Gold has started the new year on solid footing as the price rallied above its four-month high. The list of geopolitical events seems to be growing with US-China trade war, Brexit transition, US election and renewed tensions in the Middle East. Along with muted growth across global economies high demand could push the price towards $2,000 an ounce. Here is an overview of the economic and political conditions that will drive the gold price in 2020.
Low interest rates favour gold
Gold had one of its best years in a decade after rising 18% in 2019. The reversal of the US Federal Reserve policy put the precious metal on the path of an extended rally. Remember in early 2019, markets were still expecting the Fed to pursue its monetary tightening. The dollar was the king and rallied across the board, and put pressure on gold. However, the U-turn in the Fed’s rhetoric was a catalyst for the bullish gold market.
In the context of global slowdown and trade disputes, the Federal Open Market Committee (FOMC) slashed interest rates three times, by 25 basis points in July, September and October. A low interest-rate environment boosts the demand for gold. Holding the metal now incurs lower “opportunity cost,” since other interest-bearing investments like bonds have much lower yields. Additionally, a dovish Fed keeps the US dollar in check, which lifts gold prices due to the historical inverse relationship between the two.
US Fed’s monetary policy leads prices
2020 will see an extension of the current uptrend if there is no inflection in global sentiment. Despite the Fed announced a halt in monetary loosening in December, market participants do not exclude another cut should economic data fail to point to the right direction. A deeper interest cut could sink the greenback and send bullion into $1,800s. This is why this year is critical to see which way the dollar-gold balance will tip.
Positive data from the US economy, especially higher core inflation would build a case for the Fed’s standby and strengthens the dollar at the expense of gold in the process. Elsewhere, if growth starts to pick up in Europe and Asia, a concerted halt in accommodative monetary policy could weigh on safe-haven assets like gold.
As global asset allocation goes, a number of uncertainties would support gold. For this reason, demand would rise as the soft metal plays an important insurance role in investors’ portfolios. Gold is likely to rally further as a preferred instrument of hedge and a liquid alternative asset.
Political headlines boost flight-to-quality
2020 will be a year of heightened uncertainty. Hedge-related buying could push gold prices to new levels. While global stock markets continue to fly high, if sentiment starts to turn sour, gold would become investors’ favourite asset as equities go into a sharp correction.
Concerns over the US-China trade deal have undeniably been a major catalyst behind the volatility we have seen so far. The impact of the lengthy trade war could be felt well beyond both countries’ economies. It only adds burdens to an already softening global growth, prompting central banks around the world to maintain a low-interest environment. This means that if the trade disputes drag on, bullion has plenty of room to rally.
There were signs of progress late in 2019 when both countries announced a “phase one” trade agreement. However, the on-and-off nature of the negotiations could keep market participants on their toes. Shifts in sentiment cannot be excluded unless the US and China reach a comprehensive and meaningful agreement ahead of the US election in November. But before that, there is always a possibility that the talk may stall, and investors are likely to get into gold as a hedge against this scenario.
The Middle East could once again become the hot spot this year. The recent killing of an Iranian general by the US, Iran’s missile retaliation and the downing of a passenger airliner have put the region’s stability on thin ice. While a direct military escalation seems improbable, for now, markets are uncomfortable with the region’s prospect. The US has announced it would step up its sanction against Iran. Meanwhile, the latter is facing growing domestic discontent after the Ukrainian jet incident. This could revive underlying resentment against the Khomeini regime as protests against corruption and the collapsing economy resume. Uncertainty regarding Iran’s and the region’s fate could keep bullion in an upward trajectory.
Finally, the year of 2020 will be closing with a bang as US President Trump faces the challenge of re-election. Trade wars will be the centrepiece of his foreign policy as he seeks to appeal to the rural and industrial America. That is why the US trade policy and the election have become inextricably intertwined. Trump’s re-election would mean a continuation of a firm trade stance and thus supports gold prices. Surprise and volatility would come in the case of a Democrat victory, in which the market may see a reversal of current measures or at least some sort of a de-escalation on their agenda.
The recent surge has pushed the precious metal to the highs from March 2013 (1610). The long spike is a sign of rejection as traders started to take profit. What we are seeing is more of an over-extension than a reversal in the making. The RSI indicator has ventured into the over-bought area. The price is likely to pull back and consolidate before the uptrend resumes. The bullish trend line around the major support level of 1450 will be a key area to keep the optimism intact.
Sentiment remains upbeat after the metal rose above 1550 following three months of sideways actions. As trend followers join in, the price would test again the resistance level of 1610. If buyers succeed in lifting the offers gold could extend its rally towards 1700 or even 1800 later this year. While there would be event-driven volatility as we mentioned above, the bulls stay in control as long as the price makes higher highs. The downside risk would be a deeper retracement below 1450 and then below the psychological level of 1400.