The key people to watch in 2020 (Left to right, top to bottom): US President Trump, Chinese President Xi, UK Prime Minister Johnson, Iranian President Rouhani, ECB President Christine Lagarde, US Fed Chairman Jerome Powell, President of the European Commission Ursula von der Leyen, and North Korea's Supreme Leader Kim Jong Un.
2019 was a very strong year for both gold demand and the gold price. In stark contrast with 2018 where gold in US Dollars actually fell, gold saw a very impressive increase in value of 13.59% per ounce from start to finish, rising from $1,282.90 to $1,484.66 per ounce.
Here in the UK, gold took advantage of the weak Pound for most of the year. At its summer peak, gold had gained 20% value against Sterling, but by the end of the year - and following the Conservative landslide victory at the general election - gold fell back slightly, resulting in an 11.07% gain for the year of £126.51 per ounce.
Domestic events drove currency shifts and subsequent asset value changes just as much as international matters. For the UK, Brexit fears drove the Pound down and the general election pushed it back up. In 2020, the US will have its own presidential election. Before this, President Trump will continue to fight the trade war with China, as well as manage the threat of war with both Iran and North Korea, and wrestle with the Federal Reserve over monetary policy decisions.
These are the key questions that will explain gold’s performance in 2019 and help predict its potential in 2020:
- What is driving gold demand?
- How is the US Dollar impacting gold and why?
- Can gold’s appeal and demand continue?
- How high could the gold price go?
1 – What is driving gold demand?
Gold is a safe haven asset; a type of asset that traditionally has preserved wealth in the event of economic uncertainty, whether that’s recession, currency devaluation, or the aftermath of a political event like Brexit.
Since the 2008/09 financial crisis, gold’s popularity has risen, with many investors keen not to repeat the same mistakes of losing wealth due to a lack of diversity to their portfolios or savings. In the decade since the crash, gold rose from £435.21 per ounce to £969.77 per ounce – a 122.8% increase in value. Even accounting for inflation, demand was the main factor behind price growth.
Demand from private investors has had a moderate impact on gold, given that economic slowdown puts pressure on how much disposable income an individual has and is willing to invest. Instead it is demand from central banks that has driven the current gold bull market; central banks who are pursuing gold bullion as a way to diversify their national reserve holdings, helping set new record annual demand totals in the process.
Nations like Russia, China, India, Poland, Kazakhstan, Turkey, Hungary, and many more have been buying gold to protect their nation’s wealth. In 2018 we reported how central bank gold buying was at its highest for 50 years. In 2019, central bank buying managed to surpass the total of 651.5 tonnes by 17 tonnes, increasing the record total to 668.5 tonnes.
Part of this is sensible planning, but the reality is that this has been triggered by the US/China trade war and its impact to global supply chains. This, in turn, has impacted the boom and bust cycle of global economics and exacerbated a slowdown amongst international economies.
This exacerbated slowdown has led to a rise in protectionist behaviour across the world, with the United States and India two major parties pursuing such policies, and with nations unsure how best to protect themselves, they are turning to safe havens like gold bullion.
Protectionism and heightened tension has led to clashes around the world. China and India are at arms over Kashmir, Russia is involved in Ukraine, Iran and America have ramped up hostilities in the past 10 days, and North Korea are threatening to resume their nuclear missile development program.
MoneyWeek’s Dominic Frisby summed the situation up in an article of his published last Wednesday:
“Gold is in a bull market. If it’s not one thing driving it higher, it’s something else. Last night, as Iran hit US military bases with missile strikes, gold busted through $1,600 an ounce. It was $1,480 just before Christmas. A year ago it was sitting below $1,300.
“The bull market continues into 2020. However, rather than break out to all-time highs, we see consolidation, backing and filling. The $1,360-80 area which for maybe five years was resistance is now support, and gold never strays below. Gold prices above $1,600 become more commonplace.”
2 – How is the US Dollar impacting gold and why?
Gold's performance in 2018 was limited by the US Dollar. Gold's performance in 2019, despite making sizeable gains, was again limited by the US Dollar. The reason is that the Dollar is stronger than it should be, due to unusual circumstances such as the US/China trade war (in which America is seen as winning at present) and a raft of weak economic data from the Eurozone.
The frustration for gold miners, refiners, and bullion dealers has been the strength of the US Dollar. A stronger Dollar arguably means greater purchasing power for those using the currency, but the reality is it prices buyers out of purchasing. It is also devaluing foreign currencies, which has had a knock-on effect on domestic demand in both China and India – two of the largest sources of consumer demand for physical gold.
