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Monday, 23 December 2019

Gold 2019- A Quick Look Back
















It’s time to look back. 2019 was a great year for gold. Just when the global markets had started writing off gold in 2018, it once again proved its safe haven appeal in the current year.

he third quarter of 2019 was eventful for the gold sector, with two interest rate cuts from the US Federal Reserve, a price rally and subsequent pullback and lots of speculation.

GOLD remained one of the most trusted asset classes the world over. The precious metal was up 15% in value until 3rd week of December.

Brexit,  geo-political tensions, Global uncertainty and US-China trade tensions kept investors worried about rising uncertainty, thus benefitting gold prices which further kept the gold prices well bid in CY2019.

Central banks- In 2018 central banks bought the most gold ever recorded and these robust purchases continued year to date in 2019. Central Bankers across the world kept buying gold, underlining the possibility of tough times in the near future. In the first three quarters, they bought 547 tonnes of gold, which was 12 per cent more than in the previous year

Trade dispute- The year started with the continuation in the trade tensions between the US and China. The first phase of the trade deal did not go through. Trade wars between two major economies of the world, kept pushing gold prices high.

As the Fed shapes US monetary policy, it influences significantly the macroeconomic environment and thus also the gold market. The link between the US central bank and the yellow metal is manifold. First of all the Fed set the federal funds rate which affects short term interest rate and indirectly ht whole structure of interest rates in the economy. Hence when the Fed tightens its monetary policy, interest rates rise. Then they increase faster than inflation, real interest rates go up which is negative for gold, a non-yield-bearing asset. On the contrary, when the Fed eases its monetary policy, interest rates decline. When they decrease faster than inflation, real interest rates go down which is positive for the yellow metal. And this was clearly visible in 2019.

Brexit- Economic uncertainty in the European Union continues to drive safe haven gold investment in Europe after a failed referendum on EU-Ukraine trade relations. Concern over Great Britain’s upcoming referendum on EU membership (set to take place in June) is also straining the markets. If the Brexit were to occur, it would likely spell the eventual demise of the European Union as an institution and set a prerogative for further member state exits. The Fed announced that the implications of a Brexit would be discussed at length in its next meeting. You may have already heard about the Brexit, but if you have not, now you have. This should continue to build momentum in the news as we approach June 23rd. This date is significant because it is the day the referendum will be held to vote whether Great Britain stays or exits the EU, hence the portmanteau “Brexit”.

Slow global growth- Global growth weakened considerably in 2019, falling from 3.2% in 2018 to of 2.6; the main culprits, the trade wars and weakening growth in China. In response, many central banks began to loosen monetary policy thus proving to be positive for gold.

Increasing gold prices compelled investors to add gold to their portfolio. Gold-backed ETF holdings also reached all-time highs by October as investors responded to the high-risk, low rate environment.

As we look ahead to 2020 we believe investors will face an increasing set of geopolitical concerns, while many pre-existing ones will likely be pushed back rather than being resolved. In addition, the very low level of interest rates worldwide will likely keep stock prices high and valuations at extreme levels. Within this context, we believe there are clear reasons for higher levels of safe-haven assets like gold. Geopolitical volatility will continue to be part of the background of general uncertainty that has been very favourable to gold for several years now.

There is plenty of support for gold in 2020 and the yellow metal might embark on a long-term sustainable rally in a new era of uncertainty. Gold prices are expected to trade in a range, between $1,450 and $1,600 an ounce next year.

Prithviraj Kothari is author of this article. Find more information about Prithviraj kothari.

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