As the threat of a possible conflict between the United States and Iran increased at the start of this month, billions of dollars poured into gold.
The precious metal is already trading at what looks like quite a high price if you compare it to where it was 10-15 years ago. Is this really warranted?
What is going to drive the gold price in 2020?
We ended 2019 with one crisis averted: US-China tariffs that were supposed to be ramped up on December 15th were cancelled as the two nations reached a “phase one” trade deal. Gold remained resilient when the trade fears subsided but accelerated when Iranian crisis started. Gold has risen to US$1550/oz on 13th January 2020, up from US$1461 on 9th Dec 2019.
“We believe that the tensions in the Middle East and trade frictions will continue to support gold prices during 2020,” according to Nitesh Shah, Director of Research at fund manager Wisdom Tree. “As the US-China phase one deal based on a narrow set of issues does not really address the full scope of grievances that the US has with China, it’s not surprising that the gold market remains cautious about further trade progress being made.”
Indeed, a deal that is good enough for now could stall progress on further phases until after the Presidential election in the US (November 2020). Worse still, a vindicated Trump Administration, declaring a premature victory over China (after declaring trade victories with Mexico, Canada and a number of Asian countries), could sharpen its focus on its trade deficit with Europe in 2020, adding to the risks of economic deceleration in 2020.
“We believe that the price of gold in 2020 will continue to be influenced by the progress (or lack thereof) in trade discussions,” says Wisdom Tree’s Shah, who seems to be pinning the case for gold firmly on the trade deal.
His internal model indicates that gold prices are poised to move higher in 2020. Gold prices could end the year around US$1640/oz, he feels. WisdomTree is forming that base case view using consensus forecasts for Treasury yields, the Dollar Basket, inflation and conservative forecasts for speculative positioning in gold futures.
However, if we end up in a world where tensions in the Middle East persist or trade protectionism spirals out of control and monetary authorities have to resort to utilising radically new tools, we could see gold rising to over US$2000/oz. Conversely in a world where trade frictions are resolved amicably, gold could end 2020 around US$1470/oz.
What does The Armchair Trader think about the gold price?
This starts to make gold look more like a binary trade. Inflation risks don’t seem as large as they were in 2018, so if there is going to be a boost to gold prices, then it will likely come from a sudden and unexpected quarter.
At The Armchair Trader we don’t feel the trade talks between China and the US will break down – both countries have too much at stake, but Trump also has a delicate balancing act to maintain in an election year: being tough on China plays well with many American voters, but the trade war is already hitting the midwestern states which depend heavily on agricultural exports to Asia.
Our case for gold sits more on the potential for sudden spikes in the price should the situation in the Middle East get out of control.
Iran seems to have decided to step back from the brink for the time being, and sabre rattling with the Americans is causing, inadvertently, more demonstrations in Iranian cities, something the ayatollahs had not anticipated. The domestic political situation in Iran is unstable enough at the moment that the government there may be more intent on getting its own house in order over the next few months than starting new fights abroad. This is compounded by the fact that two of the main architects of its overseas strategy have been slain in Baghdad.
Gold futures may show some short term upside for traders who want to exploit it if there is another crisis with Iran (and never say never – the government in Tehran could get desperate), but the returns are not going to be spectacular if you are looking at gold as a medium to long term investment.
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