Gold hasn't lost its shine

Thought of the day

by Chief Investment Office 09 Oct 2019

Negative news on the US-China trade dispute ahead of this week’s talks undermined risk assets and boosted safe havens. A day after blacklisting several Chinese AI and surveillance firms, the Trump administration revealed visa restrictions on unnamed Chinese officials. A Bloomberg report suggested that the US is still discussing capital restrictions on US flows into Chinese companies, and the South China Morning Post reported that China is considering cutting short this week’s high-level talks by a day.

The S&P 500 dropped 1.6%, yields on US 10-year Treasuries fell 2 basis points and gold rose 0.8% to scale USD 1,500/oz.

Gold has struggled to stay meaningfully above USD 1,500/oz since August, when it first breached the mark, though data compiled by Bloomberg reveals that global holdings of gold bullion-backed ETFs have increased for 17 consecutive days, the longest run of inflows in a decade. The World Gold Council (WGC) shows that net inflows into global gold-backed ETFs and similar products reached USD 3.9bn in September, increasing their collective gold holdings by 75.2 tonnes to 2,808 tonnes, the highest level on record.

We think the primary drivers behind gold's rise this year remain in place and expect further price gains:

  • We see global growth slowing to 3% next year, its slowest pace since the global financial crisis. While our base case is for the US economy to avoid a recession, recent weak economic data has exacerbated growth concerns. This uncertain economic backdrop should support safe-haven assets.
  • With the Federal Reserve likely to reduce its policy rate over the coming months (we expect four more 25-basis-point cuts by the end of 2020), and other central banks also easing, real rates should stay low, making gold attractive on a relative basis.
  • Central banks have been purchasing gold and we anticipate that they will remain net buyers. According to its website, the People’s Bank of China (PBoC) bought 5.9 tonnes of the precious metal in September, and in total has added more than 100 tonnes since it resumed purchases last December. Central bank purchases last year reached their high point since 1971, when the US left the gold standard, according to WGC data.
  • As the latest threats of escalation indicate, significant US-China tensions remain, particularly with regard to the longer-term issues of national security and intellectual property rights. On balance, we expect a prolonged period of trade tensions that could add to market volatility underpinning demand for safe-haven assets. This is also likely to support central banks’, and particularly the PBoC’s, desire to diversify away from the dollar.

Against this backdrop, our forecasts for the gold price is USD 1,550/oz at end-4Q19, USD 1,600/oz at end-1Q20 and end-2Q20, and USD 1,650/oz at end-3Q20. If this week’s trade talks result in significant progress, which is not our base base, the potential for further gains for gold would be reduced, in our view. If scheduled tariff increases were postponed indefinitely, or existing tariffs rolled back, risk assets would likely rally. A trade deal could also increase the willingness of companies to take advantage of lower borrowing costs to fund investment, increasing the stimulus to the economy from the Fed's recent rate cuts and making additional rate reductions less likely.

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