It’s that time of year when FX Empire brings out the big guns to predict where gold prices will go in 2020. The forecasts, while as fallible as any others out there, are worth paying attention to because the experts use a number of factors, ranging from central bank policy to geopolitics to cycle analysis, to make their calls.
There is something for everyone – fundamental and technical traders alike – in this report. This is also a must keep report so keep it handy throughout the year as a key reference guide.
Yields Impact on Gold
Gold prices experienced a 13% rally during the first 11-months of 2019, driven by concerns surrounding the US/Chinese trade dispute, and falling global yields. This comes despite a 1.7% rally in the greenback. Gold reached a high of 1,556 in the first 11-months of 2019 but stalled in September as the Federal Reserve started to ease US short-term interest rates and economic growth started to stabilize.
The combination of solid US jobs growth and the demand for riskier assets helped stabilize the US 10-year yield which capped the upward momentum in gold prices. Recently (the past 5-years) movements in gold prices and the US 10-year yield have been inversely correlated (moving in opposite directions).
Gold 2020 Outlook
Looking forward, its hard to make a case for higher sustainable gold prices. It appears that the US Federal Reserve is on hold, as reflected by recent speeches from Fed Chair Powell and commentary from the latest FOMC meeting minutes. The Fed has made it clear that the hurdle rate for additional rate cuts is larger than it has been earlier in the autumn.
With the Fed likely on hold, any positive US economic data will continue to lift the 10-year yield which should put downward pressure on gold prices. Additionally, if global growth begins to stabilize and Europe and Asia begin to experience economic expansion, global yields will begin to rise, weighing on gold prices.
The wild card continues to be the US/Chinese trade negotiations. As of late November 2019, it appears that the US and China are moving closer to a phase 1 deal. While this might spill over into 2020, the deal would reflect a further easing of tensions and the removal of trade tariffs between the two largest economic powers globally.
If trade tensions continue to subside and the US 10-year yield rebounds to its 2018 average level of 2.65%, gold prices will likely head lower back toward $1,300.
Where gold prices are headed in 2020
If you want to know where gold prices are headed in 2020, it may be constructive to look at the yield on U.S. Treasuries. As of November 29, the nominal 10-year yield was trading at 1.78 percent, which is below the current annual rate of U.S. inflation, according to the Department of Labor’s October report.
What this means is that the real yield on the 10-year T-note is a big fat 0 percent.
When this has happened in the past, it was historically prudent to replace bonds with gold.
During the last major gold upcycle, the yellow metal went from the mid-$200s up to $1,900 an ounce. You can easily get a fivefold increase or more in its price, which is why I believe $10,000 gold could happen the longer supply trails behind U.S. money supply.
And then there’s global debt. After climbing above $250 trillion in the first half of 2019, the amount of debt that’s owed by governments, the financial sector and non-financial sector is now forecast to touch a record $255 trillion by year’s end, according to the Washington, D.C.-based Institute of International Finance (IIF).
Says IIF economists, this mind-boggling sum is the equivalent of 320 percent of total global economic activity—the highest level ever.
To put it another way, for every $1 that’s produced today, an additional $3.20 in debt is created and thrown atop the heap. I shouldn’t need to say it, but I will anyway: This is unsustainable.
It’s also one of the most important factors driving the gold price higher over the long term because, again, high debt levels limit central banks’ monetary options to lower-for-longer.
Fed Rates and Trade wars
Gold is set to finish about 13% higher for the year with its strength primarily driven by rate cuts by major central banks, a deteriorating global economic outlook and elevated geopolitical tensions.
The uncertainty over the U.S.-China trade deal has been the major catalyst behind the price action. The length of the trade war and its grinding impact on the U.S. economy even caused the U.S. Federal Reserve to alter its tightening plans. A year ago, the Fed was raising rates. This December, it’s expected to keep rates on hold after three consecutive rate cuts in July, September and October.
Although gold is in a position to finish higher for the year, how it got there is interesting. Gold traded lower until May as optimism over a trade deal drove investors into higher-yielding assets. At the same time, the Fed was hawkish although policymakers were divided over whether to continue to raise or hold rates steady.
Gold put in its low for the year in May after the U.S. and China called off trade talks. Risk aversion increased globally as fears of world recession resurfaced amid disappointing macro data in major economies. Equity markets sank worldwide and U.S. Treasury yields dipped to multi-year lows as investor sentiment soured over growing global growth worries.
Gold may have bottomed in May, but its most impressive price move took place during August and September. This was shortly after the Fed made its first of three rate cuts on July 30.
Fear of a recession also helped spike gold prices higher as Treasury yields inverted. However, the move proved to be speculative in nature as the Fed continued to insist the economy was not headed toward recession and its rate cuts were just a “mid-cycle” policy adjustment. It was at this time that the Fed started to talk about limiting its easing to 1 or 2 more rate cuts.
