Singapore (15 January 2020) – The gold market, which had its best performance last year since 2010, is set to remain well supported in 2020, the World Gold Council said.
Gold rose 18.4% in US dollar terms in 2019, outperforming emerging markets stock benchmarks and global bonds. The market rose on strong investment fund inflows into Exchange Traded Funds (ETFs), robust gold demand from central banks and healthy investment demand manifested in the net increase in long positions in COMEX gold futures.
Chart 1
Heightened geopolitical concerns, falling interest rates worldwide, are expected to encourage investors to include gold in their investment portfolios, keeping gold prices supported, said WGC, a gold producers’ lobby group.
With a whopping 90% of developed market sovereign debt is trading with negative real rates, the opportunity cost of holding gold disappears, the WGC said. The evidence is the strong positive correlation between the amount of debt and the price of gold seen over the past four years. (Chart 2)
Chart 2: The gold price has tracked the expansion of global negative yielding debt*
One of the key demand drivers of gold 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, as it does not have credit risk.
According to WGC, many central banks – the biggest number since the global financial crisis – are cutting rates, expanding or implementing quantitative (or quasi-quantitative) easing and, in some instances, doing both.
Gold has historically performed well in the 12 to 24 months following policy shifts from tightening to “on hold” or “easing” – the environment in which the markets are in right now. Historically, when real rates have been negative, gold’s average monthly returns have been twice as high as the long term average.
Weaker global growth to shave off demand from jewellery, technology sectors
Demand from the jewellery and technology sectors, however, is expected to slow as a consequence of contractions in major economies and gold’s increased volatility in 2020.
Chinese consumers are expected to spend more on staples and less on luxury jewellery items as a consequence of slowdown of its economy.
Indian jewellery consumption is expected to be dampened by a record high gold price in rupee terms, the country’s goods and services tax, which was introduced in 2017 and rose last year across many categories. The country’s gold import duty, which increased to 12.5% from 10%, is not helping, WGC said.-/- Source: World Gold Council
