Gold Outlook 2020

Gold shone in 2019

Gold had its best performance since 2010, rising by 18.4% in US dollar terms last year. It also outperformed major global bond and emerging market stock benchmarks in the same period (Chart 1). In addition, gold prices reached record highs in most major currencies except the US dollar and Swiss franc .

Gold prices rose most between early June and early September as uncertainty increased and interest rates fell. But investors’ appetite for gold was apparent throughout the year, as seen by strong flows into gold-backed ETFs, growing gold reserves from central banks, and an increase in COMEX net longs positioning.

Chart 1: Gold outperformed bonds and EM stocks

Annual performance of major global assets *

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council;

*As of 31 December 2019. Annual returns based on the LBMA Gold Price, Bloomberg Barclays US Treasury Index and Global Treasury Index ex US, ICE BAML US 3-month Tbill Index, Bloomberg Barclays US Corporate and High Yield Indices, MSCI EM Index, Bloomberg Commodity TR Index, MSCI EAFE Index, S&P 500 Indices, and Bloomberg Oil TR Index.

High risks and low rates on the horizon

We expect that many of the global dynamics seeded over the past few years will remain generally supportive for gold in 2020.

In particular, we believe that:

Financial and geopolitical uncertainty combined with low interest rates will likely bolster gold investment demand
Net gold purchases by central banks will likely remain robust even if they are lower than the record highs seen in recent quarters
Momentum and speculative positioning may keep gold price volatility elevated
And while gold price volatility and expectations of weaker economic growth may result in softer consumer demand near term, structural economic reforms in India and China will support demand in the long term.

Gold Outlook 2020 Focus: A supportive environment for gold investment

Gold has historically performed well in the 12 to 24 month period following policy shifts from tightening to “on-hold” or “easing” – the environment in which we currently find ourselves. And, historically, when real rates have been negative, gold’s average monthly returns have been twice as high as the long-term average (Table 1). Even slightly positive real interest rates may not push gold prices down. Effectively, our analysis shows that it has only been in periods with significantly higher real interest rates – an unlikely outcome given the current market conditions – that gold returns have been negative.

Gold Outlook Table 1: Gold performance nearly doubles in periods of negative interest rates

Gold performance in various real rate environments*

	Long term average	Low (<0%)	Moderate (0%-2.5%)	High (>2.5%)
Monthly Return	0.6%	1.2%	1.0%	0.3%
Standard Error	0.2%	0.4%	0.4%	0.3%
Different from 0?	Yes	Yes	Yes	No

*Based on nominal gold returns between January 1971 and September 2019. Real rate regimes based on the 12-month constant maturity US T-bill minus the corresponding y-o-y CPI inflation. Difference from zero computed as a two-way T test at a 5% significance level.

Source: Bureau of Labour Statistics, Federal Reserve, ICE Benchmark Administration, World Gold Council

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