Commodities as a whole had a mostly positive 2019
Gold, meanwhile, had its best year since 2010, climbing as much as 18.31 percent. The yellow metal’s role as an exceptional store of value shined brightly in the second half of the year when the pool of negative-yielding debt around the world began to skyrocket, eventually topping out at around $17 trillion in August. On the news last week that Iran launched a counterstroke against U.S.-occupied military bases in Iraq, the safe haven briefly broke above $1,600 an ounce for the first time since April 2013.
In the past two decades, gold has helped investors limit market volatility and portfolio losses. Between 2000 and 2019, the precious metal’s average annual price was down in only four years. Put another way, gold was up on average in four out of every five years—a remarkable track record.
Last week gold prices surged to seven-year highs after Iran launched a missile strike near U.S. troops in Iraq. Since then, prices have retreated, settling around $1,550 an ounce level as upbeat risk sentiment not the market working against the precious metal.
Gold prices continued to slip on Tuesday with overall global risk appetite still on the up as the markets eye an interim trade deal between China and the United States due to be signed in Washington on Wednesday.
The US has also dropped its designation of China as currency manipulator, which has lightened the mood still further, with markets sensing that there’s some chance of broadly improved relations between the world’s two largest economies.
Gold rallied nearly 4% in December, mainly in the second half of the month, and recently moved to an intraday high of US$1,613/oz as the US-Iran confrontation unfolded. We believe there are a few likely reasons for the move:
- A technical breakout
- Bullish positioning in derivatives markets
- Light trading volumes
- Portfolio rebalancing at the end of 2019 especially as investors hedged risk asset allocations-
- Federal Reserve (Fed) repo activity
Berenberg Cited several “volatile situations in the global geopolitical space” behind its higher forecast, notably ongoing US-China trade negotiations, the potential outcome of Brexit, rising tensions between the US and Iran and the US elections in November.
“It feels that there should be some form of resolution between the US and China over trade in the coming months, and further clarity on Brexit over the same time period; an easing of tensions is likely to weigh somewhat on gold…However, in the background, there remain elevated tensions between the US and the Middle East, and the escalation of tensions between the US and Iran (which have eased somewhat over the last two days) remains an upside risk for gold”, the bank said.
They added that the victory of a “hard left president” in the US elections such as Bernie Sanders or Elizabeth Warren is “likely” to result in stronger gold prices on the potential for radical changes to US government policy.
Meanwhile, Berenberg’s analysts also said it was likely the Federal Reserve will leave US interest rates unchanged until 2021, which they viewed as “supportive for gold” as the metal tends to suffer when interest rates rise.
They added that a pickup in US inflation could potentially provide scope for further interest rate cuts, which could push gold prices upwards.
Rebalancing ahead of 2020
We saw a pullback in investor demand for gold in November, as demonstrated by outflows in gold-backed ETFs and a reduction in COMEX net longs. This reversed in December, with net longs moving back near all-time highs and gold-backed ETF holdings reaching all-time highs.
Anecdotal evidence suggests that investors may be inclined to maintain exposure to risk-on assets such as stocks, but not without hedging their portfolios in preparation for potential pullbacks – especially given the high level of geopolitical and geo-economic risks that have been carried over from 2019 And data suggests that gold may be a recipient of some of this activity.
Fed repo activity
The Fed began reducing their balance sheet in 2018, but reversed this decision in the second half of 2019 In particular, they began regular repurchase (repo) market injections totalling nearly US$500bn in the fourth quarter. This activity has continued into 2020 and has been described by some market participants simply as another form of quantitative easing (QE) – often dubbed “QE light” – and causing some investors to worry about liquidity in the Treasury market as a whole. And, historically, expansions of QE have led to increases in the gold price.
Increased geopolitical risk-
Tensions in the Middle East, driven by the US-Iran confrontation, supported safe-haven flows, pushing the gold price to a six-year high. While a more conciliatory tone by President Trump has recently eased concerns and pushed the price down to the US$1,550/oz level, gold remains up by approx. 2.4% as of 9 January 2020.