Softening economy to mean stronger gold in 2020 - Metals Focus
(Kitco News) - A weaker global economy in 2020 is likely to mean stronger gold prices, said Philip Newman, director of the London-based consultancy Metals Focus.
>Further, he pointed out that there is still a large amount of negative-yielding bonds around the world, which also helps the metal.
“We don’t have a [forecast for a] tremendous rally, but we do have it moving gradually higher,” Newman said in an interview with Kitco News.
Newman called for gold prices to average just above $1,500 an ounce in 2020 and perhaps get as high as the $1,650 neighborhood. The consultancy is anticipating an average of around $1,400 an ounce for 2019, up from around $1,270 in 2018.
“The macro[economic] backdrop is deteriorating into 2020,” Newman said. “That tells us you’re going to have loose monetary policy by key central banks….We think this will be ultimately supportive of gold.”
The metal has struggled some recently, with spot prices falling back to roughly the $1,475 area after peaking around $1,556 in early September. Still, they remain well above the levels where they were during the first half of the year, suggesting “considerable investment” demand flowing through the market, Newman said.
“We think that as the economy starts slowing in 2020, that will bring a pause to the record highs we’ve seen in the U.S. equities. Ultimately, we think this will bring renewed inflows into the precious [metals], primarily gold,” Newman said.
As of this interview, Newman estimated that some $12 trillion in global debt is negative-yielding. This is down from an estimated $16 trillion as of the record high in August, but is still “very substantial,” well up from some $8 million as of January 2017, Newman said.
“This is the competition that gold faces,” Newman said.
Basically, when yields are low or negative, this reduces or eliminates the so-called “opportunity cost” of gold, or lost income from not holding an interest-bearing asset instead.
Further, the sharp run-up in equities in the last few years means that the percentage of total investment assets in gold and silver have fallen in value terms, Newman pointed out.
“That tells us there is considerable room for [gold] investments to grow in the coming months in 2020 and perhaps beyond 2020 as well,” Newman continued.
Still, Newman explained that the equity-gold relationship is more complicated than just assuming investors will shift en masse from stocks to gold whenever the equity market sells off. Strong equities are likely to remain a potential headwind for gold for much of the year, he continued. Oftentimes when stocks fall, there is a rotation to shares deemed more likely to stand up in a downturn.
“It’s not quite as simple as sell equities, buy precious,” Newman said. “You have that rotation….One of the challenges for the gold market is investors have seen these record highs in equities and they simply haven’t wanted exit positions because they don’t want to miss the next leg up.”
Newman looks for global jewelry demand to be “up a fraction but not too dramatic” in 2020. Much of this hinges on what happens to key currencies such as the Chinese yuan and Indian rupee, he related. Demand could soften in China in response to an ongoing trade war with the U.S. Indian demand has been hurt by a slowdown and record highs in gold in rupee terms. However, a firmer rupee may offset strong dollar-denominated gold prices, thereby helping demand in India, Newman continued.
“So you’ve got the two biggest markets in the world moving in slightly opposite directions next year,” Newman concluded.
The macroeconomic picture is likely to drive gold more-so than the political one, Newman said. Geopolitical flare-ups, such as periods of political uncertainty in the Middle East, often give the metal a boost, but this tends to be short-term “knee-jerk” spikes in prices, the Metals Focus director continued.
“The macro backdrop is more of a considered rotation into precious and therefore has a longer burn to it,” he said.
Silver could outperform gold
Newman figures silver could outperform gold during 2020 by “a little bit” and “very gradually.”
“Of course, we’ve seen the (gold-silver) ratio at a very elevated level. It has backed off a little bit, but the ratio still remains very elevated.”
Metals Focus expects the silver price to average around $16.20 an ounce in 2019, against $15.71 for 2018. Looking ahead, the consultancy is looking for silver to average around $19.40 in 2020, with the potential to touch a high of over $22.
At times, silver has benefited from a positive spillover from rising gold prices. However, silver has also at times been hurt by declines in other industrial metals.
“Some hedge funds this year have been shorting silver outright because of the trade war and what that’s done to base-metals prices,” Newman said. He pointed out that roughly half of silver’s demand is industrial.
Photovoltaic demand – for solar power -- should remain “decent,” although there are risks with the key Chinese market, Newman said. “We are seeing an increasing number of countries installing photovoltaics. That is quite important.
“Although it’s still a work in progress, we are seeing the amount of silver that is going into automotive markets continue to grow. Even in regular cars that you and I drive, we are seeing increasing electrification.”
This includes features such as land guidance, rear-view sensors, heated seats and steering wheels.
“All of these things just a few years ago were only in high-end vehicles,” Newman said. “Now, they’re very much in mass-market cars as well. That’s a quite exciting area going forward.”
Each vehicle uses a small amount of silver. But because of the large number of vehicles manufactured around the world, this silver consumption “adds up considerably,” Newman said.
Meanwhile, analysts are still trying to assess the potential impact of trade wars, Newman said. Some companies may opt to draw down silver inventories, meaning a “dampener” to demand.
“But because there is such a wide range of uses, I think we’re still fairly positive for it [silver industrial demand]. We may not see tremendous growth. But even if it holds around current levels, that is still a positive development,” Newman said.