Coronavirus worsens Egyptian gold market’s downturn

Doaa A.Moneim , Tuesday 24 Mar 2020

A worker stands in front of his gold jewellery shop at the market of Khan el-Khalili in Old Cairo (R
A worker stands in front of his gold jewellery shop at the market of Khan el-Khalili in Old Cairo (Reuters)

Egypt’s gold jewellery market has suffered since the beginning of 2020 due to global economic challenges, in addition to an increase in gold prices that exceed the purchasing power of the average Egyptian citizen in the wake of the flotation of the pound in 2016.

The fear of the coronavirus outbreak and the related precautionary procedures, including the upcoming curfew that will see shops close at 7pm, will make the situation worse.

The gold jewellery market has also seen considerable ups and downs in prices globally and domestically alike, creating volatility, especially in demand.

Gold jewellery, which represent the largest source of annual demand for gold per sector, has declined over recent decades, but still accounts for around 50 percent of total demand, according to World Gold Council (WGC) data.

In this regard, India and China are by far the largest markets, together accounting for over 50 percent of current global gold demand, while Asian and Middle Eastern markets are dominated by demand for purer, high-carat gold, according to WGC.

Ihab Wasfi, a gold jewellery manufacturer and vice chairman of the gold jewellery division at the Federation of Egyptian Chambers of Commerce (FECC), asserted that the domestic market has been suffering for the past two months.

The market is witnessing a significant fluctuation, especially in prices, due to the declining of US interest rates, which dropped recently to 0 percent, and has caused a surge in gold prices, including gold jewellery in the domestic market.

Wasfi estimated the market’s recession in 2020 at +40 percent compared to 2019, adding that the coronavirus outbreak also affected Mother’s Day sales in Egypt last week, which almost reached zero.

However, the recent actions that the Central Bank of Egypt (CBE) has taken to energise the market and contain the harsh economic impacts of the outbreak will have a positive impact on the domestic market, including gold jewellery, believes Wasfi.

“The new cuts to the interest rates and other procedures that CBE has adopted will pump a great liquidity into the market, which will make gold jewellery and bars yet again the choice for investors and the Egyptian consumer to invest in,” Wasfi explained.

The head of the gold jewellery division at FECC, Wasfi Amin, told Ahram Online that, over the past two weeks, fears of global economic recession has forced all central and investments banks and governments to buy more gold, which actually raised the gold prices in all markets.

Yet, with the frightening spread of COVID-19 globally, governments, central and investment banks have turned to withdrawing deposits to pump liquidity into the market to contain the serious economic impacts of the disease, according to Amin.

Amin told Ahram Online that the total marked gold jewellery, which is the only indicator of the situation of the domestic gold market in Egypt, in 2011 recorded 55 tons per year, while that total shrunk to 30 tons in 2019, what reflects the great decline in the total amount of gold jewellery that is pumped into the market, and accordingly the decline in demand.

Gold manufacturer Rafik Abbasi told Ahram Online that since the flotation of the Egyptian pound, the jewellery market has lost 80 percent of its clients due to the price surge.

“With the fear of COVID-19 and the global financial and stock markets’ deterioration, the situation has become worse. The demand for gold jewellery and bars recorded almost zero globally and domestically,” said Abbasi.

The situation globally is poor too. According to WGC, gold is being affected by the unprecedented economic and financial market conditions in play around the globe, attributing the recent volatility in gold prices to massive liquidations across all assets, and likely magnified by leveraged positions and rule-based trading.

In its March investment report, the WGC said that conditions in the current environment, on the back of widespread travel restrictions, the complete shutdown of numerous sectors, and higher volatility in financial markets than during the 2008-2009 financial crisis, are unprecedented, and that makes the chances of avoiding a global recession low.

“If a recession does occur, its depth and duration will depend on how quickly and effectively governments are able to slow down the contagion, buffer their economies and, hopefully, find ways of treating or preventing COVID-19,” reads the report.

Discussing the drop in gold prices that came alongside the drop in stock markets, the WGC attributed it to the massive liquidation virtually all asset classes experienced in the past week, including gold.

“Even longer-term US treasuries’ prices fell, despite a second unscheduled cut by the Fed on 15 March slashing the Fed funds rate to pre-2016 levels. The 10-year US treasury yield is trading above 1 percent after reaching a historical low of 0.33 percent on 9 March,” the report read.

It added that, as a high quality, liquid asset, gold may also have been used to raise cash, especially since it was, until recently, one of the few assets with positive returns in 2020. Gold was up 10 percent as of 9 March, more than any other major asset.

The WGC asserts that gold has played an important role in portfolios as a source of liquidity, expecting it will serve as a safe haven in the longer term.

“Gold experienced pullbacks at the onset of the global financial crisis too, falling between 15 percent and 25 percent in US-dollar terms a couple of times during 2008. But by the end of that year, gold was one of the few assets, alongside US treasuries, to post positive returns,” the report cited.

For its outlook, WGC said that the performance of gold is linked to the interaction of four key drivers, including economic expansion, risk and uncertainty, opportunity cost, and momentum.

“So far this year, more than 30 central banks have cut rates and many have implemented additional quantitative easing measures. Governments around the globe are pledging trillions of US dollars to support their citizens and their economies. But ballooning budget deficits, negative real rates and debasement of currencies will present structural challenges to asset managers, pension funds and personal savings,” according the report.

It also expected that it may take a while for financial markets to stabilise. Amid high volatility, the gold price may experience additional swings, but a combination of high risk and lower opportunity cost should support gold investment demand.

It also expects that central banks will remain net gold buyers overall, albeit likely not at the same rate as in the past two years.

On the other hand, consumer demand may soften significantly. Early figures by the National Bureau of Statistics in China suggest a 40 percent contraction in purchases of gold, silver and gem jewellery during the first two months of the year, and the new travel and movement restrictions will undoubtedly affect other regions.

Historically, however, investment flows in periods of uncertainty tend to offset weakness in consumer markets. 

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