The interplay between market risk and economic growth is expected to drive gold demand in 2020, with a particular focus on financial uncertainty and lower interest rates, as well as a weakening in the global economic growth and gold’s price volatility, the World Gold Council (WGC) says.
Owing to this, high risks and low rates remain on the horizon for the commodity, the WGC notes, adding that many of the global dynamics seeded over the past few years will remain generally supportive for gold this year.
In particular, the council believes financial and geopolitical uncertainty, combined with low interest rates, are likely to bolster gold investment demand, while net gold purchases by central banks are likely to remain robust, albeit at lower than the record highs seen in recent quarters.
Additionally, momentum and speculative positioning may keep the gold price volatility elevated.
Further, volatility, as well as expectations of weaker economic growth, may result in softer consumer demand in the near term, while structural economic reforms in India and China will support demand in the long term, according to the WGC.
Looking ahead, the council believes investors, including central banks, 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. And although investors may not step away from risk assets, anecdotal evidence suggests they are increasing exposure to safe-haven assets like gold as a means to hedge their portfolios,” the WGC elaborates.
One of the key drivers of gold, especially in the short and medium term, is the opportunity cost of holding it relative to other assets, such as short-dated bonds. Unlike bonds, the council explains that gold does not pay interest or dividends because it does not have credit risk.
Additionally, as the gold price significantly rose in 2019, so did volatility, but, similarly to other assets, it remains well below its long-term trend.
The council doe not anticipate a reduction in gold volatility in the near term, but says that, should the economic and political environment deteriorate, it may even rise, “especially as gold volatility historically exhibits a positive skew in such circumstances, tending to increase as stocks pull back”.
Gold shined in 2019, when it had its best performance since 2010, rising by 18.4% in dollar terms. It also outperformed major global bond and emerging stock benchmarks over that period, the council points out.
Further, market surveys indicate that the majority of economists expect positive growth for most countries this year, with a few forecasting contractions in major economies by 2021 or 2022.
However, the WGC notes that median forecasts also show an expectation of softer global economic growth relative to 2019.
“This, combined with gold price volatility at or above current levels, may discourage jewellery consumers and cause technology demand to soften,” the council says.
The slowdown in China’s economic growth and rising staples’ prices have further also been squeezing consumers’ budgets, and uncertainty lingers.
As a result of tighter budgets and higher expenditure on staple goods, consumers will likely limit their consumption of luxury items, putting pressure on China’s jewellery demand, the council says, adding that, in addition, demand from younger consumers is shifting towards innovative jewellery pieces with fashionable designs and lighter weights.
This marks a divergence in sales of traditional and innovative products that the council expects will continue in 2020.
Additionally, gold price volatility and higher taxes may deter Indian consumers, the WGC says, adding that, until tax cuts are introduced as a credible incentive to spur economic growth – the infrastructure for which may not be available until 2021 – higher taxes are exacerbating the impact of the record high local gold price on consumption.
The introduction of mandatory hallmarking for gold jewellery at the beginning of the year may enhance consumer trust, and this potential initial disruption “should not be ignored”, the council warns.
All in all, however, the council believes consumer and gold trade sentiment may remain soft this year.
Economic reforms may improve long-term demand, considering that both China and India are implementing economic reforms geared towards strengthening growth and internal consumption.
In China, the “belt and road” initiative should also strengthen its regional role and reduce dependence on the West. In India, policy reforms designed to bring transparency and an orderly trade structure to many sectors of the economy are expected to improve confidence, remove inefficiencies and promote growth.
“We expect these factors to be a long-term positive for gold demand although their effects may take time to become apparent.”
Overall, however, the council has said that a “generally positive implied performance for 2020” is expected for gold, which rallied by 4% in December 2019, and increasing by an additional 6% by January 7.
While the council believes there are various reasons for this move, “tensions in the Middle East linked to the US–Iran confrontation ultimately pushed the gold price to an almost seven-year high in early January”.
Subsequent comments made by US President Donald Trump aimed to ease concerns and pushed the price down to the $1 560/oz and $1 550/oz level as of January 10.
Despite this, gold still remains 2.6% higher relative to the end of 2019.
“We expect that investor positioning related to this specific event will likely influence gold’s performance in the near term, but over the medium term, broader financial and geopolitical uncertainty and developments in monetary policy will play a more important role,” the council concludes.