Upbeat on the outlook for gold
Recent signs of stabilisation in the global growth outlook and the de-escalation of trade tensions have made the purchase of gold less attractive and increased the opportunity cost of holding this non-yielding asset. However, we remain of the view that US real rates should continue to support the yellow metal, given accommodative US monetary policy and reduced concerns about the US federal deficit.
Fears of an imminent US recession have receded in recent months, while global growth has showed signs of stabilising, trade tensions have dropped somewhat and global yields have rebounded. Consequently, the need for insurance in the form of gold has faded whereas the relative cost of holding it has increased. This explains the decline in the gold price of late.
However, investment demand for gold is likely to remain strong next year. Our central scenario is for further moderation in global growth in 2020, and notably a significant decline in US growth momentum in the second half of the year. Gold should also benefit from a (moderate) decline in the US dollar next year, as per our central scenario. Consequently, the rationale for holding gold in portfolios as a hedge is likely to remain strong in 2020, while its relative cost is likely to decline again.
Overall, we do not forecast any significant decline in jewellery demand in the coming years from countries like China and India. Jewellery demand is unlikely to lead to a surge in gold prices, but it should at least remain a buffer against any significant decline.
Finally, official demand for gold, which represents slightly more than 10% of total demand, has undergone a structural shift since 2009. From net sellers, central banks have become net buyers of gold. This trend is particularly visible in developing countries, whose central banks have less gold reserves than their peers in advanced economies. Gold’s diversifying qualities and the lack of any alternative offering zero default risk suggest that such demand will support gold prices in the coming years. Having already reached a record in 2018, central bank demand for gold may have risen even further in 2019.
While it is difficult to time the end of current price weakness, we still see gold at USD1650 per troy ounce in 12 months’ time.