In relation to the Dollar’s strength, America's stock markets were almost constantly at all-time high levels in 2019. Employment figures are high too. GDP is growing better than nearly anywhere else in the world. It's not hard to see why investors have been keen to back the US economy and the Dollar, but despite this gold has been making price gains. The expectation from German refiners Heraeus and other financial experts is continued strong demand for gold next year, but the strength of the greenback will determine to what extent gold rises or falls.
3 – Can gold’s appeal and demand continue?
As stated earlier in this feature, gold is a safe haven asset. It has historical and traditional appeal as a fall-back asset that has typically negative correlation with stock market crashes and other financial troubles. Safe haven status will always ensure some demand for gold, but the metal requires other circumstances – often negative – to thrive.
The most obvious factor that could drive demand for gold is
geopolitical tensions, aka conflict and war. The US and Iran
are the most recent and relevant example of tensions driving
up the gold price, but in 2018 it was the US and North Korea
that achieved similar spikes in demand and price. Hostility
threatens trade and the supply of resources and assets. For
the Middle East in particular, it impacts oil, which then raises
inflation as oil prices rise for the reduced supply and impact
on things like food prices. Beyond that, nations inevitably
have a surge in government spending and print money to meet
their funding requirements for said conflict. Gold typically preserves wealth in the event of inflation or currency devaluation, and recent price rises echo years of habitual investing to back gold when the sabres rattle.
The US/China trade war is another factor, as is Brexit. These two
issues group together because they centre around trading
relationships. The impact of both on gold is quite simple to track;
news about the inability or refusal to deal will drive currencies
down and gold up. Positive news about a deal being imminent or
making good progress (as we’ve heard from President Trump
repeatedly) will boost currency and remove demand for gold and
other safe havens.
Stock markets are another area that could generate demand for
gold. The US markets are in a seemingly incredible position at
the moment, and repeatedly broke records in 2019. Experts argue
constantly about if this is a bubble and if the bubble will burst,
akin to the Dot Com Bubble in the early 2000s. Unlike the other
factors, markets are another investment avenue, and so like gold
they will rely on other events to determine their own popularity.
The final and most important factor upon gold demand in 2020 is
the actions of the US Federal Reserve. The US is experiencing a
slowdown in its GDP growth, and there are indicators that recessions
- domestic and global - could be imminent. It is the Fed’s job to
manage this economic decline so that it results in as minimal a
domestic impact upon America as possible.
The Federal Reserve has already said it won't cut interest rates in
2020 unless it really has to, due to a lack of inflation in America.
It already cut rates by a quarter three times in 2019, and further
cuts would be a deterrent from the Dollar and tempt investors into
other assets, like gold. The World Gold Council believes rate cuts are going to happen regardless though, as is increased quantitative easing. Gold would likely benefit from the double act of Dollar depreciation and low interest rates, due to the implication that the Fed is having to cut rates because the US economy isn’t coping unaided. This hurts investor confidence and opens them up to diversifying their investments.
4 – How high could the gold price go?
Experts are varying in their forecasts for 2020. Some, like Commerzbank, have suggested a conservative average price of $1,550 per ounce. To achieve such a plateau in price would need the US/China trade war to be resolved, the avoidance of any military conflict, and global economic recovery.
GoldmanSachs went similarly conservative last month that gold will reach between $1,600 and $1,650 an ounce this year – a milestone that has already been achieved in January with the recent Iranian missile strikes.
The majority of forecasts – from the likes of City Index, Citigroup, Independent Strategy, and TD Securities – are all estimating $2,000 per ounce or higher on the basis of stock corrections, a lack of faith in fiat currencies, or other unconventional support policies from central banks – all prior to the US assassination of Qasem Soleimani and Iran’s missile attacks in retaliation.
Paul Schatz of Heritage Capital argued that GoldmanSachs were way off with their forecast and believes “$1,600 is going to be a footnote” in 2020, according to a recent interview with Yahoo Finance. Schatz echoed what others had said: that the financial climate is incredibly supportive of gold, and that gold will continue to climb, reaching the $2,500 - $3,000 mark by 2025. David Rosenberg, the well-respected economist who recently launched his own firm Rosenberg Research, gave the Financial Times a similar response: that gold “will go to $3,000 per ounce before this cycle is over.”
Gold performed very well in 2019 with a 13% gain in value in Dollar terms. With the economic slowdown set to worsen and the added threat of international conflict, gold demand should continue to grow and so too the gold price. That same 13% gain on current Dollar prices last year would put gold to $1,750.14 per ounce – a $200 increase – by the end of 2020. With one or more of the additional demand-driving factors mentioned above, we could see gold reach the all-time Dollar record of $1,896 per ounce or even break the $2,000 mark.
