The price of gold has been rising since last summer. The global economy, geopolitical tensions, and nervousness in financial markets predict further rises.
The troubled river is a sea of opportunities. At least for investors, who have opted to take shelter in a safe place. The prospects for an economic slowdown, growing global political uncertainty, and the trade conflict between the United States and China, have revalued the safe-haven asset par excellence: gold.
The asset has had a mixed evolution in the last 12 months. But since last summer, when it reached $ 1,174 per ounce (1,034 euros, the lowest value since January 2017), the price has risen more than 9%, touching $ 1,300 per ounce, which is equivalent to about 28.35 grams. But for the year’s summary, the metal ended at 1,282 dollars (1.56% less than a year earlier).
So in 12 months, and despite financial volatility and risk aversion, the value of gold did not increase.
“it lost its safe-haven property for most of the year”
Says Gabriela Siller, an analyst at Banco Base. The strengthening of the American economy contributed to this evolution. This was linked to the expectation of further increases in the Fed’s interest rate, which caused a drop in the demand for gold as an investment asset. “Higher rates strengthen the dollar, reducing demand for raw materials,” adds Siller.
An opportunity for investors
It was in October when gold returned to the ring. Bad news boosted its price as world GDP began to falter. The International Monetary Fund (IMF) once again lowered its forecasts for the global economy. China published data for the third quarter, the smallest rebound in its GDP since 2009: 6.5%. The wealth of the eurozone increased by only 1.6%, the lowest figure since 2014.
“In the United States, the differential between the yield rates of the three and five-year Treasury bonds reversed momentarily, which historically it is taken as an indicator of the beginning of a downward economic cycle” Siller emphasizes.
All this happened in the middle of a trade war between the US and China and the Brexit discussions. Nervousness was latent in most of the world’s major capital markets. This ended 2018 in the red. The S&P 500 fell 6.24% and the Dow Jones fell 5.63%. December was particularly bad for this last indicator, falling by 8.7% (its worst last month of the year since 1931). The stock markets of Europe and Asia were not spared from the collapse. Gold became more and more desirable. US 10-year Treasuries (a fixed-income asset for conservative investors) reduced their yield to 2.69%, down from a peak of almost 3.25% achieved months ago. “If bond yields fall, the metal is more attractive” argue analysts at Capital Economics.
The price of gold has been flat this month, which tends to be typically good, explain the analysts consulted. This was due to a strengthening of the US dollar and a possible trade agreement between the US and China. However, in the next few months, it could take its toll.
“The progress in the trade dispute between the two main world economies gives a boost to gold because it suggests a greater demand for metals from the Asian country … The Chinese economy will perform better with an agreement”
Explains Jim Wyckoff, an analyst at Kitco, firm Canadian trading of gold, platinum, palladium, and silver.
Added to this is a panorama full of anxiety, The IMF has announced a new downward revision of global growth for 2019. World GDP will grow only 3.5% this year, two tenths less than in the previous forecast. In Europe, investor nervousness will revolve around the Brexit negotiations, which appear bogged down as the UK’s disconnection date with Europe (March 29) is dangerously close. The sum of all these problems will continue to increase risk aversion and raise the demand for safe-haven assets, says Siller.
The appeal of gold gains strength: the holdings of investment funds or ETFs backed by this metal have reached a maximum of 71.98 million ounces, a level not seen since May 2017.
The $ 1,400 level
For Georgette Boele, currency and metals coordinator at ABN Amro, gold could go as high as $1,400 per ounce this year. This forecast is equivalent to returning to 5 years ago’ levels. And it coincides with that of the investment firm Goldman Sachs, and with that of various financial institutions that tie their forecast to a weaker dollar. Higher volatility in equity markets, and at the end of the cycle, or in the increase in interest rates of the US Federal Reserve (Fed).
“All these factors should act as tailwinds,” argue the UBS experts in an analysis, where they point to a less flattering price of $ 1,300 per ounce.
TO INVEST OR NOT TO INVEST?
When looking at the challenges the world will face in the coming months, the question may pop up. The answer is not so simple. Investors often turn to gold to diversify their portfolios. This has worked well in times of crisis, especially if the US dollar is in low hours. It even performs well in times of deflation. Its value tends to move in a different direction than other assets such as stocks or bonds. “Stock market volatility and metal prices do not have a stable relationship,” explains Georgette Boele, coordinator of foreign exchange and metals at ABN Amro.
However, companies linked to this material and listed on the Stock Market have had good numbers. Newmont, a minor listed on the S&P 500, has increased its share price more than 8.4% since last October. Barrick Gold, which just merged with Randgold to create the world’s largest gold miner, is up nearly 23% since September 2018.