The price of gold has languished for the better part of four months, as technical resistance and the return of risk appetite undercut demand for the traditional haven asset. But if 2020 is anything like this past year, bullion’s breakout performance is set to continue.
As I’ve written before, the key to gold’s continued success is real interest rates.
To say that 2019 was a breakout year for gold would be an understatement. Geopolitics, trade uncertainty and an aggressive stimulus push by global central banks aided gold’s ascent to fresh six-year highs.
Beyond these immediate catalyst, one only has to look to real interest rates to get the full picture. Interest rates have not only fallen in a nominal sense, they’ve barely kept up with inflation.
The yield on the benchmark 10-year U.S. Treasury yield, which moves inversely to price, hit three-year lows during the summer. A partial recovery still puts yields nearly one full percentage point below year-ago levels.
In the 12 months through September, the 10-year Treasury yield plunged from 3.20% all the way down to 1.44%. Over the same stretch, spot gold rallied from around $1,175 a troy ounce to $1,572. At its peak, bullion was up 22.6% for the year. After a massive correction, the yellow metal is still up more than 16% for 2019.
The macro trends that emerged in 2019 – a weakening global economy, central bank easing, negative bond yields and U.S.-China trade uncertainty – will remain on the docket for 2020. In theory, gold should have plenty of runway to make further gains.
Unlike bitcoin, which has yet to fully price in global turmoil, gold seems to respond favorably to market risks. With the Federal Reserve blowing the lid on the next financial crisis, activity in the overnight repo market will be on investors’ radar for the foreseeable future. If the Fed’s overnight liquidity operations morph into full-blown quantitative easing, it’s safe to say policymakers are no longer afraid of inflation. (Gold regains its shine during periods of inflation.)
Higher inflation, even by the Fed’s own flawed metric, will only push real interest rates lower and make bullion a more attractive option for investors. As Kitco recently pointed out, mainstream economists aren’t respecting the possibility of an inflation scare in the not-too-distant future.
In an interview with Kitco , Bannockburn strategist Marc Chandler said:
People aren’t talking about inflation. They think that topic is dead, but there are signs that it is picking up. I think we see an inflation scare in 2020. The threat will rise before inflation actually does.
Bullion saw limited upside on Thursday, as investors dissected lukewarm economic data on housing and unemployment.
Gold for February settlement peaked at $1,485.80 a troy ounce on the Comex division of the New York Mercantile Exchange. The contract was last up $5.00, or 0.3%, at $1,483.70 an ounce.
The yellow metal is on track to break even for the week but has fully recovered from an early December slump that dragged prices all the way down to $1,465.
Silver followed a similar trajectory as gold, as the futures price climbed 10 cents, or 0.6%, to hit $17.15 an ounce.