Risk and uncertainty, as well as opportunity costs and momentum, are likely to support continued gold investment in the second half of 2020, the World Gold Council said.
Gold has had a remarkable first half of 2020, increasing 17 percent in U.S. dollar terms and significantly outperforming all major assets, with even more impressive performance in other currencies. The price of the yellow metal currently sits at around $1,874/oz – highs not seen since 2011-2012.
A combination of high risk, low opportunity cost, and positive price momentum is likely to support continued gold investment demand in H2 2020, especially with the unexpectedly sharp rally in stocks without underlying fundamentals that could lead to pullbacks, and the low returns and limited risk protection from bonds, Krishan Gopaul, from World Gold Council's market intelligence team, said at its mid-year outlook 2020 briefing, held on Thursday
«What investors have made clear over the past six months is that gold is an important hedging strategy. Many of the drivers behind its performance in the first half of the year will continue to reinforce the role of gold going forward,» Gopaul said.
«Tale of Two Halves»
Gold in 2020 and beyond will depend on the ability of investment demand to offset weak consumer demand, said WGC chief market strategist John Reade, who called the gold market a «tale of two halves.»
There was a sharp fall in jewelry demand in the first quarter of the year – 39 percent compared to the first quarter of 2019, with China and India – the two largest consumer markets – down 65 percent and 41 percent respectively. Consumer demand is likely to remain weak for the rest of the year, Reade said, noting that it would probably only recover in 2021.
Conversely, there was a big increase in gold ETFs, with 298 tons of inflows in the first quarter of the year, up 600 percent year on year. The 734 tons of inflows in the first half of 2020 was more than any one full year on record, and more than the record central bank buying of 2018 and 2019, WGC said.
Key Indicators
Reade advised investors to pay attention to real yields, as 10-year Real US Treasuries have provided the best correlation to gold of any market variable since the global financial crisis. To judge positioning, he recommended looking at ETF flow data, and regional trends in particular.
Finally, he said to pay close attention to the consumer market: monthy Indian imports and local market premia, Shanghai 9999 turnover and premia, as well as anecdotal evidence from the trade.
