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Looking back: 2019 rate cuts help gold to best year since 2010

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Looking back: 2019 rate cuts help gold to best year since 2010

(Kitco News) The year 2019 was the best one for gold in nearly a decade, getting a lift from Federal Reserve rate cuts and geopolitical tensions, analysts said.

Spot metal rose 18%, its best one-year performance since a 30% gain back in 2010. Spot gold finished 2019 at $1,516.95 an ounce.

The No. 1 factor helping gold was a reversal of Federal Reserve monetary policy, with officials cutting interest rates three times, said Phil Flynn, senior market analyst with Price Futures Group.

“You’ll remember earlier in the year, the Fed was talking about raising interest rates,” Flynn said. “That was making the dollar strong and putting pressure on gold prices earlier in the year.

“But when the Fed changed policy…it was really a catalyst for gold prices to start moving higher.”

The Federal Open Market Committee trimmed interest rates by 25 basis points in July, September and October, before announcing a halt in December. Still, market watchers suspect that if there is another change in policy, another cut would be more likely than a hike. The Federal funds rate ended the year in a range of 1.5% to 1.75%.

“A lower interest-rate environment is good for gold,” said Kevin Grady, president of Phoenix Futures and Options LLC. Besides the Fed cuts, he pointed out that there are trillions of negative-yielding bonds around the world.

Low rates help the precious metal several ways. It lowers the so-called “opportunity cost,” which is the lost interest income from holding a hard asset rather than interest-bearing investments. Lower rates also hurt the U.S. dollar, which is good for gold due to the historical inverse relationship between the two.

“When you couple the trade tensions and Brexit, there are some geopolitical reasons why people are in there buying gold,” Grady added. “But for me, the biggest reason [behind the 2019 gain] is the lower interest rates.”

John Weyer, co-director of commercial hedging with Walsh Trading, cited hedge-related buying as investors braced for an eventual correction in the high-flying stock market, which was hitting fresh record highs early Thursday.

“There was a sustained flight-to-quality play…to always have it on [in case of the stock] correction, even though we haven’t seen it yet,” Weyer said.

George Gero, managing director with RBC Wealth Management, cited political headlines, particularly in the U.S., and news reports about tensions in the Middle East.

Key headlines in the U.S. were those leading up to the impeachment of President Donald Trump in the House of Representatives, as well as market unease with some of the political candidates, Gero explained. Meanwhile, gold and other markets monitored the U.S.-China trade war.

“The on-and-off nature of the [trade-war] headlines brought more investors into gold as a hedge against possible failures,” Gero said.

There were signs of progress late in 2019 when the countries announced a “phase one” trade agreement. Nevertheless, the standoff for most of the year left investors worried about a trade war hurting the global economy, Gero said.

Flynn said some gold buying was encouraged by events in the Middle East.

“We’ve had a lot of tensions from the Iranian attack on the Saudi oilfields, and we’ve had tensions in Syria,” he said. He also cited tensions surrounding South American OPEC member Venezuela.

“There are some genuine concerns about debt at the same time,” Flynn said. “Governments are printing a lot of money right now. There are concerns that may come back to haunt us.”

Gold has also drawn momentum-based buying as it rose, observers said.

“The trend is up in gold, and a lot of trend followers are coming in there,” Grady added.

He noted that as of Tuesday, open interest – which is the number of open positions at the end of the day – stood at 786,422 futures contracts.

“It’s huge,” Grady said.

Meanwhile, investors weren’t the only ones buying gold in 2019. So were central banks.

Through during the first 10 months of 2019, net official-sector purchases totaled 562 metric tons, according to data from the World Gold Council. This came after the strongest buying in more than half a century in 2018, when central banks collectively added 656 tons to their reserves.

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