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.