The tentative easing of tensions in the Middle East in the second half of last week caused the price of gold to pull back from a seven-year high. But analysts see further gains in store for the yellow metal this year, with US$1,700 per ounce achievable on the back of sustained geopolitical risks and lower US interest rates.
On Friday spot gold was quoted at US$1,547.51 per ounce, having lost almost 2 per cent over the previous three days from a peak of US$1,574.37 per ounce on Tuesday.
Fuelling gold’s spike early last week was a rush to the traditional safe haven asset after Iran fired at least a dozen missiles at military bases in Iraq that hosted American personnel, in retaliation for the US’ assassination of its top general, Qassem Soleimani, on January 3.
But gold’s ascent lost steam when President Trump appeared to seek de-escalation after the strike, declaring later that Washington would respond to the missile strike with economic sanctions and that the “US is ready to embrace peace”.
Year-to-date, gold is up about 2 per cent. The US$1,700 per ounce forecast would mean a near 10 per cent rally.
ING recently revised up its 2020 forecast for gold to US$1,500-1650 per ounce from US$1,500 per ounce, in light of the heightened geopolitical risks from the Middle East. Warren Patterson, ING’s head of commodities strategy in London, said the Gulf attacks at the start of the year will continue to weigh on investors’ minds.
“While it appears that there has been something of an easing in tensions, we believe market participants are unlikely to forget about these risks any time soon,” said Patterson.
ING expects the US Federal Reserve to cut the short-term federal funds rate in April, which will send the real yield of US treasuries lower. This will provide further support for gold, because as short term real interest rates decline, the opportunity cost of holding gold also drops.
Jasper Lo, an independent market commentator, said he would not be surprised to see gold hitting US$1,700 per ounce in 2020, echoing a call made earlier last year by billionaire investor Paul Tudor Jones, founder of macro-trading hedge fund firm Tudor Investment.
Uncertainty stemming from the geopolitical tension in the Middle East is further compounded by the US-China trade war. With officials from Beijing and Washington expected to sign the phase one trade deal this week, the bigger question now becomes whether there will be a second round of resolution.
“It appears that Chinese officials are reluctant to start the second round any time soon, this means that the outlook for US-China trade negotiations beyond January would still remain bumpy,” said Lo.
Central banks’ buying globally is also likely to support demand for gold.
Societe Generale, which forecasts an average gold price of US$1,575 per ounce in 2020, predicts that central banks’ net buying will reach more than 800 tonnes this year because of their need to diversify away from the dollar.
During the third quarter, central banks added 156.2 tonnes of the precious metal in reserves, and in the first three quarters they bought 547.5 tonnes, up 12 per cent from a year ago.
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