Gold price hit six-year high

As 2019 comes to an end, wealth builders will surely look back and marvel at how gold price had stormed back in style. Since the beginning of the year, gold price had surged 17% to reach a six-year high. The last time that gold price was in such bullish form was 2009 – 2011. That was the tumultuous period in the aftermath of the Great Financial Crisis and European debt crisis.

Since 2011, global loose monetary policies and low interest rate environment caused gold price to fall from a record high of USD1900 to a low of USD1068 per ounce in 2015. The crash of gold price was the result of recovering US economy and strengthening of US dollar.

Question now is whether gold price will reach another high in 2020? In this regard, I don’t see why not. This is because the world has not seen another alternative safe haven for financial assets. And gold has always been used as a form of hedge against uncertainties and volatility in the financial markets.

In 2016, the crash of China stock market, UK Brexit and the US Presidential Election saw gold price surging from USD1100 to USD1300 per ounce. Based on these events, my opinion is that gold price may stage another magnificent run in 2020 due to the following factors.

Forecast for gold price in 2020

Interest rate: One of driving factors for gold price in 2019 was the interest rates, which was cut three times by the US Federal Reserves. As gold does not yield interests, investors tend to switch to higher-yielding instruments like bonds when interest rates increased. Conversely, when interest rates dropped, investors are more likely to look at investing in gold.

Of course, one shouldn’t view interest rate as the sole function of gold price, which can be affected by a number of factors. But having a decreasing interest rate environment is likely to bolster the form of gold price. Given that many analysts are predicting the US Federal Reserve to make a few more interest rate cuts in 2020, I believe gold price could benefit and continues its momentum.

Geopolitical tensions: Much attention had been placed on the trade war between United States and China. This is understandable as they are the number 1 and 2 largest economies in the world. Despite reaching a Phase One trade deal, a large portion of the tariffs remained in place. To complicate things, part of the trade deal involves the transfer of technologies between US and Chinese firms. Both sides are not willing to compromise on their principles.

In view of the above, I doubt the trade war will end abruptly in 2020. My view is that this issue will continue to blow hot and cold in the coming year, thereby creating much economic uncertainties. Due to this, gold price could stand to benefit as well because investors are likely to buy gold to hedge against market volatility.

Brexit: All eyes are on the outcome of the long-running Brexit saga. An orderly exit will make the exit of UK from EU less painful. But surely, UK will see growth being impact as a result of the divorce. To mitigate this, it is likely that England central bank will cut interest rate. This move, if materialized, could favour gold price.

Central bank buying: According to the latest World Gold Council report, “on a year-to-date basis, central bank net purchases totalled 547.5t at the end of September, 12% higher than over the same period in 2018”. The data from World Gold Council is certainly encouraging and illustrates the confidence of big boys in gold.

Although governments had decoupled gold from the monetary system, the precious metal still hold a great influence on central banks. This is because many governments are turning to buying gold bullion as a form of diversification to holding foreign currencies. Such long-term strategic initiative will bode well for gold price.

Conclusion

In Singapore, the gold market ecosystem grew substantially with the removal of GST on investment grade precious metals in 2012. Being a country with low crime rate and strong jurisdiction system, Singapore is viewed by many international wealth builders to be the best place to buy and store gold bullion.

In all honesty, I doubt gold price will hit the record high of USD1,900 seen in 2011. But the uncertainties in the macro-market, coupled with supply and demand dynamics, should see gold price continuing its climb. My prediction is that gold price should see an moderate increase of 5 – 7% in 2020.

When it comes to owning gold, one must have the right mindset. The purposes of buying gold should be primarily for portfolio diversification. Thus, one should hold allocate about 10% to 20% of his wealth in gold. The prospects of gold in the long-term is still fundamentally sound because gold remains a significant part of many central banks’ reserves.

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