Gold prices rose about 18% in 2019, realizing their best year since 2010. With gold starting to break out, more and more buyers are coming into the market, including central banks who set another record in gold acquisition in 2019. Much speaks for a new bull market in gold and gold-related equities. The party has only just begun.
As we enter this young decade, a number of factors bode well for gold investors. We expect that the dynamics created by increased risks and uncertainties in financial markets, resulting from slower economic growth and dovish monetary policies, to continually boost demand for gold.
The explosive rally in gold prices that we witnessed in recent weeks will hardly extend without a few breathers. However, this young bull market in gold can be expected to result in another good year for gold investors.
While most bankers and asset managers still shun gold and like to deride it as a relic from the past, the facts tell a different story and will change the minds of those stubbornly reciting their anti-gold mantra: Gold outperformed most other asset classes in 2019. The following chart, published by the World Gold Council, speaks for itself.
Annual performance of major global assets
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Uncertainties, low interest rates and first signs of inflation
“You don’t make mistakes when you don’t have money. When you have too much money, you will make a lot of mistakes.”
- Jack Ma, founder of Alibaba, the Amazon of China
One of the “inexplicable” surprises of the last decade is that despite ultra-low, zero, or even negative interest rates, inflation has generally fallen rather than risen. However, when you look at asset prices, it’s an entirely different story. There, we see an overabundance of inflation, in stocks, bonds, and real estate.
While these asset classes grew rapidly in their bubble modes, one asset class was lagging. Gold and other precious metals did not rise as fast, leading to investors losing interest in the shiny metal. It even went through an extended bear market as other asset classes benefitted from an unprecedented flood of liquidity, all without (at least officially) showing up in bottom-line consumer inflation.
Well, a few things have changed: Inflation is starting to rear its head. And, a growing number of well-respected economists expect a recession to hit in 2020. In reaction to an impending recession, we are likely to see governments and central banks orchestrate another coordinated “rescue” blitz of additional trillions of paper money and unbridled fiscal stimulus. They will do the Draghi shuffle… “whatever it takes”!
With most investment portfolios tilted heavily towards paper assets (i.e. stocks and bonds) and nearly devoid of “real” assets such as precious metals, gold miners or agricultural companies, the coming decade is set for significant gains in precisely those asset classes.
The global dynamics seeded over the past decades will continue to be supportive for the demand and price of gold in 2020 and beyond. Most importantly, we believe that the following factors will play a key role:
Low interest rates and easy monetary policies, resulting from a weak-ish global economy that will “surprise” the consensus on the downside, will bolster demand for gold.
Geopolitical uncertainty and toppish financial markets will result in an increasing number of investors seeking the safe haven of gold as a hedge against the growing probability of recession and financial crisis.
Higher debt levels worldwide and increasingly politicized central banks will continue to drive the price of gold in the wake of new liquidity injections and ultimately inflation.
Central banks are buying gold…a lot of gold. Net purchases in 2019 reached new highs and are expected to remain robust.
Negative interest rates. Historically, as shown in a recent report by the World Gold Council, gold outperforms in times of negative interest rates.
Gold performance in various real rate environments*
Source: World Gold Council, Bureau of Labor Statistics, Federal Reserve
All of the above makes gold an indispensable component of a smart and well-diversified portfolio. As central bankers increasingly display their appetite for gold, so will other members of the financial market community.
>> Contact Global Gold to learn more about how to stock up on physical and allocated precious metals, safely stored in high-security vaults in Switzerland and around the globe.