As the new year has rolled around, many predictions have been made about the gold price outlook in 2020. In this article, we will first discuss influences on the price of gold, followed by some 2020 forecasts. We will then go over some common ways that you can invest in this commodity.
Factors that influence gold prices
Before discussing gold price expectations for 2020, we will provide you with background information about some of the influencers on the price performance of this precious metal.
Currency movements are a strong influencer of gold prices. In particular, the performance of the United States dollar can significantly impact the price of gold, as the commodity is dollar-denominated. The two have long been associated because the dollar was historically tied to a specific amount of gold. This lasted up until the 1970s when the gold standard was abolished and replaced with a fiat system.
In general, the US dollar and gold prices have an inverse relationship. When the dollar is falling in value, gold prices tend to increase because it becomes cheaper to buy in other currencies. The demand for gold then increases and thus the price. On the other hand, gold prices tend to decrease when the dollar appreciates in value, as it becomes more expensive for foreign investors.
The US dollar and gold generally have an inverse relationship.
Another factor that can influence the price of gold is monetary policy. In the US, monetary policy is controlled by the Federal Reserve. Moreover, the Federal Open Market Committee (FOMC) is the Federal Reserve’s monetary policymaking body and they determine interest rates in the US.
Interest rates come into play because of opportunity cost. This is the benefit of one investment you give up when you choose an alternative.
For example, when low interest rates yield nominal returns that are less than the national inflation rate, gold becomes a more appealing investment, despite its 0% yield. This scenario leads to nominal gains but real money losses, and therefore, the opportunity cost of passing up on interest-based investments is low. In this case, gold prices tend to react positively.
Alternatively, when interest rates are rising, this boosts the yields of interest-bearing assets, making these investments more attractive than gold. Since the opportunity cost of forgoing interest-bearing assets rises, gold prices can be pushed down.
Global economic data can also drive the price of gold. For example, job reports, wage data, manufacturing data, and GDP growth can all play a role in a country’s monetary policy decisions. And as discussed earlier, these monetary decisions can impact gold prices.
For the most part, in a stronger economy with indicators such as low employment, job growth, manufacturing expansion and GDP growth, gold prices can be pushed down. This is because monetary policies may tighten when there is high economic growth. When the economy is weaker, this can increase gold prices.
Although very general, uncertainty can play a role in the price of gold. In particular, political uncertainty. This is partly due to the fact that gold is commonly viewed as a safe haven asset. Safe haven investments are ones that are expected to retain or increase in value in times of market volatility and downswings. Metals, like gold and silver, can be used as a tool to hedge against inflation. Moreover, when there is a threat of inflation, the value of gold can increase.
Gold price forecast
Due to trade wars, such as the US-China trade war, easier monetary policy, and sustained-central bank buying, gold’s performance in 2019 was positive, with a near 20% gain. At the beginning of 2020, Citigroup, UBS Group AB, and Goldman Sachs expected that gold should reach $1,600 per troy ounce at some point during the year. Other analysts believe that gold could hit $2,000 per ounce. The reasoning behind this is if looser monetary policy continues in 2020 and pushes bond yields further into negative territory, the appeal for the yellow metal could further increase.
As tensions between the US and China rise, investors may look to invest in assets such as gold.
In the first week of January 2020, gold hit its highest level since 2013 as tensions rose in the Middle East. The US carried out an airstrike at Baghdad International Airport, killing their major general, Qasem Soleimani. These growing tensions have caused some investors to turn to gold, driving its price up. Gold prices surged even more when Iran retaliated with a missile strike on US-Iraqi bases. Following this, gold futures prices breached $1,600 an ounce for the first time since 2013. Gold’s prices did not stay up past the $1,600 mark for long after the missile attacks.
Even if trade wars are expected to continue, tensions between the US and the Middle East are predicted to rise and the value of the dollar is not projected to increase in the short-term, it is still hard to say what will happen with the price of gold in the long term. Especially since gold’s performance is also partially dependent on what central banks will do, and that remains unclear. Analysts also have conflicting forecasts on performance and this year's high. Some say that gold or silver may offer a more effective hedge than oil in regards to the crisis between the US and the Middle East. Other analysts have indicated that markets tend to overact to geopolitics and that this upward swing may not last.
Investing in gold
One way you can invest in gold is by physically buying the commodity. For example, by purchasing bullion (gold, silver or other precious metals in the form of bars, ingots, or coins) or jewelry. According to the World Gold Council, jewelry accounts for around 50% of the total demand for gold. It is more common for governments to invest in gold bars but it is still possible to do so.
You can invest in gold via gold mining stocks, such as Barrick Gold and Newmont Goldcorp.
Gold mining stocks
You can also invest in gold mining stocks. This is a more indirect route in investing in gold as you do not personally own the gold. The value of gold mining shares will typically fluctuate up and down, closely following the price of gold. However, there can be price fluctuations and additional considerations, such as the company’s financials or other mining-related issues.
There are also many gold ETFs available that enable investors to put money into the gold market. In recent years, ETFs have become popular since they offer trading flexibility and portfolio diversification for relatively lower costs. Gold ETFs typically fall into two categories. Some gold ETFs concentrate on the commodity aspects of gold, such as price fluctuations. Others will invest in companies in the gold industry. You can find out information about the fund and its composition in its Key Investor Information Document (KIID). Either way, with gold ETFs, you do not own the physical commodity, but rather small quantities of gold-related assets within a single share.
Additionally, you can invest in gold futures. Gold futures are exchange-traded contracts in which the buyer agrees to purchase a specific quantity of gold at a predetermined price and date in the future. When taking a long position, there is an obligation to accept delivery of the physical metal, whereas a short position takes on the obligation to make the delivery. Futures are complex instruments and can have a high risk of losing your investment, or even more. We advise only investing in products that match your knowledge and experience and understand the risks.
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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.
Sources: Bloomberg, Investopedia, Motley Fool, World Gold Council, Zacks, Forbes