Since the beginning of the coronavirus pandemic, precious metal funds have not responded in typical safe-haven fashion, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

Historically, precious metals have appealed to investors seeking to diversify from asset classes with high correlations. These commodities have also served as a store of currency. However, research from Cerulli Associates finds that although the price of gold soared in 2019 on the back of geopolitical risks, the coronavirus crisis has been less favorable for precious metal equities and prices.

Some investment vehicles give investors exposure to physical gold, silver, and other precious metals such as copper, palladium, and zinc. Others offer investment in related equities by holding, primarily, mining companies. Whereas, in March, silver has registered its lowest price in 11 years due to lower industrial demand, in the first three months of the year, global mining companies lost substantial market capitalization.

“It would be understandable to assume that the pandemic, its impact on financial markets, and the countermeasures taken by central banks would send commodity prices soaring again, but this time, there is more to consider,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli.

Asset prices rise only when there are enough investors with liquid capital to buy the assets. With the immediate liquidity crisis sparked by the pandemic now resolved, buying should resume. However, the actions taken by central banks to ease the liquidity crisis—and broader economic crisis—may have neutralized some of the buying power of dollars, euros, and sterling.

“Given a scenario in which a reasonable global economic recovery drives up asset price inflation, gold could recover as it did in 2009–2010 after the global financial crisis. However, there is another possible scenario in which the recovery is marred by extremely low growth in a deflationary environment, meaning asset prices suffer, including gold,” says Zumbo.

For long-term investors in mining companies, there is some expectation of a rebound. The collapse in the oil price will be a key factor in reducing operating costs, so the outlook for gold and silver prices may turn positive, continues Zumbo. However, after gathering more than €600 million (US$648 million) of net inflows in January, Europe-domiciled precious metals equity funds registered some €200 million of net redemptions by the end of March.

Other Findings:

• After a strong start to 2020, February saw investors move into a risk-off mood as fears of the coronavirus outbreak in China sent early ripples through global markets. Some €279 billion, the equivalent of 3.9%, was wiped off European fund assets under management during the month, resetting levels to where they were in October 2019. Flows into actively managed funds held up better than flows into passives.
  
  
• Flows into exchange-traded funds (ETFs) were positive in February for the sixth consecutive month. ETFs registered €3.2 billion of net inflows during the month, although this was 74% lower than January's figure. The best-performing sector in terms of sales was bonds, which contributed net inflows of €2.2 billion; commodity ETFs were in second place, with inflows of €1.3 billion.