Gold started 2020 on a positive footing with the price rising more than 2% in the first two weeks of the year. This rally is a continuation of the 18% rally that happened in 2019. The question among investors is whether the current rally can continue.
There are two sides to this question. On the one hand, there are the bears like Capital Economics, who believe that gold will lose steam this year. Then there are those like Ray Dalio’s Bridgewater Associates who are predicting that gold price will rise by 30% this year.
Let’s look at the two sides. Gold bears argue that the price of gold will be affected by softer demand from China and India, and softer safe-haven demand. Bulls, however, are of the opinion that the gold price will be boosted by the increasing political uncertainties and central banks’ embracing higher inflation.
Let’s look back at what happened in 2019 when gold had its best year in more than 7 years. In 2019, we saw the Federal Reserve slash interest rates three times. We also saw many central banks, including China, Russia and Turkey, continue hoarding gold, in what was known as de-dollarization of the economy.
We also saw increased trade tensions in the first three quarters of the year. These tensions started to wane in October when the Trump administration started talking about doing a deal in phases. This is when the gold rally started to wane, as shown below.
We started the year with increased geopolitical uncertainties that played a part in the recent gold rally. These tensions appear to have eased. We also started the year knowing that the Federal Reserve will pause on interest rates and with relatively lower trade tensions between the United States and China.
All this seems bearish for the price of gold. However, a close look reveals several catalysts for gold. The first major catalyst could be the political situation in the United States.
This is an election year, and the Democrats are battling out on who will take on Donald Trump in the November election. There are two sets of candidates. There are the super-liberal candidates like Bernie Sanders and Elizabeth Warren and the more moderate like Joe Biden and Peter Buttigieg. The former group is viewed as being less business-friendly, and their victory could lead to more demand for gold. The latter group is viewed as a safer option for the markets. Investors should be wise to track the opinion polling data ahead of the March 3 Super Tuesday primaries.
Will the Democrats nominate a winnable candidate?
Historically, the price of gold has done well when a Republican is in the White House. The price rose by more than 200% in the two terms of George W Bush. It rose by just 36% under Obama and is already up by 30% under Trump, as shown below.
Another catalyst for the gold price will be the Federal Reserve. The price of gold tends to rise when the Fed is slashing rates. The idea is that the cost of owning gold falls with low-interest rates. Indeed, the price of gold rose by 21% in 2019 when the Fed slashed rates three times. It fell by almost a percentage point in 2018, when the Fed made four rate hikes. It rose by just 12% in 2017 when the Fed hiked three times.
The Fed has said that it won’t hike or cut rates this year. However, there is still a likelihood that the Fed will cut rates again this year. In fact, UBS, the Swiss banking group, believes that the Fed could make three more cuts. The argument is that the political uncertainty in the United States could be a drag for the economy. Another drag could be trade. Sure, the two countries have signed an agreement that will lower tensions. Still, looking at the deal shows that not much will stimulate the US economy. For example, the deal has not put in place any implementation and supervision measures. Most importantly, tariffs on Chinese goods will remain, which will hamper trade in the US.
There is a possibility that central banks will start slowing down their gold purchases. According to Bloomberg, Russia has already started winding down its gold purchases. This slowdown, which is not guaranteed, will be a bit negative for gold prices. Still, this trend is likely to be supported by the political and economic risks in the United States