Gold monthly view for January 2020

February 6, 2020
Quantum Alternative Investments Team

We’ve barely set foot in 2020 and it’s already gotten bumpy across asset markets. January turned out to be a roller coaster ride for gold with gold prices moving in the wide $1510-1610/ounce range as investors reacted to a host of fresh uncertainties on the economic, social, environmental and geopolitical fronts. While markets were just rejoicing the phase one trade deal, outbreak of Corona virus started taking its toll on global growth projections. Volatility and uncertainty bodes well for gold, ending the month at $1580.85/ounce with gains of 3.8%.

GLOBAL GROWTH STABILIZES, BUT RISKS PERSIST
The global economy started off the new decade on a firmer footing with a slight rebound in economic activity. The almost synchronized monetary easing last year across major economies that make up 70 percent of global GDP can be thanked for this. “Tentative stabilization, sluggish recovery” is the IMF’s outlook for global growth in 2020, projected at 3.3%, modestly higher than 2.9% in 2019 but 0.1% lower than in the prior report released in October last year.

The question facing us is whether or not these early signs of stabilization will persist, as new and significant risks continue to emerge.Few of the economic headwinds which dominated 2019 seem to have calmed down for now. The US-China trade deal and the hope of Britain executing an orderly exit from the EU have boosted sentiment temporarily. But skepticism remains high.

Though the “Phase One” deal has been inked, it seems to have omitted many of the key issues which lie at the heart of US-China tensions. US will continue to levy tariffs on around two-thirds of Chinese imports till the next phase of a deal. Plenty of questions remain on how some of the thornier issues like intellectual property and Huawei will be addressed in further talks and how America will ensure China sticks to its word. It’s important to remember that this deal is not a resolution to the trade war; it is just the first step in that direction. Also, with the US leadership’s America First agenda & growing Chinese clout, it is becoming clear that a clash for supremacy is at the core of the US-China trade wars which is expected to intensify over the long term, rendering these short term ceasefires meaningless.

Trumps attention has for the time being turned to Europe with him threatening to impose punitive tariffs on auto exports of EU countries that go ahead with a tax on digital services of US giants Google, Facebook. This isn’t good news for a weaker post-Brexit Britain which will now find itself at loggerheads with America not only on the tax but also the technology front with it deciding to work with Huawei despite American suggestions.

Other events that jolted markets were the American raid that killed a top Iranian commander flaring up tensions in the Middle East, Australian wildfires hurting the continent’s economy and more recently the Corona virus outbreak in China.

WITH CHINA SNEEZING, THE WORLD IS CATCHING A COLD
The outbreak has fueled concerns over the damage it could cause to the Chinese economy which contributes almost a third of global growth. In the short term, economic output will be hit as China tries to control the health emergency.

There are valid concerns that the epidemic will add to existing growth headwinds as China grapples with its slowest pace of growth in 3 decades. According to the Economist Intelligence Unit, the virus could reduce China’s GDP growth by up to 1% from the baseline forecast of 5.9% for 2020.

The flu-like ailment adds to worries over the interconnected global economy as a slowdown in China will have ripple effects across the globe. As the virus shows signs of spreading beyond China, this adds further uncertainty as everyone waits to see how the pandemic evolves. The global hit from this outbreak could be much larger than the $40 billion blow from SARS. Markets are already pricing in a slowdown as a prolonged deterioration in the conditions increases the odds of a global market downturn in 2020.Brent crude is trading at $59 a barrel, a multi-month low. Equity markets too are facing the heat. This risk-off sentiment is driving demand for gold.

TRUMP IS THE BLACK SWAN
With the impeachment trial under-way and U.S. Presidential elections barely 10 months away, this year is expected to be tumultuous. Trump will now be motivated to do things that add to his popularity including stepping up his ante against China if he feels threatened by his eventual Democratic rival. He could also further trade squabbles with Mexico, Canada, India and EU to steal back the protectionist narrative. And if POTUS is indeed impeached, economic and geo-political uncertainty will peak pushing up demand for gold. As widely predicted, the Federal Reserve kept the policy rate unchanged in its January policy meet. But with its 2% inflation target still unachieved and continuous pressure from Trump, negative interest rates are slowly becoming a possibility in the US; especially since the negative rate regime across the Atlantic is proving to be a competitive disadvantage in the race for the weakest currency. If this happens the pile of global negative yielding debt can be expected to balloon further improving the prospects of holding gold.

Despite the apparent de-escalation in the Middle East, the region continues to be a source of global economic uncertainty as it affects energy markets. The Trump administration has cranked up pressure on Iran by slapping new sanctions and Iran on its part has suggested that it will no longer abide by the 2016 nuclear deal. Any escalation between the countries could impact U.S national security as well as U.S elections.

Be prepared for a dramatic restructuring of the WTO with Trump arguing that if emerging economies like China and India are treated as developing by the WTO, the US too should be. The WTO lost its ability to adjudicate trade disputes after the US incapacitated it by refusing to nominate new members to its dispute settlement body. This can further deepen extent of global trade clashes and stifle economic growth.

BRIGHT TIMES AHEAD FOR BULLION
The next couple of months are going to be action - packed for gold due to the numerous downside risks that currently persist in the global arena.

Global slowdown concerns fueled by the China epidemic are expected to re-emerge leading to volatility in equity markets and driving up demand for gold. Also, with major central banks expected to remain accommodative throughout 2020, gold is likely to continue benefitting.

Taking a long-term view, risks from central bank-funded cheap liquidity and the buildup of financial vulnerabilities in the form of stretched asset valuations and rising debt levels cannot be ignored. The U.S. budget deficit is expected to top $1 trillion this year in spite of the economy doing well and unemployment at multi-year lows. In addition, deep trade disputes existing alongside geopolitical tensions and intensifying effects of climate change clearly indicate that the world is in choppy waters.

It is these reasons why maybe the global elite gathered at the World Economic Forum at Davos didn’t declare the all-clear for the world economy even though it is showing signs of stabilizing after a year.

Negative yielding debt again starting to inch higher totaling into a huge pile of $13.5 trillion, stock markets detached from fundamentals, and currencies subject to devaluation wars make gold a better bet for investors seeking a store of value and a valuable diversification tool. We suggest an allocation of between 10-15% of one’s portfolio. Investors could use any corrections as an opportunity to add more gold to their portfolio or ideally keep allocating to gold in a systematic manner.

Source: Bloomberg, World Gold Council

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