Positive medium-term outlook for gold

This article was prepared by Macquarie’s Commodities Strategists for LME Week 2019.

24 October 2019

In 2019, geopolitical conditions have provided a near-perfect backdrop for the gold market. We experienced weak but positive global growth, subdued interest rates and heightened geopolitical tensions – in US-China trade and the Middle East too. All of which have lifted gold's price to heights not seen since 2013.

When the global value of negative yielding bonds exceeds $US 15 trillion, gold, as a zero-yielding defensive asset, is attractive. With global central banks back in easing mode the opportunity cost of holding gold is low and falling.

Even falling inflation expectations have not taken the wind out of gold’s sails. These have been more than offset by the slide in nominal rates. In particular, gold has benefitted from the flattening or, in some prominent cases, inversion of global yield curves.

Is there more upside for gold's price? Investors worldwide have already substantially boosted their exposure to the metal, net-length in CME futures and ETF holdings are oscillating around all-time highs recently – while the price has reported historic highs in almost all major producer and consumer currency-terms.

Of course, these highs also pose some correction risk- if global growth improves or if risk sentiment is lifted by a stabilisation of the geopolitical backdrop in the UK, US and Middle East, this could ultimate impact the price.

What’s next?

Our base case is for the price to stabilise in the $US 1,400/oz in 2020, underpinned by on-going central bank buying and increased long-term investor allocations both offsetting the retracing of short-term positioning to more sustainable levels.

"Beyond this, we expect prices to stay higher for longer, as structurally subdued real rates pare the long-term opportunity cost of holding gold. "

Certainly, while global growth is kept on life support by very easy monetary policy, the outlook for gold's price should remain positive. Our forecast peaks above $US 1,600/oz in 2021.

The biggest risk for this gold outlook? A comprehensive, credible resolution to the US-China trade conflict; fiscal policy taking up some of the heavy lifting of the monetary authorities; and a sustained recovery in business investment and global economic growth.