Covid-19 pandemic, all Pallion subsidiary production facilities have continued to operate as usual with our multi-site model providing built in contingency ensuring continuity of operations. A significant contributing factor to group precious metal supply and sales growth has been the strength of ABC Refinery’s responsible and sustainable supply chain initiatives that are increasingly a focus of suppliers and consumers. Weaker Asian demand has to some degree been supplanted by demand for warranting on the Comex division.

Nicholas Frappell, Global General Manager, ABC Bullion


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