Geopolitical Events Support Gold
Gold started the year driven by risks associated with geopolitical events. On January 3, a US drone attack on an Iranian general in Iraq led to a retaliatory strike by Iran on a US-Iraq military base on January 8. This enabled gold to briefly reach the US$1,600 per ounce level for the first time since 2013. Gold pulled back to its low for the month on January 14, but then trended higher with news of the Coronavirus outbreak in China. Metals and crude oil prices fell sharply as the virus spread and markets worried about impacts on economic growth in China and beyond. U.S. treasuries rallied and gold finished the month with a US$71.89 per ounce (4.7%) gain at US$1,589.16. Meanwhile, gold stocks underperformed gold, probably due to some mean reversion following strong outperformance in December.
Gold Price not Indicative of Physical Demand
The World Gold Council reported that total gold demand dipped 1% in 2019. Consumer demand for jewellery, bars, and coins was especially weak, falling 11% to a decade low, mainly due to weakness in India and China. Given the decline in demand, how is it that the gold price was able to advance 18% in 2019? It’s because gold behaves more like a financial asset than a commodity. Physical demand drives commodities prices, whereas financial demand drives gold prices. Strong buying from bullion exchange traded products and central banks for gold as a financial and currency hedge drove the price, even though the volumetrically larger consumer demand was very weak. Investment demand in the paper market (futures and over-the-counter) also contributed to gains in 2019. We expect the same demand and price relationships to persist in 2020 if gold price strength continues. It currently looks like gold is poised to trend through US$1,600 per ounce in the first half of the year.
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