Investors and Central Banks Moving Back Into Gold

With stocks at all-time highs and global negative-yielding debt over $15 trillion, investors and central banks alike are making a huge shift into physical gold.

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The stock market, viewed by many as being diametrically opposed to gold, is still hitting all-time highs and extending its decade-long bull run. Despite this, the outflow of money from both the private and official sectors suggests that investors are not quite as optimistic regarding equities’ future prospects.

Last year ushered in what many view as a new norm of negative-yielding debt in the form of government bonds, which has since climbed past $15 trillion, the highest figure on record. Central bankers have demonstrated a willingness to keep easing monetary policy after a 2019 that saw a sudden dovish shift by central banks worldwide. And while many sovereign bonds have since dipped into negative territory, along with U.S. Treasuries’ exceptionally weak showings, the appetite for haven assets is tremendous.

According to recent research by J.P. Morgan analysts, investors are becoming more and more concerned in regards to equities and are slowly but surely rebalancing their portfolios. JPM’s analysts noted that global funds have poured a combined $1 trillion into negative-yielding bonds over the past year. Money managers have likewise taken note of gold’s outperformance over the past six months and now hold the highest weighting in gold since 2012, just after the metal hit its all-time high.

Central banks are, by and large, following the same strategy. 2018 and 2019 were record years in terms of purchases from the official sector, as countries around the world bought more than 600 tons of bullion each year, a figure that doubled most previous expectations. Central bankers, however, might have different motives than simply wanting to diversify their portfolio.

Although the U.S. dollar has held steady in its place as the global reserve currency, recent signs suggest that various countries might be looking to either usurp the greenback’s status as the reserve currency or reduce their foreign reserves in case the dollar pulls back significantly. As Barron’s Randall W. Forsyth points out, the inflows into gold from various angles are far from uncorrelated. The loose monetary policies that central banks continue to unravel have artificially inflated the prices of various assets, including stocks and bonds, reigniting existing fears that equity valuations have been overblown for some time.

Regardless of the demand spike, the JPM team thinks that both private and institutional investors remain underexposed to gold and expects them to continue buying up the metal at the same frantic pace. The team also predicts that the strikingly high purchases from central banks will persist due to their low overall allocation to the yellow metal, stating that some nations might be aiming to double their allocation to gold in the near future.

As Forsyth notes, gold is mostly approached as a safety play, as it guarantees that the investor will retain their wealth in the event of an economic crisis. But with gold having gained more than 30% in the span of two years, it would be difficult to overlook the metal’s role as a profit-making asset that can generate returns just as significant as those from much riskier investments.

The Many Reasons Gold May Rally in 2020

After a strong year in 2019, two analysts are just as bullish on the yellow metal for 2020. Here are three significant reasons for that optimism.

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As 2019 drew to a close, some analysts pondered whether gold can continue its outstanding bull run, which brought the metal’s price up by nearly 20% in the second half of the year. Those questions were emphatically answered less than a week into the New Year, as gold breached the $1,600 level for the first time in seven years, riding on tensions between the U.S. and Iran.

Although prices have pulled back as tensions simmered, gold remains around last year’s high of $1,553, a level last seen in 2013. According to various strategists, the exceptional start to the year that gold has had could be the continuation of 2019’s upwards momentum due to 3 key reasons: ongoing geopolitical risk, a weakening of the dollar and the new norm of negative real rates.

In a note discussing the latest bout of price gains, UBS commodity strategists Joni Teves and James Malcolm shared their view on why gold has a solid case to retrace to the $1,600 level and form a base around it. Out of the three factors, the strategists hinge the least importance on geopolitical tensions. Nonetheless, should these tensions spill over and affect factors such as inflation or growth, the pair noted that gold would be primed for another massive jump. ING’s Head of Commodities Strategy Warren Patterson also stated that traders are more likely to assume significant long gold positions in the wake of the Middle Eastern flare-up, a notion supported by latest data from the Commodity Futures Trading Commission (CFTC).

Speaking about other drivers, Teves and Malcolm pointed out that gold has been outperforming in a variety of different currencies. The strategists expect U.S. economic data for Q1 2020 to come in as underwhelming, which would serve as another tailwind for gold and potentially weaken the dollar.

Colin Hamilton, managing director of commodities research at BMO Capital Markets, said that China is another important factor to look out for as the nation ushers in its own new year. As Hamilton explains, the past few months have hinted towards notable improvements in the Chinese economy. If data after the Lunar New Year confirms that an economic recovery is underway, investors can expect a significant increase in physical demand from the famously gold-favoring nation.

Besides an expected rebalancing of portfolios to increase investors’ exposure to gold, Hamilton also highlighted central bank gold demand as another important price driver. With official sector purchases riding all-time highs for two years straight, Hamilton expects the pursuit of de-dollarization through bullion purchases to keep backing the yellow metal up, especially as new countries enter the gold market with sizeable purchases.