Last year's drivers ease back...
ANOTHER year has passed, writes Arkadiusz Sieroń at Sunshine Profits.
Last New Year, in the January 2019 edition of our Market Overview, we wrote that the fundamental outlook for the gold market was better than one year before, and so should see better price performance.
Fast forward to January 2020, and just look at the chart below.
Gold rose more than 18% last year. We can distinguish four phases:
- a bullish phase that lasted until mid-February;
- a bearish period that ended at the end of May, erasing all previous gains;
- the super bullish phase that lasted until early September, when the price of gold reached its peak of $1546, soaring 21.6% in just 3 months; and
- the bearish remainder of the year, during which the yellow metal declined.
What were the drivers behind gold's behavior during these phases?
One important factor was monetary policy. Gold started to go up at the very end of November 2018, when Powell delivered a speech considered as dovish. But the February Fed meeting's minutes were perceived as more hawkish than expected, which sent gold prices down.
Moreover, the ECB adopted a more dovish stance later, which strengthened the US Dollar while weakening both the Euro and gold.
However, in May, the yield curve became even more inverted, which triggered recessionary fears and pushed investors to expect more dovish actions from the Fed. And indeed, the US central bank started to signal more accommodation, and cut the federal funds rate three times.
Let's not forget about the greenback and real US interest rates – two of the most important drivers of the gold prices. As one can see in the chart below, the Dollar index, which measures the strength of the American currency against its peers, reached a local peak at the end of May, when gold started its rally.
Real yields were also important, as they bottomed out around the beginning of September, when the price of the yellow metal reached its 2019 peak.
What is interesting is that gold peaked together with the US Dollar, which suggests that both were considered as safe havens during elevated worries about recession. The increase in the interest rates since then pushed gold prices lower, despite the depreciation of the US Dollar.
And what about 2020 – will gold soar even more, shifting up a gear, or will it decelerate after a good year?
Nobody knows this for sure. But what we know is that – unless the next economic crisis arrives – the US central bank is likely to remain neutral (or to cut interest rates just once, according to the CME FedWatch Tool).
Given the Fed cut interest rates three times in 2019, it implies that the monetary policy will be less supportive for gold prices. Moreover, the federal deficit is going to increase, which should lift the Treasury yields, putting downward pressure on the yellow metal. Last but not least, the reached "phase one" trade deal and the triumph of Conservatives in the British parliamentary elections mean that the uncertainty over the trade wars and Brexit should diminish.
So unless anything ugly happens, the macroeconomic environment could be less supportive for gold than in 2019. However, bad things do happen, and, according to Murphy's law, anything that can go wrong will go wrong. And after all, the US yield curve did invert last year and we are already observing some recessionary trends, especially in the manufacturing sector and among smaller-sized companies.
So while the first half of the year may be not the best for gold, we could possibly see an improvement later.