2020 is shaping up to be one of the most intriguing leap years in recent memory. We have major political upheaval in Malaysia with Dr Mahathir resigning as Malaysia Prime Minister abruptly. The US Presidential election will have a major influence on the financial market. Coronavirus emerged out of nowhere to wreck havocs in China. In view of these uncertainties, gold price had a good run. But whether this run is sustainable is a big question because the epicentre of the virus is China, the biggest importer of gold in the world.
At the point of writing, there were about 2,700 deaths linked to the virus. The countries significantly affected by the virus outbreak are China, Japan, South Korea and Italy. Against this backdrop, global economic growth for 2020 is widely expected to slow down, fuelling the charge of gold price.
Traditionally viewed as a safe haven, gold price typically surge in times of crises as investors buy gold to preserve wealth. The coronavirus takes place at a time when US stock market hit a record high. Dow Jones hit a record peak of almost 30,000 points on 12 February 2020. However, on 25 and 26 February 2020, Dow Jones plunged about 1,900 points.
Gold price emerged from nightmare run
It seems that investors are taking some monies off the stock market in view of the unfolding virus outbreak. The US stock market had enjoyed an unprecedented decade of bull run and this correction is timely. After all, what goes up will surely come down. But what surprises investors is that it takes a black swan event like coronavirus to shatter the multi-years bull run. Whether the virus outbreak is a short-term disruption or a global recession in the making is too early to tell. But gold price is increasing because of the uncertainties.
Given the bullish gold price, is it a good time to buy into the precious metal? Data has suggested that the surging gold price may not bode well for the demand side. According to World Gold Council (WGC), global gold demand declined to 4355.7 tonnes in 2019, down 1% on 2018. The bullish gold price in 2019 had dampened buying sentiments for bullion. Thus, if gold price continues its momentum, retail investors may be put off from buying the precious metal at current price level.
Of course, the big boys are the ones driving up gold price, not retail investors. According to WGC, “central banks were net buyers for a tenth consecutive year, the second highest annual total for 50 years”. As global trade tensions remained high, governments are stocking up on gold in their reserves.
According to WGC report, another major force backing gold price is the inflows into gold-backed ETFs. The holdings grew by a stunning 401.1t over the year.
Looking back, it has not always been a bed of rose for gold investors. Since 2011, global loose monetary policies and low interest rate environment caused gold price to fall from a record high of USD1,900 to a low of USD1,068 per ounce in 2015. The crash of gold price was the result of recovering US economy and strengthening of US dollar.
Notwithstanding the nightmarish run, those who bought the yellow metal when gold price was at abysmal level in 2015 should be smiling to themselves. Their conviction and patience had finally paid off as gold price rallied to reach USD1650 per ounce as of 26 February 2020.
Gold price thrives on market fears and uncertainties. Below are a few fear factors that could drive gold price in 2020.
Virus out of control: Given the evolving nature of the coronavirus, it is too early to tell the impact of the virus outbreak on gold price. But one thing for sure is that China economy had been stung by the virus as the government took the draconian measure of locking down cities. This containment measure effectively halts transportation in major cities and bring most of the infrastructure network to a standstill.
Being the largest importer of gold, the infrastructure shutdown in China will greatly hurt consumer and industrial demand for gold. It is unknown if the outbreak will subside or persist in the coming months. If the lockdown measures in China are lifted when the situation improved, that will remove a major roadblock for gold demands.
US President election: Will Donald Trump win the US President election and will the stock market really crash if he don’t continue to be the next US President? Nobody knows for future as the election will surely be a close fight. Although Donald Trump is a polarizing figure, Dow Jones had surged from 10,000 points when he took office, to almost 30,000 points at this point of writing. Unemployment rate has also fell to the lowest in almost 50 years.
Based on the data above, the outcome of the US President election will have major impact on the gold price, which I foresee to be volatile in the latter half of the year as the election draws near.
Geopolitical tensions: The bitter trade war between United States and China had lingered on for two years now. Despite reaching a Phase One trade deal, a large portion of the tariffs remained in place. To complicate things, part of the trade deal involves the transfer of technologies between US and Chinese firms. Both sides are not willing to compromise on their principles.
In view of the above, I doubt the trade war will end abruptly in 2020. My view is that this issue will continue to blow hot and cold in the coming year, thereby creating much economic uncertainties. Further to this, China should be focusing it’s resources and attention in fighting the coronavirus outbreak, which would have a major impact on its domestic economy.
Global trade disputes should continue to weigh on the world economic condition, thereby providing the uplift for gold price. There is also the possibility of US Federal Reserve cutting interest rates in view of the challenging operating environment.
In Singapore, the gold market ecosystem grew substantially with the removal of GST on investment grade precious metals in 2012. Being a country with low crime rate and strong jurisdiction system, Singapore is viewed by many international wealth builders to be the best place to buy and store gold bullion.
The unfolding virus outbreak, the uncertainties in the macro-market, coupled with supply and demand dynamics, should see gold price continuing its climb. My prediction is that gold price will continue its positive momentum to reach USD1,700 per ounce in 2020. It is unlikely that gold price will hit USD2,000, at least not this year in my opinion.
When it comes to owning gold, one must have the right mindset. The purposes of buying gold should be primarily for portfolio diversification. Thus, one should hold allocate about 10% to 20% of his wealth in gold. The prospects of gold in the long-term is still fundamentally sound because gold remains a significant part of many central banks’ reserves.
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