A Perfect Storm Brewing To Support Gold In 2020

Heightened geo-political tensions, weak global economy and depressed bond yields set to strengthen the precious metal. Gold will protect your portfolio from risks in bond and equity

- Rajalakshmi Nirmal

Gold proves analysts wrong every year by surprise moves up or down. But in 2019 BusinessLine got its call on the metal right. As predicted in an analysis titled ‘Gold to glitter as dollar descends’, published on January 7 last year, the metal rallied, buoyed by its appeal as a safe haven, in the wake of geopolitical tension, weak economic growth in the US and Europe, and higher central bank buying. But the dollar moved contrary to expectations.

While it was widely believed that the US Federal Reserve will pause after 1-2 hikes at the beginning of the year and it may see the dollar losing sheen in 2019, the Fed paused in the first six months of the year. And in the second half, instead of hiking rates, the Fed cut rates. This gave rise to fears that a tight monetary policy, together with the trade war (US-China) could, result in a recession in the US.

Between July and October, the Fed did three 25-basis pointcuts and brought the Fed funds rate down from 2.50 per cent to 1.75 per cent. While the rate cut was bad for the dollar and it was thought that the gates will open for the greenback’s downward drift, but it actually appreciated vis-à-vis other currencies on safe-haven buying. The US dollar’s up-move, however, didn’t steal the sheen of gold. Both dollar and gold moved up in tandem and the metal turned into an investor darling.

In 2019, gold prices rallied from $1,284 an ounce to $1517 an ounce —a return of 18 per cent. While 2020 may not see a repeat of this performance, gold prices are likely to move higher.

The US-Iran confrontation can give a leg-up to the metal in the near future.

This conflict will remain on the front burner and dictate commodity price movement, especially if Iran, as expected, retaliates.

Gold can save investors in equity and bonds from wild gyrations. With its negative correlation to other assets, it can protect the portfolio.