Safe-haven gold prices are down more than 6% from its 52w high level of $1566.20/oz reached on September 04, 2019 to $1463.5/oz as on November 26, 2019. But is this level sustainable for the precious metal or could the prices surge again in 2020 or 2020 will be the year for equities?
Before we rush to forecast gold outlook for 2020, let’s throw some light on how gold performed during the past market volatilities and economic slowdowns.
Since the beginning of 2007 till the end of 2012, gold recorded a spectacular rally, as it delivered return of more than 150% in absolute terms to the gold investors, during the same time equities broadly bottomed out, because the world was going through the vagaries of financial crisis, which started from mid of the 2007 and its drastic impacts were seen in 2008. It’s not a hidden fact what the world experienced during the period and which led to the bankruptcy of a more than 150-years old bank-Lehman Brothers.
Hardly anyone remained unaffected with the 2008 Financial Crisis, which jolted everyone, from common man to business community, everyone witnessed the disaster, during which many factories were shut, people were out of job, major banks, insurance companies and other financial service provider turned insolvent.
Those days were extremely painful for equity investors and traders as well, the real estate market was in bad shape, and cryptocurrencies were not in vogue at that point of time. It was like every prevalent investment asset classes had turned untouchable for the investment community.
But it was a blessing in disguise for the gold as the prevailing situation provided humongous headroom for the gold rally, as globally, the investment community was looking to swap their speculative bets with safe-haven gold to prevent capital erosion, which hit hard to many equity investors and kicking them out of the market with enormous losses.
The sudden rush for gold demand sent it more than 150% up from around $650/oz levels in early 2007 to $1,700/oz by late 2012.
Monthly Gold price chart (from Jan 2007 to December 2012). Source: Thomson Reuters
However, the global economy started getting into shape from 2012 onwards, which brought the investment community back to the market again, and equity market across the world started attracting investors and traders, and many major and emerging markets surged to their life-time highs. This led investors to liquidate their gold position to binge on equities to benefit from the equity rally.
This changed scenario made one thing very clear that in a normal economic cycle when things are moving in a fairly favourable direction, there is no other asset class than equity which can provide unexpected returns. However, when the scenario turs rough, they impact the investors equally badly and brutally.
However, post-2012, gold broadly remained in a consolidation mood near $1,300/oz level, except for a couple of little spikes. But post September 2018, things got changed again as global economy started contacting because of number of macro-economic and geopolitical factors like US-China trade war which led to contraction in economic growth of the world’s two major economies, Brexit, US sanction on Iran and Venezuela oil export, negative bond yields, classical signals of recession from US bond market and a drone attack on the two large oil facilities of the Saudi Arabia which accounted for 5% of the global crude oil supply.
These events which all took place in the last two years have escalated volatility to the peak again, after 2008 financial crisis, that helped gold to gain investors’ attraction in the wake of large swings in the financial markets.
Though, all the major factors have impacted the gold price trends but trade escalation between two large economies of the world (US-China) is widely considered as the root cause behind this volatility rise, which is dragging global growth and demand of goods and services, weighing adversely on global companies and impacting their top-line and bottom-line and growth prospects as well.
However, despite a large swings in the market across the world, broader global equity indices are sitting on their life-time highs, which reflects that traders are driving the market with their leverage position, if this is the case, the market could correct shortly but on the same time if fresh investments start entering at this level under the impression that things will change in 2020, it could register new highs going further.
Since September 2018, from around $1230/oz level, gold surged to $1560/oz in September 2019, which is around 26% of rise it recorded in just a year of time and then it contracted approximately 6% from its September 2019 peak levels to around $1,460/oz levels.
It is widely considered that gold does better in times when there is a slowdown and financial instruments are registering large swings in the financial markets, this has turned absolutely correct this time as well, as global economic growth started slowing down since mid of 2018, equities registered large ups and downs, Brexit saga disrupted the whole EU zone and the UK, 10-year US Bond yield inverted below 2-year Bond yield, oil prices moved up sharply during the first half of 2019.
But from October 2019, things are moving favourably for the equity market, as China and US trade negotiators announced that they could soon strike a Phase-1 trade deal, oil prices lowered, however it was broadly because of lower energy demand but a supply glut from the US can also be a key reason, No-deal Brexit discarded by the British Prime Minister in late October 2019, as he negotiated a deal with EU administrators, and that deal went through successfully in the House of Commons, and spread between long-term bond yield and short-term bond yield expanded, which gave investors some sort of comfort that we are far from any recession.
This relaxation, which investment community felt post-September 2019, is again paring gains for Gold, which it accumulated during the heightened volatility and a recession like situation and it has plummeted approximately 6% from September 2019 highs.
Gold price outlook for 2020
To understand the potential movement in the gold price in 2020, we have created two scenarios which could help in estimating the potential movement in the Gold price.
- If things move as per the market expectation
A Phase-1 trade deal is due to be signed between the world's two large economies (US-China) and both have shown interest to secure a Phase-1 trade deal, recently Chinese President Xi Jinping said that, we want to work towards a Phase-1 trade deal, and it is largely expected that the second batch of tariffs which is due to be imposed on Chinese imports in the United States would be delayed , this development has soothed the investors’ sentiments, that a phase-1 trade deal could lead the world economy to start getting in to the shape.
Also, as per opinion polls which are repeatedly predicting the UK Prime Minster Johnson victory in the December 12 general election, who will deliver Brexit by January 31, 2020. The Withdrawal deal, which PM Johnson has negotiated in late October 2019 and that went through the British Parliament as well. This has also relaxed investors that a "no-deal" Brexit chance is off the table, which could have a considerable adverse impact on the British currency and import oriented companies as well.
Also, interest rates have been lowered recently by major Central Banks across the world, which could boost the investment cycle and growth again.
So, if things go accordingly, then 2020 is for the year for equities, and safe-haven gold will underperform equities and prices could fall further from the current levels as well. And, 2020 would be a year of steady growth in equity assets.
- If Trade tension escalates, Brexit again gets delayed, and Bond yields start moving down again
However, if Phase-1 deal between the US and China just act as a patch to the damage, and if it starts again, as US President has repeatedly stated that "China and we are not on the equal platform, as the US needs a much better deal than just a Phase-1 trade deal." And in retaliation recently Chinese President had said that China wants a trade deal with the US but is not afraid to fight back when required.
These kinds of retaliatory statements are not pointing to any good sign or end here; there could be more escalation. As US Presidential election is due in early November 2020, which is very crucial for Donald Trump and he cannot go for election campaign with the economy in bad shape.
Secondly, if Brexit again goes for a toss in the wake of no political party getting a majority at the House of Commons during the December 2019, general election. This will again evoke uncertainties over the nature of Brexit, or no-deal Brexit that could come back on the table. People will again start speculating over future trade relationship with the EU.
So, if things move in the aforesaid direction 2020, then, of course, Safe-haven metal like gold could witness upward movement, as these events would again push the global growth outlook into uncertainty.
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