World Gold Council: Risk, uncertainty to drive gold in 2020

In 2019, gold had its best performance since 2010, rising 18.4% in U.S. dollar terms. It also outperformed major global bond and emerging market stock benchmarks over that period. In addition, gold reached record highs in most major currencies except the U.S. dollar and Swiss franc.

Gold rose most between early June and early September as uncertainty increased and interest rates fell. But investors’ appetite for gold was apparent throughout the year, as seen by strong ETF flows, robust central bank demand and an increase in COMEX net long positioning.

We expect that many of the global dynamics seeded over the past few years will remain generally supportive for gold in 2020.

In particular:

• Financial and geopolitical uncertainty combined with low interest rates will likely bolster gold investment demand;

• Net gold purchases by central banks will likely remain robust, even if they are lower than the record highs seen in recent quarters;

• Momentum and speculative positioning may keep gold price volatility elevated;

• Gold price volatility, and expectations of weaker economic growth, may result in softer consumer demand near-term, but structural economic reforms in India and China will support demand in the long-term.

Looking ahead, 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 to hedge their portfolios.

One of the key gold drivers, 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, gold does not pay interest or dividends because it does not have credit risk. This perceived lack of yield can deter some investors. But in an environment where a whopping 90% of developed market sovereign debt is trading with negative real rates, we believe the opportunity cost of gold almost goes away. And it may even provide what can be seen as a positive “cost of carry” relative to bonds.

This is further evidenced by the strong positive correlation between the amount of debt and gold price over the past four years. To some degree this illustrates the erosion of confidence in fiat currencies due to monetary intervention.

And the low-rate environment is unlikely to change any time soon. Many central banks — the highest number since the global financial crisis — are cutting rates, expanding or implementing quantitative (or quasi-quantitative) easing, and, in some instances, doing both.

In fact, gold has historically performed well in the 12- to 24-month period following policy shifts from tightening to “on-hold” or “easing” — the environment in which we currently find ourselves. And, historically, when real rates have been negative, gold’s average monthly returns have been twice as high as the long-term average. Even slightly positive real interest rates may not push gold prices down.

Effectively, our analysis shows that it has only been in periods with significantly higher real interest rates — an unlikely outcome given the current market conditions — that gold returns have been negative.