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Gold outlook and Investment Scenario in 2020

  • January 12, 2020 02:24 AM AEDT
  • Kunal Sawhney
    CEO Kunal Sawhney
    2267 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Gold outlook and Investment Scenario in 2020

Gold MTF non-AMP

The decline in bulk commodity prices, slowing global economic growth, the prolonged US-China trade dispute, impeachment trial of US president, with all the global issues circling could you think of one sector that's performing swell? Well, it is Gold. All the above global issues along with the recent US-Iran attacks on each other's military personals has led the gold prices. Now, we know that gold is good but how can we invest in it.

Gold Performance in the last year

Recently, the gold market achieved the impeccable feat of reaching the $2350+ an ounce territory on the response to the Iranian retaliation on the US airbases in Iraq. The XAU (Philadelphia Gold and Silver Index Gold Spot US $ prices) prices started 2019 at the US $1282.17 an ounce and completed the year 2019 at US $1,517.01 an ounce, an increase of almost 18%, similar to the performance of the commodity on the London metals exchange. The record level encourages the miners to ramp up the supply and the junior exploration companies to fast track the exploration and development of the gold projects.

Gold gave out excellent returns on investment, an 18% increase in 2019. The year 2019 ended with the Christmas holiday season observing a good healthy growth in the gold prices. During the holiday season when many investors enjoy vacation and are off the desk, the volume traded generally is much lower than the rest of the year. Gold entered the iconic level of US $1500 an ounce on Christmas and ended the year with the same.

XAU Gold Spot Prices US$ per Ounce Source: Thomson Reuters

Demand-Supply Balance

Demand grew by 2.4% in 2019 to 1,108 tonnes in September quarter, fuelled by the inflows into gold-backed ETFs and the purchase by the central banks. Notably, the gold ETF holdings reached an all-time high of holdings of about 2,900 tonnes in the December quarter of 2019. A total of inflow of US $19.2 Billion in the gold-backed ETFs. The prolonged US-China trade dispute cut in interest rates thrice by the US federal reserves and slowing global economic growth shifted the institutional investors towards gold.

Central bank is forecasted to continue the gold purchases in the next two years with a growth rate of 8.1 per cent a year, obtaining a level of 840 tonnes by the end of the next year.

Must Read: Factors that Rule the Gold Prices

Jewellery Demand

Tonnes

Jan-Sept'18

Jan-Sept'19

% change

World total

1,594.3

1,520.9

?

-4.6

India

417.9

395.6

?

-5.3

China, P.R.: Mainland

508.3

475.8

?

-6.4

Source: World Gold Council & Kalkine Research

Gold brings balance to the world economy. As for the demand, China and India which used to consume less than 10% of the total supply 30 years ago, now consumes almost half of the current gold supply fuelled by rising GDP per capita which is invested in gold due to their perpetual love for gold. Due to higher prices, slower economic growth in India, the Jwellery demand has decreased to a small extent, but not because of the unwilling natures of the consumers to buy gold but because with higher prices, a smaller amount can be bought in 2019 than in 2018.

The surge in the prices boosted the customers to sell gold back to recyclers and 2019 experienced the record level of gold recycling. Supply from the mines fell by 0.6% in the September quarter to 878 tonnes, due to lower outputs from Cadia, Telfer, Boddington, Super pit operations and the mine transition from Open pit to underground for Grasberg operations. Both the joint owners of Super pit operations, Newmont and Barrick sold their shares in the operations and the new owners expect to revamp the mining operations during a targeted three-year turnaround period. Global mine product is expected to increase to 3,568 tonnes in 2020 and 3,625 tonnes in 2021 due to commencement of mining projects in Australia, Russia and Canada. Ghana is also expected to ramp up its producing assets to emerge as the largest gold producer in Africa by 2021. The Indonesian Grasberg operations will also ramp up its production during the period.

To know about the top performing gold stocks on ASX, visit on: Excitement Around 5 Gold Stocks on ASX as Gold Zooms

Will Gold rally continue in 2020?

Jwellery

Even after the surge in prices, the jwellery market saw a small decrease in buying and is expected to stable over the upcoming years. The Jwellery demand is considered to be quite stable with small fluctuations as in the past and a similar trend is expected in the future as well. In fact, the growth in the market would come from the buying by the institutional investors and the central bank.

Trade War

As the US seeks a trade deal with China in 2020, the purchase manager’s index (PMI) is forward-looking US had 4 months of decline in a row, if the same situation continues for a longer period, there could be a transient slowdown in the American economy and as the US economy approaches the Presidential election season, the incumbent administration needs to build an environment with robust economic activities., which otherwise could hamper Trump's chances in the getting re-elected.

In the absence of a resolution to the trade war, the federal banks need to further cut down their interest rates quickly to an even lower figure.

Want to sit back and enjoy the benefits on your investment in gold: Is Gold Suitable for Your Retirement Needs

ETF & Central Banks

As for the gold-backed ETF and physical gold buying by central banks is ruled by the hedging property of the gold against global issues. Also, for other major factors such as the slowing of the global economy no major signs of recovery are yet to be observed. In view of the short and medium-term, gold would remain to be investible.

Price Forecasts

As per the Resources and Energy Quarterly December 2019, published by Department of Industry Australia, gold would benefit from the higher demand as a hedge to other commodities and therefore, the 2020 estimates were revised to US$1,474 an ounce in 2020, and then before fall to a lower average gold price of US$1,450 an ounce in 2021.

Gold is investible in 2020 and is expected to outshine other commodities for the most part of the year. However, an intelligent investor should be aware of the bubble and use his options at the right time.


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