5 gold bars.

Overview

Gold has already proven its value in portfolios as a safe haven in 2020. Muted economic growth and now lower interest rates reduce the opportunity cost of holding gold, which does not offer a yield. And since the precious metal is priced in US dollars, a weaker dollar would in turn push gold prices higher.

Gold: safe haven

Gold has already responded positively as equities fell in both of this year’s main bouts of volatility: around US-Iran tensions and the coronavirus. On 8 January, gold traded above USD 1,600/oz in the immediate aftermath of Iran’s military retaliation against the US. That was the first time the precious metal hit the mark since 2013, though prices did drop back down from there. Then, safe haven demand returned later in January as markets started to fear the rapid outbreak of the coronavirus in China.

On both occasions, stocks reacted negatively, while gold held up. Gold in our view does offer some safe-haven qualities, but it also has backing from fundamentals, which helped it rally through 2019.

Global growth is muted

We see global economic growth at around 3.1% this year, after 3% last year which was the slowest since the global financial crisis. While the US and China have reached a Phase 1 trade deal, we do not expect companies to go on an investment spree given the partial nature of the deal.

Real interest rates are lower

The debate surrounding negative policy rates has intensified in recent months, but central banks look likely to stay accommodative. The US Federal Reserve cut rates three times in 2019, and with rates set to remain lower for longer, the opportunity cost of holding gold, which does not offer a yield, is lower.

Central banks are still buyers

Central banks have been purchasing gold, with a total of 650 tonnes in 2019. That marks the 10th consecutive year of annual net purchases.

The US dollar looks likely to weaken

Gold has an inverse correlation with the US dollar. After two years of dollar strength, we expect it to weaken this year. If that materializes, gold prices would be pushed higher.

So we think gold can reach the USD 1,600/oz mark in part due to political uncertainty as well as support from fundamentals.

Key takeaways

  • In 2020, gold has already proven its value in portfolios as a safe haven.
  • But the precious metal also has support from fundamentals, as a result of weak global growth and low real interest rates.
  • We expect gold to hit USD 1,600/oz in the first half of 2020.

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