Financial, geopolitical uncertainty to drive gold demand this year says WGC

The interplay between market risk and economic growth is expected to drive gold demand in 2020, with a particular focus on financial uncertainty and lower interest rates, as well as a weakening in the global economic growth and gold’s price volatility, the World Gold Council (WGC) says.

Owing to this, high risks and low rates remain on the horizon for the commodity, the WGC notes, adding that many of the global dynamics seeded over the past few years will remain generally supportive for gold this year.

In particular, the council believes financial and geopolitical uncertainty, combined with low interest rates, are likely to bolster gold investment demand, while net gold purchases by central banks are likely to remain robust, albeit at lower than the record highs seen in recent quarters.

Additionally, momentum and speculative positioning may keep the gold price volatility elevated.

Further, volatility, as well as expectations of weaker economic growth, may result in softer consumer demand in the near term, while structural economic reforms in India and China will support demand in the long term, according to the WGC.

Looking ahead, the council believes investors, including central banks, will face an increasing set of geopolitical concerns, while many pre-existing ones will likely be pushed back rather than being resolved.

“In addition, the very low level of interest rates worldwide will likely keep stock prices high and valuations at extreme levels. And although investors may not step away from risk assets, anecdotal evidence suggests they are increasing exposure to safe-haven assets like gold as a means to hedge their portfolios,” the WGC elaborates.

One of the key drivers of gold, especially in the short and medium term, is the opportunity cost of holding it relative to other assets, such as short-dated bonds. Unlike bonds, the council explains that gold does not pay interest or dividends because it does not have credit risk.

Additionally, as the gold price significantly rose in 2019, so did volatility, but, similarly to other assets, it remains well below its long-term trend.

The council does not anticipate a reduction in gold volatility in the near term, but says that, should the economic and political environment deteriorate, it may even rise, “especially as gold volatility historically exhibits a positive skew in such circumstances, tending to increase as stocks pull back”.

Gold shined in 2019, when it had its best performance since 2010, rising by 18.4% in dollar terms. It also outperformed major global bond and emerging stock benchmarks over that period, the council points out.