Commerzbank: Loose monetary policy to lift gold in 2020
Gold has backed down from its early-September high just shy of $1,560 an ounce, but still remains 14% stronger for the year, Commerzbank pointed out. This would be the strongest annual gain since 2010. The metal last traded at $1,465.80 an ounce.
“We envisage an increase to $1,550 per troy ounce by the end of 2020,” the bank said. ”The high optimism among speculative financial investors and the subdued demand in Asia will initially preclude any higher prices, so we expect to see the lion’s share of the upswing in the second half of the year.”
Prospects for the yellow metal are “positive,” the bank said.
“Monetary policy pursued by the major central banks will remain ultra-loose next year,” analysts said. “Admittedly, the U.S. Fed ruled out any further rate cuts. All the same, they are not entirely off the table, and are still more likely than rate hikes.”
In fact, Commerzbank expects another Fed rate cut in the second quarter. Further, analysts pointed out that since mid-October, the Fed has been buying short-term Treasury bills worth $60 billion per month. Meanwhile, the European Central Bank and Bank of Japan are also buying bonds.
“Thus the world’s three most important central banks will be keeping their feet firmly on the accelerator for the foreseeable future as far as printing money is concerned,” Commerzbank said.
Analysts commented that negative yields on a significant chunk of global debt will also underpin gold. At their peak, bonds worth $17 trillion were yielding below 0%, the bank said.
“The fact that gold does not yield any interest, which used to be a disadvantage, is no longer applicable in an environment of zero or negative interest rates,” Commerzbank said. “Instead, these days one could say that gold does not ‘cost’ any interest.”
Commerzbank said gold should also benefit from a weaker U.S. dollar in 2020, calling the currency “fundamentally overvalued.” Meanwhile, Commerzbank pointed out, central-bank gold buying should remain strong, with official-sector buying of nearly 550 metric tons after the first three quarters of this year.
Commerzbank looks for gold demand to pick up in the two largest markets in the world – China and India – helped by a decline in local prices. Further, plentiful rainfall in India in recent months means improved prospects for crops, important to gold since much of the demand in the country is from rural areas.
Commerzbank looks for silver to be pulled up by gold during 2020. The metal has underperformed gold this year, rising 7% for the year to date, Commerzbank said.
Analysts described silver’s picture as mixed, with weaker investment demand due to lower exchange-traded-fund inflows, along with “stagnating industrial demand at best.” This will preclude a sharp rise in silver prices, the bank said.
“Silver is likely to be helped upwards along by gold’s slipstream,” Commerzbank said. “We anticipate a silver price of $18.50 per troy ounce, though most of the price rise – as with gold – will probably be seen in the second half of the year.”
Palladium was the strongest precious metal in 2019, but Commerzbank said this metal may be due for a sharp correction lower. Palladium has climbed to a record high just shy of $1,900 an ounce, soaring by nearly 50% for the year.
The metal has been boosted by tight supplies, with another large supply/demand deficit expected this year, Commerzbank said. The automobile industry accounts for 85% of palladium demand, with the metal used for catalytic converters in gasoline-powered engines. While car sales fell in major global markets this year, more palladium was required due to stricter emissions regulations, Commerzbank explained.
However, the bank pointed out, there is potential for a shift toward more diesel-powered vehicles in Europe again, since gasoline-powered ones may have trouble meeting new carbon regulations. “We do not think that the market is paying sufficient attention to this risk,” the bank said.
Further, U.S. and Chinese passenger-car sales are likely to fall, the bank said. And there is the long-talked-about risk of substitution of platinum for palladium in catalysts, Commerzbank said.
“The higher the palladium price rises, the more pronounced the subsequent price slide is likely to be,” Commerzbank said. “It is not possible to predict the precise timing. We are confident that the palladium price will be significantly lower at the end of 2020 than it is now. Our year-end forecast is for a price of $1,500 per troy ounce.”
Commerzbank described the outlook for platinum as “cloudy,” but called for it to rise some on spillover buying from gold.
“The platinum market was balanced this year only thanks to record-high investment demand. It will be difficult to repeat this, so a sizeable supply surplus is on the cards for 2020,” Commerzbank said. “We therefore envisage little scope for significantly higher platinum prices unless there are substantial substitution effects in the automotive industry or production outages in South Africa.
“That said, the platinum price is likely to be pulled up by the rising gold price. We expect to see an average platinum price of $900 per troy ounce in 2020 and a price of $950 per troy ounce at the end of the coming year.”