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.