2020, the start of a golden decennium?

stuk joris 13-1-2020

The recent assassination of Iranian general Qasem Soleimani increased tensions worldwide. When such occurrence take place, investors usually steer their portfolio to more traditional safe-haven assets such as the Swiss Franc or gold. 

In the recent turmoil, the value of the latter commodity have done little else than going up. Last year the gold price almost rose by 19%, its best year since 2010. The most plausible reasons; fear of lower stock returns due to the tariff war, fear of a recession in general. And fear of (delayed) inflationary pressures due the immense growth of the money supply under quantitative easing by the major central banks. Fear is really the keyword here, as all effects are not observed yet. But the demand for gold, being a safe-haven, is then also mainly determined by market psychology, which as we all may know does not have to be rational. 

Gold is often seen as a shield against inflation, as it is a scarce commodity with a slowly increasing supply. But as a metal, it is a non-productive asset and therefore only yields a capital gain. The real returns of stocks or the real interest rate on assets (subtracting inflation), is therefore often regarded as the opportunity cost of holding bullion. 

Last year the Federal Reserve lowered the Federal Funds Rate multiple times, reducing these opportunity costs. Also the ECB pushed European rates further to zero, or even into the red. This decreases these opportunity costs of holding gold.
At the same time the dollar depreciated against other major currencies. This is relevant as gold as commodity is expressed in dollars, this makes bullion effectively cheaper for non-American investors. Interestingly, central banks of emerging economies also have been accumulating gold, diversifying their international reserves away from dollars with all the political risks attached to it. 

Despite the already observed rally in gold prices, the consensus of analysts remains positive. Investment bank Goldman Sachs expects gold to raise by another 9 percent in 2020. An important given reason are the higher saving rates in developed countries coupled with lower global investment. This has resulted in a savings glut, and an expected stream of capital in financial assets, including gold. Also net purchases of Central banks are expected to continue, and political turmoil might bring gold a bright future this decennium.
Or is it not all gold that shines?

By: Joris Hoefnagel