Where is gold price headed in 2020?

OCBC report says there’s little reason for gold prices to return above US$1,500/oz, as the rally looks to be largely over

By SHAZNI ONG / Pic By MUHD AMIN NAHARUL  & BLOOMBERG

GOLD remains one of the most trusted asset classes the world over. The precious metal is up 15% in value year-to-date at US$1,476 (RM6,111) per troy oz as of Dec 18 and well above the benchmark FTSE Bursa Malaysia KLCI which is down some 7% over the same period.

Gold has been driven up over the period due to various factors like the weakening growth momentum as a result of the US-China trade war and easing of monetary policies in various economies.

While there are investors who see gold as an asset class, the vast numbers of people buy and sell gold in the form of jewellery for social reasons, such as for weddings.

Irrespective of the reason for buying, holding or selling gold, the precious metal is traded actively on the global financial markets with the price changing daily. While the equity, debt or commodity markets may attract a limited scope of interest, almost everyone relates to the change in the value of gold.

As one can gain profit or make a loss from trading in gold or its products, what does 2020 hold for gold price?

Speculative trading is expected to continue dictating the direction of gold prices

OCBC Bank Ltd’s 2020 Commodity Outlook report sees little reason for gold prices to return above US$1,500/oz, as the rally enjoyed this year looks to be largely over in the absence of any further deterioration in the US-China trade relations.

“We bring forward our long-term bearishness slated for 2021 onward to mid-2020, where we expect an improvement in global growth to push gold prices lower. The resulting improved physical consumption demand as a result of a strengthened Chinese yuan and Indian rupee is unlikely to majorly stem losses on gold,” OCBC Bank economist Howie Lee stated in the report.

In the near term, however, Lee remains cautious that trade negotiations between the US and China remain fraught with uncertainty.

“This means the precious metal is not expected to sink below US$1,400/oz until the ink dries on the Phase 1 trade deal. Further out, once the US Federal Reserve (Fed) begins hiking interest rates — possibly from 2021 onwards — we think gold will eventually find a steady state at US$1,350/oz,” he added.

Since the start of the second half of this year, gold prices and 10-year US Treasury yields have shown a tight negative correlation.

Lee said the catalyst to maintain gold prices above US$1,450/oz resides in 10-year yields trading below the 1.9% handle with rare exceptions. “If US 10-year yields return above the 2% level, a cascading run on profit-taking looks likely to take place and algo-trading pressures could quickly lead gold back below the US$1,400/oz level. To that end, we think the US 10-year yield levels are worth a close watch,” he said.

While global risk appetite has noticeably returned compared to half a year ago, Lee remains cautious as trade negotiations can turn south very quickly.

US President Donald Trump has remarked he may leave the tariffs on China imports till after the 2020 presidential elections scheduled at the end of next year.

“If that scenario comes to pass, we think it will likely present an opportunity for gold to return above the US$1,500/oz level.

“The long absence from negotiations plus the pressures from campaigning will likely mean Trump will turn the screw tighter on China in the one-year interim, resulting in a flight to safety,” Lee warned.

The OCBC report noted that most central banks around the world appear to signal the current benchmark rate levels commensurate with economic fundamentals, after a year of interest-rate cuts.

Notably, expectations for further aggressive rate cuts by the Fed have fallen, with analysts expecting only one more rate cut in 2020.

“Other central banks now find themselves with limited monetary easing buffers and have effectively turned over the buck of stimulus to the fiscal department.

“Without further cuts on interest rates, gold lacks the impetus to rally higher; simultaneously, the rebound in risk appetite from thawing US-China relations and economic green shoots have pushed bond yields higher, and in turn depressing gold prices,” Lee said.

However, Lee opined a ray of optimism may reside on physical purchases.

He expects the weakening of the greenback as global growth gains traction next year, and the strengthening of the yuan and rupee could encourage physical purchases by consumers and the central banks, thus cushioning the downside for gold price.

“Speculative trading is expected to continue dictating the direction of gold prices — even though improved purchases from China and India may help cushion any potential sell-off, the trend is largely for gold to decline once global growth picks up pace,” he said.