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Big Story: Outlook for gold and base metals in 2020

| Updated on January 07, 2020 Published on January 04, 2020

Why you should add gold to your portfolio

Gold proves analysts wrong every year by surprise moves up or down. But in 2019 BusinessLine got its call on the metal right. As predicted in an analysis titled ‘Gold to glitter as dollar descends’, published on January 7 last year, the metal rallied, buoyed by its appeal as a safe haven in the wake of geopolitical tension, weak economic growth in US and Europe, and higher central bank buying. But the dollar moved contrary to expectations.

While it was widely believed that the US Federal Reserve will pause after one/two hikes in the beginning of the year and it may see the dollar losing sheen in 2019, the Fed paused in the first six months of the year and in the second-half, instead of hiking rates, the Fed cut rates. This was due to fears that a tight monetary policy together with trade war (US-China) could result in recession in the US.

Between July and October, the Fed did three 25-basis point cuts and brought the Fed funds rate down from 2.50 per cent to 1.75 per cent. While the rate cut was bad for the dollar and it was thought the gates will open for the greenback’s downward drift, but it actually appreciated vis-à-vis other currencies on safe haven buying. The US dollar’s up move, however, didn’t steal the sheen of gold. Both dollar and gold moved up in tandem and the metal turned in to an investor darling.

In 2019, gold prices rallied from $1,284 an ounce to $1517 an ounce – a return of 18 per cent. While 2020 may not see a repeat of this performance, gold prices are likely to move higher. The US-Iran confrontation can give a leg-up to the metal in the near future. This conflict will remain on the front burner and dictate commodity prices movement, especially if Iran, as expected, retaliates.

Gold can save investors in equity and bonds from wild gyrations. With its negative correlation to other assets, it can protect the portfolio.

Gloomy economic picture

The increase in tariffs, post US-China trade war impacted the global economy last year. The new year doesn’t look promising either. The IMF projects global growth to improve modestly to 3.4 per cent in 2020 from 3 per cent in 2019, driven by recovery in the developing and emerging economies, including Turkey, Argentina, Iran, Brazil, Mexico, India, Russia, and Saudi Arabia. But large emerging markets and developing economies may continue to face challenges, it adds, due to trade and policy uncertainties.

The US GDP growth has slipped from 3.1 per cent in Q1 2019 to 2.1 per cent in Q3, and, outlook for 2020 is not too good. In a release dated December 11, the Federal Reserve projected that GDP growth will slow to 2 per cent in 2020 from 2.1 per cent in 2019. Note that if there is a breakdown in US-China trade talks, even this growth will not be attainable.

While the expectation is that the Federal Reserve may not resort to further rate cuts in 2020, there is uncertainty around how the Fed will act if growth slows.

So, if the US and China are unable to sign a truce and it interrupts the economic recovery process in the United States, the Federal Reserve may be forced to go for more rate cuts, pushing bond yields further lower. The benchmark 10-year US Treasury yields ended 2019 at 1.92 per cent recording a drop of 72 basis points in one year – the largest annual drop since 2011. Note that the trade war between US and China is far from over. Eyeing a second term-- the US presidential election is in November-- he may take a tough stance with China.

In EU, also, the picture is not too good. While the euro area’s economic woes continue with a sharp fall in PMI for manufacturing, the ECB doesn’t have room left for monetary stimulus. All eyes are now on the new ECB President, Christine Lagarde, for some definitive action. The US-EU trade deal should progress this year; otherwise there is risk of a tariff on autos and the region suffering economically.


The United Kingdom will formally exit the European Union at the end of January and it will start negotiating fresh free trade agreements. But if this arbitration doesn’t go well, it will further hurt business sentiments and growth. From the Asia pack, China, is also set to see a challenging year.

Analysts expect a sub 6 per cent growth in China in 2020 which is sharply lower compared to recent years. A slowdown in China will hit all other nations including South Korea, Hong Kong and others who export to China.

Gold fundamentals strong

Given higher prices, consumer demand was muted. The two largemarkets for gold – India and China– have seen consumption slowing in 2019. But if prices continue to be higher for a prolonged time, demand will return. What is also promising at this point is that there is a strong buying by investors and central banks.




In Q32019, demand for gold jewellery was 460.9 tonnes, 16 per cent lower than in the same quarter of the previous year due to lower purchases in Asia and the Middle-East. The demand for bars and coins by retail investors was 150 tonnes – down 50 per cent over last year.

Demand for gold ETFs, however, increased sharply to 258 tonnes – the highest in a single quarter since Q12016. Central banks also added 156 tonnes of gold to their reserves; year-to-date, the total purchases by central banks come to 550 tonnes, 12 per cent higher compared to the same in the corresponding period last year.

