Gold: The potential is evident as we turn the corner

2019 has ended with the yellow metal shining even brighter. In the year just gone by, Comex gold gained more than 18 per cent, and MCX gold 24 per cent. The precious metal took off in June when the US Federal Reserve told markets to expect lower interest rates by end-2019.

Besides, the US central bank ended its programme of balance-sheet normalisation, which had been pushing up rates further out along the yield curve. Simultaneously, the bank has been active in the repo market, providing liquidity and stimulus at the front end of the yield curve. Meanwhile, at its final meeting of the year, the Fed left rates unchanged, saying its current stance on monetary policy was “appropriate.”

Boost factors

Gold’s best performance this year arose from investor aversion to equity as economic storms loomed large over Wall Street. Some of that turmoil has recently been pushed to the backburner by a resurgent stock market. Indeed, optimism has revived among traders, who foresee a positive outcome to the US-China trade war and a revived global economy in 2020. Gold, consequently, has spent the last few months in the shadow of riskier assets.

The trend in interest rates, in the US and globally, continues to be lower as we head into a new decade in a fortnight. In the present economic milieu, favourable signs are evident for prospects for gold. As the year comes to a close, the price of the yellow metal is a fleck below its early-September peak, but, at just below $1,380 an ounce, well above its critical technical support. After its June through September rally, gold continues to consolidate. As we slide into 2020, buying of the yellow metal could give better returns.

By far, one of the most important considerations when evaluating gold’s intermediate-term outlook is the trend of the US dollar index. The dominant longer-term trend in the dollar, however, is still up as revealed in the fact that the greenback hasn’t yet made a decisively lower low in several months. A move below 96, however, would clearly confirm that a major shift toward a dollar-bear market is under way (as opposed to merely a “correction” in an ongoing dollar-bull market).

Nevertheless, even if the dollar’s recent weakness is merely temporary, it should suffice for gold to commence a renewed rally early in 2020. With the rising “fear factor” – arising from renewed military tension in the Gulf region and continuing concerns over the strength of the global economy – the metal has even more support beyond merely the currency aspect. In view of these supporting factors, investors are therefore justified in maintaining a bullish intermediate-term tilt toward the metal.

January outlook

All of the factors that have lit a golden fuse under the metal in 2019 are still in place as we hurtle into 2020. While the Fed left the rates unchanged at the FOMC meeting last week, it is unlikely to raise short-term rates in 2020. The Fed is an apolitical body. As 2020 is an election year, the US central bank would not want to take any monetary-policy decisions that could make waves at the time of the election.

Besides, global interest rates are at past lows. In September the ECB lowered its deposit rate to a negative 50 basis points and in November re-started its QE programme. Low rates tend to get the gold bulls snorting and pawing.

US election

The US election campaign in 2020 will be a highly contentious affair, and could lead to periods of fear and uncertainty across all asset classes. The potential for a significant shift in the US policy could support gold. Before final campaigns get under way, the President faces impeachment by the House of Representatives and a trial before the Senate.

Simultaneously, protectionist policies have heightened market volatility. The ups and downs of the trade war between the US and China will continue into 2020. President Trump recently added a front to the trade war after slapping tariffs on aluminium and steel exports from Brazil and Argentina.

North Korea has begun test-firing missiles again, and Iran remains hostile to the US. The ‘phase one’ trade deal between the US and China could ignite the Chinese economy and demand for gold in the Asian nation in 2020. The bottom line is that the stage is set for another leg to the upswing in the bullion market that tends to start the year bullish.

We are likely to see immediate resistance at 39,400-41,500 and support at 35,500-34,200 levels. Overall, we maintain our bullish view in MCX gold for 2020.

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