Emerging market jewelry demand and global central bank gold buying are pivotal elements to the direction of the price of gold in 2020.
Beyond lower interest rates, macroeconomics and geopolitics are likely to influence investment demand for gold.
As I wrote in my last Gold Nuggets blog in September, my role as Chief Gold Strategist means I spend a lot of time on the road meeting with financial advisors and their clients. In recent weeks, the biggest questions I have been facing concern the outlook for 2020 - where gold will go and what the major drivers of the price will be. In this blog, I want to outline my base case for the trading range of the gold price in 2020 and also offer some insights into the potential bear and bull cases. Right now, I am leaning more toward the base/bull end of the spectrum, given that the environment for gold — both internal market dynamics and external drivers — seems broadly favorable.
Below are the three scenarios and the factors that seem most likely to drive prices. Remember, these suggested prices represent possible trading ranges, not forecasts for year-end prices.
SCENARIO 1: THE BEAR CASE: $1,300 to $1,450
Continued weakening in economic activity in the emerging markets could lead to a significant decline in jewelry demand in the region. Nevertheless, it is possible that emerging market currencies may strengthen against the dollar, which could reduce emerging market investment demand for gold. Emerging market central banks could also cut back on diversifying away from USD instruments and buy only 0-5% of annual global demand, instead of 11%, as they have over the past decade.
Macroeconomics: US equities may move from strength to strength and bond yields may edge gradually into positive territory if foreign investors move capital into US assets, which may increase the value of the dollar. The US may continue to avoid recession.
Geopolitics: There is a possibility that the US presidential election will proceed calmly, with the impeachment process receding into the background and a new atmosphere of bipartisanship emerging. The US could succeed in extricating itself from most entanglements in the Middle East, the situation on the Korean Peninsula could begin to improve, and the Brexit issue might be resolved quickly, with no apparent deterioration in the economic situation in Europe or the UK. A generally more stable political and economic environment might decrease the demand for gold.
The key drivers for the gold price in this hypothetical Bear Case would be the deteriorating economic situation in emerging markets and continued progress in US financial markets.
SCENARIO 2: THE BASE CASE: $1,400 to $1,600
This hypothetical scenario assumes no improvement in the emerging market economic situation, so jewelry demand would remain depressed. Continued weak currencies in the region could potentially support emerging market investment demand. Emerging market central banks may continue to buy in their historic 10% range of annual global demand.
Macroeconomics: US equities may remain stable, with no significant moves in either direction. Global bond yields could remain predominantly negative. US economic growth may remain anemic, but there may be no outright decline into recession in the US. The US dollar would remain weaker, along with a rising deficit and a Fed that is on hold. Global bond yields could remain predominantly negative.
Geopolitics: The US presidential election could potentially turn out to be no more contentious than expected. The tone from the Senate and House incumbents and new legislators may become more about seeking unity than division, with promises to take steps toward working together after the election. This scenario envisages some signs that the US may be able to reduce its involvement in the Middle East. The Brexit situation may be resolved without significant weakness in European economies. Under this scenario, the situation could remain favorable for gold demand and continued strategic allocations.
The key drivers for the gold price in this hypothetical Base Case would be the absence of economic recovery in the emerging markets, a less partisan tone in US politics, and no significant change in US financial markets. -
The direction of equity valuations and interest rates in 2020 may impact the price of gold
SCENARIO 3: THE BULL CASE: $1,450 to $1,700
If there is an economic recovery in the emerging markets, this could be expected to lift jewelry demand in the region. On the other hand, if emerging market currencies remain weak, this might be supportive of growing investment demand in the region. Emerging market central banks could also potentially step up their buying to the equivalent of 15-20% of annual global demand.
Macroeconomics: There is a possibility that US equities could show their first significant decline in 10 years. Similarly, global bond yields could move further into negative territory, and the US economy could slip into its first recession in 10 years.
Geopolitics: There is a threat that ongoing impeachment efforts might produce the most divisive presidential election in many years, with the added risk of continued gridlock in Washington. US troops may remain mired in Afghanistan, Iraq, and Syria. The political situations in Iran and North Korea could continue to deteriorate. The ultimate outcome of the Brexit process may potentially be that all European economies suffer. All of this could be positive for gold demand and provide an endorsement of additional strategic asset allocation purchases.
The key drivers for the gold price under this hypothetical Bull Case would be a recession in the US and a deteriorating political situation around the world.
Interest rates can certainly exercise some influence over movements in the price of gold, but I think it is important to emphasize that historically, rates have been only one factor among many, and for much of the time, not one of the most important factors. Conventional wisdom has it that rising interest rates are bad for gold because they raise the opportunity cost of investing in gold. The Fed started raising rates in December 2015 and ended that process in December 2018 after eight rate hikes. What did gold do? It certainly didn't go down — in fact, the price rose 20% over that period . That tells me that there is a lot more to movements in the gold price than just interest rates.
This past year has been a dramatic one for gold, with the price breaking out above an upper band of $1,350/oz, which had been in place since the spring of 2013. 2020 is looking to be no less exciting, and gold may prove to be a beneficial source of diversification in portfolios. As we enter a new decade, the margin for error — and opportunity — will be narrower than it was during the decade that has just passed.
Past Performance is not Indicative of Future Results
1 Source: World Gold Council, Gold Demand Trends Q3’ 2019, date as of November 5, 2019. Date range from January 1, 2010 to September 30, 2019
2 Source: Bloomberg Financial L.P. and State Street Global Advisors; date range from December 17, 2015 to December 20, 2018.
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