The price of gold rose to its highest level since 2013 on Monday 24th February as a significant number of coronavirus cases were reported outside of China over the weekend. Prices climbed more than 2% to levels not seen in seven years, with buyers driving prices as high as $1,678.58 per ounce before falling back slightly.
Source: Bloomberg
Even with the slight drop off, Gold’s value has increased approximately 9% since the beginning of 2020. This is even more impressive when considering the performance of stocks across Europe, with the FTSE plunging almost 7% this week – down to a 13-month low – as the markets react with jitters to the latest developments of the Covid-19 outbreak. Meanwhile, Milan’s main index has fallen by more than 5% as the government introduced a series of drastic measures with a lockdown in place across several small towns.
Source: Refinitiv
But with the coronavirus still spreading and Trump’s appointment of Mike Pence to oversee the US’s response failing to reassure markets, what next for gold?
Short-term drivers for gold prices
Setting gold’s performance in 2020 aside, last year was also positive for the precious metal. It ended decisively above the $1,500 level, reaching a six-year high as investment demand and a rebound of gold purchases from central banks drove prices up. These two strong demand forces offset the negative impact from lower jewellery demand, which was dampened by high prices in yuans and rupees.
Gold actually rose almost 20% in dollar terms, despite a spectacular year for the US equity market. It’s also set fresh all-time highs in a number of world currencies, including some in top gold mining economies such as Russia, Canada and South Africa.
This year could deliver even more price action: investment and central bank demand for gold is generally forecasted to increase, and if the dollar loses value, this could turn out to have a positive impact on gold.
The dollar has been declining since the Fed renewed its balance sheet expansion and suggested that a bar for rate hikes was very high. Additionally, 2020 may be challenging for the US economy as the effects of past tax cuts dry up and the country faces an election with a potential democratic socialist in Bernie Sanders, which could be negative for stocks but positive for gold.
The general consensus is that central banks will do whatever it takes to support the global economy, and this expansionary policy drives more and more investment interest to precious metals – especially gold and silver.
In terms of the coronavirus however, things are less clear. If the situation is resolved relatively quickly and global impact is contained, the impact on gold may be limited to slightly lower Chinese gold demand and a softer impact on prices.
If the epidemic spreads further and continues to affect investor sentiment, safe-haven flows amidst concerns of a global economic slowdown would have a more sustained and positive impact on gold prices. (Source: World Gold Council)
Long-term drivers for gold prices
At the current price of around $1,640, gold still has a little over 16% to go before it reaches its all-time high, set in September 2011. Many analysts believe this price could be reached in the next 1-2 years, and there is confidence in the market that the gold bull rally that began at the end of 2015 is likely to remain in place thanks to accommodative monetary policy and US government policy.
Looking ahead longer-term, a key driver of gold’s price is expected to be a steady decline in global output. The chart below shows that global gold production will begin to slow down in 2021, and by the end of the decade be at multi-year lows – with no regions expecting to see an increase in production:
Source: AME Metals & Mining/Strategic Market Study Q2 2019, Barrick, US Global Investors
In other words, gold’s scarcity is a big factor to consider. If it’s no longer economically feasible to develop new mining deposits that aren’t expected to yield a high amount of gold, then prices could soar higher than ever before.
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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.