The active central banks here include those in Turkey, Russia and China. In Russia, gold reserves total 2,241.9 tonnes, accounting for a fifth of total reserves and worth over $100 billion, according to a WGC report. The Russian central bank has hinted that it had almost halved its allocation to dollars – from 43.7 per cent to 23.6 per cent – and is using other currencies, such as the yuan and euro, as well as gold, to boost diversification.

On supply side, while mine output dropped 1 per cent in the September 2019 quarter, overall supply increased 4 per cent due to higher availability of recycled gold (on higher prices).

Year-to-date, mine output has been flat. Looking at numbers for the recent September quarter, we see that many large players including US, China, South Africa, Peru and Indonesia, have seen output fall. This is explained by stricter environment norms, labour problems and mine closures. The all-in-sustaining costs for mining has kept rising , pushing up cost for miners despite weaker currencies.

Watch out on rupee

For Indian investors, gold has delivered a higher return in 2019, thanks to a weak rupee vis-à-vis dollar. In 2020, while strong FPI and FDI flows may support the rupee, a spike in crude oil prices can widen the trade deficit, thus making the currency weak. In periods of heightened risk aversion, FPIs tend to pull money out of debt market, hurting the currency.

An Indian investor can consider buying gold at the current level. Returns will be akin to what it is in dollar terms or higher, if rupee depreciates.

Sovereign gold bonds are the best route to investing in the metal. These are listed in the secondary market. Else, you can also consider gold ETFs.

One can invest about 10-15 per cent of the portfolio in gold. Correlation between gold-equity and gold-bond yields is negative, meaning, they move in opposite directions. If bond yields drop on monetary easing or equity markets see a return to sane valuations, gold will do good.


Base metals: Fortunes hinge on China

For base metals, 2019 was a challenging year in the backdrop of a fierce trade dispute between two of the world’s largest economies — the US and China. The initial high hopes of an amicable resolution were gradually dashed in the later months.

In combination with a growth slowdown in major economies such as Europe and Japan, the seemingly endless trade dispute resulted in a more sober assessment of the market conditions, especially the demand side, which in turn had a softening effect on metal prices. Fortunately, towards the end of the year, prices somewhat recovered, following the agreement between the US and China to sign the Phase One of the trade deal. As a result, most metals recouped their losses. In fact, copper turned out to be one metal that showed a net gain during the year, ending well above the psychological level of $6,000 a tonne.

Another metal that was often the focus of attention was nickel. Its prices soared almost by two-thirds following the mineral-ore export ban announced by Indonesia. But the metal later lost almost half of its gains. On the other hand, tin was the biggest casualty of the sharply falling prices. The market turned so unfavourable that production cuts and export restrictions were announced in order to shore up prices. Given the enervated demand conditions, the tightness in supplies was reduced, and the supply deficit narrowed in many metals.

So, what’s the outlook for the base metals market in 2020? Macro issues will continue to dominate the headlines and overshadow the market. The ongoing trade dispute and the US presidential election towards the end of the year will grab attention.

Gradual pick-up

At the same time, there is an expectation of a gradual pick- up in global economic growth at a time of subdued growth in the supply of some metals. The easy money policy pursued by many central banks around the world will begin to deliver results. This should prove positive for the market.

In the case of copper, there appears to be an improvement in investor sentiment. There is an expectation that constrained supply will push the market higher next year. However, the International Copper Study Group believes the supply deficit will end in 2020 and the market will return to supply surplus, assuming no supply interruptions during the year.

Mining supplies of copper concentrate are set to increase, resulting in higher production of refined copper. At the same time, demand growth will remain muted. So, copper prices should hover around the $ 6,000/tonne mark with the possibility of a 5 per cent up or down movement in the first half of the year.

The aluminium market is well supplied. In 2020, there will be a significant rise in production, especially in China, but demand conditions are expected to remain subdued. The weakness in the manufacturing sector seen in 2019 is likely to continue into 2020 as well. The market is likely to stay below the $1,800/tonne mark and average close to $1,750/tonne in H1 2020.

Nickel will remain a supply-driven story in 2020. The International Nickel Study Group estimates that the metal will remain in deficit in the global market, but such deficit will be on a reduced scale. Lower mine supply from Indonesia has the potential to increase the deficit and boost prices. So, expect the nickel market to stay in the vicinity of $15,000/tonne in H1 2020.

In the case of zinc, the market in 2020 is expected to swing into surplus after four years of deficit, as estimated by the International Lead and Zinc Study Group, which foresees noticeably higher refined- zinc production. At the same time, demand is expected to trail production. Zinc demand is essentially driven by galvanisation of steel.

Even in China, where large investments flow in property construction and public infrastructure, demand growth may be subdued in the new year. At the same time, the automotive industry is not likely to help generate any big demand for the metal. So, the zinc market is likely to stay range-bound and trade in the $2,150-2,350 a tonne range.

G Chandrashekhar is a policy commentator and a commodities market specialist

Published on January 04, 2020
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