With 2020’s volatile start, and plenty of uncertainty still looming, George Milling-Stanley assesses the state of the gold market at midyear, how it held up during the initial phases of the pandemic, and what might be in store for the remaining part of the year.
This post was written with contributions from the SPDR® Gold Strategy Team: Maxwell Gold, CFA, Head of Gold Strategy and Diego Andrade, Senior Gold Strategist.
Back in December, in the pre-COVID-19 era, I offered my thoughts on the likely trading range for the gold price in 2020.1 I developed the customary three hypothetical scenarios — a bear case, a base case, and a bull case — and I outlined what I thought would need to happen for each to develop. The pandemic has brought major changes to just about all aspects of human life, and the gold market has certainly not been immune to the impact of COVID-19. I commented on some of the changes we have seen year to date, including: gold’s behavior during Q1 market volatility,2 as well as the initial impact of COVID-19 on gold demand.3 As we pass the halfway mark of 2020, I have updated my outlook for the remainder of the year across three new scenarios and the factors that seem most likely to drive gold prices. This time around, I have attributed a probability rating to each of the three scenarios.
Remember, these suggested hypothetical prices represent possible trading ranges, not forecasts for year-end prices.
SCENARIO 1: THE BEAR CASE: $1,700 to $1,900. Probability rating: 20%
What needs to happen for the bear scenario? This hypothetical scenario assumes a moderate level of success in reopening economies around the world, which can be expected to reduce investment and perceived “safe-haven”4 demand for gold. Progress is gradual, however, and jewelry demand remains depressed, especially in the emerging markets. With economic recovery on the horizon, EM central banks may slow their move away from US dollar instruments and reduce their purchases of gold for official reserves.
In this case, gold declines from present levels as investment and perceived safe-haven buying fall dramatically, but the downside remains limited to the lower bound of the suggested range due to the potential inflationary impact of the huge stimulus measures taken around the world. In addition, even before the advent of the pandemic, gold had already climbed $250 above the high point of the trading range that had been in place for six years from June 2013 to June 2019. And the concerns that drove that rally, including the threat of escalating trade wars, have not entirely dissipated.