New record-high gold prices are coming in the medium term - CPM Group
(Kitco News) Gold's 2019 rally will continue with prices likely to see new record highs in the medium term, said CPM Group, citing COVID-19 crisis, geopolitical tensions, and the U.S. election.
“CPM Group expects gold prices to continue on their upward trajectory during 2020 and to reach new record highs in the medium term,” stated the 34th annual Gold Yearbook 2020.
The COVID-19 outbreak has reminded investors why it is important to have gold and other precious metals in a portfolio, which will be supportive for prices in the future.
“The emergence of this virus should send warning signals to governments, corporations, and individuals around the world about the next outbreak of a previously unknown or new disease, and the next one after that,” CPM Group said on Tuesday.
It is still hard to gauge the full impact of the COVID-19 outbreak on the global economy, but CPM Group examined a number of scenarios, highlighting May as a key turnaround time.
“Scenarios range from a short but deep recession to a much more prolonged period of economic contraction. Regardless of when and how economies recover, the economic, social, and financial disruptions and dislocations caused by all of these developments will continue for many years to come,” the Yearbook 2020 noted. “CPM Group is working under the assumption of a short but deep global recession during the first half of this year followed by a strong recovery during the second half of the year in some parts of the world.”
The coronavirus is now the main driver for everything in the marketplace as it can push global economies into a major recession, depending on the outcome.
“It is a human tragedy, which has the ability to drive the global economy into a recession. Coordinated efforts are being made by both governments and central banks to contain the virus and the negative economic fallout of this containment effort,” said CPM Group. “Gold is in good shape for the remainder of this year and the medium term. How good of a shape gold would be in will depend on how intense the economic fallout from the coronavirus will be on the global economy.”
No amount of monetary policy response is enough unless there is a vaccine developed, CPM Group noted.
“The solution is a vaccine, which still is in the development stage,” the report said. “The effectiveness of monetary policy loosening and fiscal stimulus may be limited in part, because of the already low real interest rates around the world, recipients of fiscal stimulus holding tight onto any funding that they receive, and because loose policy (monetary and fiscal) will not help to restart factories that have been shuttered due to a virus quarantine.”
The outbreak could keep hurting markets and the economy until May, the report added, stating that the virus could become dormant as temperatures rise.
Gold’s 2020 fundamentals
All of this is good for the gold price in the medium and long term. But 2020 will not be just about the COVID-19 outbreak.
Even prior to this virus, prices were set to see impressive gains due to a number of pre-existing drivers, including the U.S. election, low or negative real interest rates, shift away from globalization, elevated stock markets, rising global debt, cross border tensions, climate change, and renewed central bank demand for gold.
And once the coronavirus outbreak peaks and things will start to get back to normal all of these pre-existing drivers will be back on everyone’s minds.
Last year, gold saw its fourth consecutive annual gain with the yearly average based on the Comex gold futures around $1,396.47, noted CPM Group. “Gold price volatility measured at 11.6% in 2019, up from 10.6% from the 2018 level and up from 10.4% measured for 2017,” the report said.
March’s price action was already surpassed last year’s volatility levels with prices ranging $253.40 — between a high of $1,704.30 on March 9 and a low of $1,450.90 on March 16. “This far surpassed the volatility of the first two months of the year, as well as the range of gold prices in the full year of 2018,” the report said.
Gold market fundamentals are well positioned this year — supply, investment demand, and central bank demand are all supportive of higher prices.
Gold investment demand is estimated to be around 17.2 million ounces in 2020, but the COVID-19 situation could boost it by as much as 500,000 ounces to 600,000 ounces higher.
Gold fabrication is one of the few drivers that will likely remain weak in 2020 due to higher gold prices and slower economic growth. “Fabrication demand is forecast to decline to 90.4 million ounces during 2020, weighed down by higher gold prices, a further reduction in demand from China, weaker economic conditions around the world compared to 2019, and increased gold price volatility,” the report said.
Central banks are expected to continue buying the precious metal in 2020, possibly accumulating around 19 million ounces.
Total supply is estimated to continue to decline this year, falling to 126.6 million ounces as “ongoing decline in mine production overwhelm[s] any gains in scrap supply.”
Going forward, it makes sense to hold bigger proportions of gold in portfolios with CPM projecting many future recessions, major financial crises, geopolitical disputes and more global epidemics.
“We see the next five years, maybe longer, as being particularly hostile to consumers, investors, and small enterprises for a variety of reasons, and thus a time when holding gold makes more sense than it did in seeming more placid periods such as the late 1990s,” the report added.