Year 2019 is about to end on a positive note for the yellow metal. Its shine and lustre was maintained as it almost finished the year 13 percent higher. This rally was majorly influenced by central banks, a deterioration and slow growing global economy and escalating geopolitical tensions.
Furthermore, concerns surrounding the US Chinese trade dispute and falling global yields added fuel to the fire. This has occurred in spite of a 1.7% rally in the greenback. Gold reached a high of 1,556 in the first 11-months of 2019 but stalled in September as the Federal Reserve started to ease US short-term interest rates and economic growth started to stabilize.
The length of the trade war and its grinding impact on the U.S. economy even caused the U.S. Federal Reserve to alter its tightening plans. A year ago, the Fed was raising rates. This December, it’s expected to keep rates on hold after three consecutive rate cuts in July, September and October.
The combination of solid US jobs growth and the demand for riskier assets helped stabilize the US 10-year yield which capped the upward momentum in gold prices. Recently (the past 5-years) movements in gold prices and the US 10-year yield have been inversely correlated (moving in opposite directions).
We all know that this year gold has witness some great rallies. But all this doesn’t happen overnight. Gold has achieved this mark gradually. Let’s see how gold made its way here.
From 1987 until 1993 a gentle price downtrend occurred. Prices traded sideways from 1993 until 1996 and were in a downtrend from 1996 until 1999. Prices then traded sideways until 2001, and then embarked upon a powerful 10-year uptrend that produced an all-time high of $1,908.60 in 2011. And then from 2011 until 2015 prices trended solidly lower.
Since 2015 gold prices have been trending up, but in choppy fashion. The monthly gold chart at present is overall technically bullish. That suggests the outlook for gold in the coming New Year is for more of the same—trending sideways to higher in the coming months.
Gold traded lower until May as optimism over a trade deal drove investors into higher-yielding assets. At the same time, the Fed was hawkish although policymakers were divided over whether to continue to raise or hold rates steady.
Gold put in its low for the year in May after the U.S. and China called off trade talks. Risk aversion increased globally as fears of world recession resurfaced amid disappointing macro data in major economies. Equity markets sank worldwide and U.S. Treasury yields dipped to multi-year lows as investor sentiment soured over growing global growth worries.
Gold may have bottomed in May, but its most impressive price move took place during August and September. This was shortly after the Fed made its first of three rate cuts on July 30.
Fear of a recession also helped spike gold prices higher as Treasury yields inverted. However, the move proved to be speculative in nature as the Fed continued to insist the economy was not headed toward recession and its rate cuts were just a “mid-cycle” policy adjustment. It was at this time that the Fed started to talk about limiting its easing to 1 or 2 more rate cuts.
Gold hit its high for the year after the Fed started to talk about easing up on its rate cuts, and the U.S. and China decided to move back to the negotiation table. It’s likely to trade sideways to lower over the near-term as long as the trade talks continue and the Fed holds rates steady.
Expectations of at least three rate cuts and a summer of trade war uncertainty fuelled a four month rally in gold in 2019. With the Fed expected to hold rates steady and the U.S. and China still negotiating, gold may be underpinned over the near-term, but there is no urgency to buy it
When we talk about outlook for any asset, the market always gets divided into two sections- the bulls and the bears.
Let’s take a look as to how each section continues to justify its belief-
THE BEARS BANDWAGON
For the bearish sentiment followers, it is difficult to predict a high sustainable growth for gold. From the recent speeches addressed by Fed Chairman Powell, it can be stated that the Federal Reserve is on hold. The Fed has made it clear that the hurdle rate for additional rate cuts is larger than it has been earlier in the autumn
With the Fed likely on hold, any positive US economic data will continue to lift the 10-year yield which should put downward pressure on gold prices. Additionally, if global growth begins to stabilize and Europe and Asia begin to experience economic expansion, global yields will begin to rise, weighing on gold prices.
Not forgetting to mention the US/Chinese trade negotiations. As of late November 2019, it appears that the US and China are moving closer to a phase 1 deal. While this might spill over into 2020, the deal would reflect a further easing of tensions and the removal of trade tariffs between the two largest economic powers globally.
If there is any positive achievement in trade dispute then gold is likely to head lower, back towards $1300.
THE BULLS BELIEVERS
A lot has changed as a consequence of the United Kingdom was voted in the favour of Brexit on June 23 including a change in gold prices. Gold has surged by 6.5% ever since the Brexit decision, gold has only been climbing higher by each day. And the spill over effect will be witnessed in 2020 too as believed by the bullish supporters for gold. But for this to be true there will be three major catalysts that will play a very important role in pushing gold prices up-
A weakening global economy- Whenever the global economy faces a crisis, gold prices always benefit. The post Brexit economy uncertainties will definitely continue for a while, thus helping gold prices climb higher. A lot of investors and economists have raised questions about the next country to drop out of the European Union ever since the United Kingdom left the European Union. There are talks that the European Union might actually completely dismantle over the next couple of years. The geopolitical uncertainty will definitely send investors rushing to invest in gold.
Rate Cuts- It is a fact that rate cuts lower the value of a currency. When the value of a currency decreases, gold tends to look more appealing as a store of value. ECB has reduced interest rates by -0.4% and there are indications of further rate cuts. And there has been some gossip about UK rate cuts ever since Brexit. Rate cuts, big or small will definitely aid gold prices in climbing higher this year.
Discounted gold- It is evident that gold is trading at quite a discount right now considering the Dow/gold ratio. The Dow/gold ratio can be arrived at by dividing the Dow index by the price of gold. The current ratio of 13.3 is proof that gold is trading at a good discount. Gold will continue trading at a much higher premium in the next few years. The demand for gold is rising in the Asian countries and will continue to do so in the next couple of years.
If the above mentioned catalysts move the way they are supposed to, then gold can show some real bold price movements in 2020.
Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.
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