Outlook
for 2020 – Gold risks losing some glitter
G.
Chandrashekhar, Independent Director, Foretell Business Solutions, is an
economist, senior journalist and policy commentator
After an
extended period of languish, investors’ eternal favourite gold has had a
stellar run in 2019, especially in the second half, with prices touching
multi-year high of $ 1550 a troy ounce at some stage. Several factors
contributed to the rally, not the least of which was the USA-China trade war,
successive rate cuts by the US Federal Reserve, global economic growth concerns
and weakened emerging market currencies. Gold’s appeal as a safe haven
investment was on display most of the time.
No doubt,
the market has corrected as the rally was somewhat overdone, with rates falling
below the psychological $ 1500/oz. The correction was coming in any case given
that physical demand was enervated. In two of the world’s largest markets -
China and India - physical demand has taken a beating for a variety of reasons
including the currency factor.
So,
what’s the outlook for gold as we head into 2020?
Global
economic growth in 2020 is likely to show an uptick. From 3.1 percent in 2019,
growth rate may rise to 3.4 percent. Rising economic growth is sure to boost
the equity markets, which is negative for gold. Less committed investors will
exit the precious metal and move to equities, a phenomenon that has played out
umpteen number of times in the past.
In terms
of interest rate cuts that characterized much of 2019, the year 2020 is
unlikely to witness many. Central bankers around the world now find very
limited scope for easing the rates further. Many believe, the monetary policy
stance (easy money policy) has run its course. The market has more or less come
to believe that the US Fed may cut rate once, likely in March and then take a
pause. So, liquidity (or the lack of it) is unlikely to help gold in 2020,
unlike in the past when the metal’s rally was substantially liquidity driven.
US dollar
is expected to continue to remain resilient. There are dire predictions that
the US economy will begin to slow in the second half of 2020. Slow it may
because economic activity has nearly peaked with joblessness at multi-year low and
capacity utilization robust. The dollar may weaken a bit, but is unlikely to
collapse. Rising shale oil production and export from the USA is a huge
positive for the economy. A resilient dollar is not good news for the precious
metal.
The
author believes, the ongoing US-China trade war is likely to find a more or
less amicable solution. The Phase One agreement is sure to be followed up with
a larger engagement and agreement that will see trade between USA and China
improve substantially in 2020. The two countries need each other. This author
believes President Donald Trump will clinch a good deal with China some time in
Q2 or early Q3 2020. In the event, there will be a boost to market sentiment and
market confidence. Gold’s safe haven status will wane.
Perhaps
the most important factor to impact the gold market in 2020 will be the demand
side. While many central banks are likely to buy gold to bolster their
reserves, physical demand in key markets is not expected to show any
significant rebound. Chinese economy is decidedly slowing and the currency is
depreciating. China’s import numbers of last several months confirm the story.
In India,
a combination of weak rupee and high import tariff means gold prices have
turned unaffordable. Rural demand has taken a hit because rural incomes are not
rising fast enough. Indian economy is slowing as evidenced by a host of
parameters. If anything, there is demand compression at high prices. In other
words, the Indian physical market is most unlikely to help gold’s cause. Even
if the rupee were to firm up from the current level of 71 to a dollar, it is
unlikely to make any material impact on physical demand.
Given the
aforesaid scenario, in 2020, gold is unlikely to show the same kind of price
performance as in 2019. If anything the metal is likely to be under pressure.
By and large it should revolve around the $ 1450/oz levels for the most part;
and depending on specific developments may go up or down by about $ 50/oz. With
every increase in price, there will be sell-off and profit booking leading to a
price correction.
However,
if the US-China trade negotiations flounder in 2020, if the dollar weakens markedly,
if liquidity expands and if emerging market currencies gain strength (on the
back of a weak dollar), then speculative capital is sure to rush to gold and
propel it higher well above $ 1500/oz. But his seems to be less-likely scenario
on current reckoning.
At the
moment outlook for gold is not bullish. There is nothing to suggest prices will
decidedly stay above $ 1500/oz. So, brace for a modest weakness in gold prices
heading into 2020.
Disclaimer:
Views are personal and not the views of the publisher.