Why gold still looks attractive
17th January 2020
Resources Rising Stars
The gold price is slightly off its strong start to 2020 but it's yet to retreat below $US1500 an ounce. Despite a short-term easing in global uncertainty, gold investors appear to be more pessimistic about the longer term (reports The Australian Financial Review).
With the wave of geopolitical risks that have supported safe-haven demand in the last few years diminishing quickly in the last month, certainty looked to be returning to the market. Equities across the globe have soared to fresh highs, with the S&P/ASX 200 index knocking on the door of hitting 7,000 points.
The US and China are set to sign a "phase one" trade deal this week, bringing a temporary truce to almost two years of tit-for-tat escalations between the world's two largest economies.
And the UK general election has paved the way for Britain to finally leave the European Union, more than three years after it first voted to leave, ending a volatile period for British and European investors.
Even the first major risk of 2020, the conflict between the US and Iran, seems to have been brushed aside by most investors just as quickly as it started.
But the optimism reflected across equities is not shared by gold investors. Last week, the price of gold roared to a near-seven year high of $US1574.37 an ounce, after rallying more than 7.5 per cent since the start of December, even as the S&P 500 continued to top recent highs.
“Gold prices have been driven upwards by rising political and financial uncertainty in the United States and geopolitical risks in the Middle East,” says IBISWorld senior industry analyst Michael Youren.
"Amid the longest bull market in United States history, many investors seem to be bracing for an inevitable downturn."
IBISWorld is forecasting the price of gold will rise 3.5 per cent in 2020, even amid signs the tensions between Washington and Tehran will not escalate further.
Friday's US non-farm payrolls gave given gold prices a further boost in the back end of last week, with the figure falling short of investor expectations.
"The weaker non-farm payrolls in the US on Friday adds to the case for the Fed to be on hold for longer, thereby boosting the support for gold, which tends to do better when interest rates are falling or low and more stable at those levels," says NAB's head of commodity research Lachlan Shaw.
The US dollar has started the year firmly although its gains could be capped, with the Federal Reserve unlikely to lift rates at any point this year.
According to CME's FedWatch Tool, the odds of the Fed hiking this year is just 12.7 per cent, with futures markets implying the target rate will be kept on hold through 2020.
The price of gold has tapered slightly since last week, although it remains more expensive than at any point between 2016 and 2019, trading above $US1500 an ounce.
But while the price is being supported for the time being, analysts are warning investors to be wary of a potential slide.
Macquarie brokers say the dramatic surge caused by heightened geopolitical uncertainty needs to be treated with caution, with previous geopolitical events failing to spook investors enough to deliver a sustained rally in the price.
"For the rally to continue, we need some bullish combination of general US
dollar weakness, lower interest rates and a spike in inflation expectations," they said.
Macquarie forecasts gold prices will trade below $US1400 an ounce through 2020 before rising above $US1600 an ounce through 2022 and 2023.
There are signs the appetite for gold is already beginning to diminish. According to NAB, more than $US1 billion ($1.45 billion) was withdrawn from the SPDR Gold Shares physically-backed exchange traded fund (ETF) last week, marking the largest weekly withdrawal since 2016.
In the same week, global holdings in gold ETFs fell for the first time in four weeks while holdings in silver ETFs slid for the ninth straight week, marking the longest run of withdrawals since 2006.
Tribeca Investment Partners Asia chief executive and portfolio manager Ben Cleary says there is likely to be some short-term downside for gold as the risk of further tensions between the US and Iran dissipates.
"There has been a pullback from the highs already," he adds. "The relationship has certainly broken down with US 10-year yields that was driving gold higher in 2019. And that whole argument of the trillions of negative-yielding debt making gold more attractive has certainly pulled back since October."
That said, investors could find advantage in keeping their gold exposure.
Cleary isn't writing off gold for the rest of the year, saying a lower US dollar would support the price of the precious metal.
"I am generally very bullish on metal prices in 2020 which includes both risk metals such as copper and defensive metals such as gold," he says.
"This is because stronger-than-expected growth in the G20 and emerging markets will likely drive the US dollar lower, which will support all metal prices similar to 2011 and 2016.
"I generally still prefer base metals over precious metals but think both will be higher in 2020."
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