Gold hit its high for the year after the Fed started to talk about easing up on its rate cuts, and the U.S. and China decided to move back to the negotiation table. It’s likely to trade sideways to lower over the near-term as long as the trade talks continue and the Fed holds rates steady.
The rally in February Comex gold from $1292.30 in May to $1571.70 in September was fueled by speculators betting on at least three rates cuts by the Fed. Once the Fed delivered and the trade talks resumed, gold investors had no reason to hold onto their long positions and prices retraced nearly 50% of the four month rally.
Expectations of at least three rate cuts and a summer of trade war uncertainty fueled a four month rally in gold in 2019. With the Fed expected to hold rates steady and the U.S. and China still negotiating, gold may be underpinned over the near-term, but there is no urgency to buy it.
I don’t see gold strengthening over the near term as long as the trade talks continue and the Fed holds rates steady. Furthermore, gold remains the least preferred safe-haven as investors prefer to place their money in Treasury bonds and Japanese yen. The best chance for a major rally in gold will come from growing recessionary concerns. And that’s not in the cards right now.
Gold’s 2019 Breakout
According to our work, gold broke out of a critical 6-year base in June 2019 and established a new bull market. The correction that began in September is nearly complete, and gold should resume the uptrend in 2020.
For 2020, we expect gold to continue to advance the larger pattern and challenge key resistance between $1750 – $1800. Our current forecast calls for a pattern breakout above $2000 by 2021 or 2022. However, that timeframe could be expedited depending on the results of the 2020 election.
Longer-term, we believe gold will continue to progress throughout the 2020s, potentially reaching $7500 – $10,000 or higher as the debt super cycle implodes globally.
Near-term, the potential for one more drop in early December remains. A breakdown below $1445 would support a bottom around the time of the December 11th Fed decision. Futures would have to close above $1485 to promote a 6-month low on November 12th at $1446.20.
The first 2-weeks of December are critical. The ISM manufacturing numbers, November non-farm payrolls, the December 11th Fed decision, and the December 15th tariff deadline are all significant triggers that could push gold in either direction – expect increased volatility.
Long-Term Charts Bullish for Gold, Neutral for Silver
The longer-term monthly continuation bar chart for nearby Comex gold futures shows prices have been trending higher since the 2015 low and this year notched a six-year high. See the longer-term technical support and resistance lines on the chart.
From a longer-term trend perspective, price history dating back over 40 years shows the gold market experienced a price uptrend from 1976 to 1980. A downtrend occurred from 1980 to 1985 (with an upside correction within the downtrend in 1982. From 1985 until 1987, a price uptrend occurred.
From 1987 until 1993 a gentle price downtrend occurred. Prices traded sideways from 1993 until 1996 and were in a downtrend form 1996 until 1999. Prices then traded sideways until 2001, and then embarked upon a powerful 10-year uptrend that produced an all-time high of $1,908.60 in 2011. And then from 2011 until 2015 prices trended solidly lower.
Since 2015 gold prices have been trending up, but in choppy fashion. The monthly gold chart at present is overall technically bullish. That suggests the outlook for gold in the coming new year is for more of the same—trending sideways to higher in the coming months.
It will take a move in nearby gold futures prices above longer-term technical resistance at the 2019 high of $1,556.20, basis nearby futures, to provide the bulls with fresh longer-term technical strength to suggest a challenge of significantly higher resistance levels that include the all-time high of $1,908.60 scored in 2011.
It would take a move in nearby gold futures prices below longer-term chart support at the $1,375.00 level to produce serious longer-term technical damage to then suggest a years-long price downtrend.
Silver Prices Also Trapped in a Trading Range
Meantime, the monthly continuation chart for nearby Comex silver futures shows that prices are in the middle of a wide trading range, bound by longer-term chart resistance at the 2016 high of $20.825 and by the 2015 low of $13.666.
Silver’s long-term technical posture favors neither the bulls nor the bears. The monthly chart also suggests that in 2019 silver prices will trade in choppy fashion with the range defined by the support and resistance lines seen on the chart. This longer-term chart does slightly hint that silver prices could drift a bit lower in the coming months, possibly even challenging the 2015 low.
Gold as a currency
2019 was the year of fear. A global economic downturn, blamed on US-China trade tensions, ruled the financial world. Uncertainty resulted in spot gold rallying some $300 after bottoming in May at $1,266.19 a troy ounce, to reach a multi-year high of 1,556.97 in September.
Now trading at around $1,460 a troy ounce, the long-term picture shows that the bright metal retreated after nearing the 61.8% retracement of its 1,920.70/1,046.37 decline between 2011 and 2015, trading now below the 50% retracement of the same slump.
The market believes that the US and China will reach a trade agreement, and despite a bit naive, it also believes that such a deal could be the end of the economic slowdown. In such a scenario, safe-haven assets should continue to lose momentum. Whatever happens, gold trend will be set solely by the market’s sentiment.
There’s one more factor that skews the risk toward the downside: the US Federal Reserve stance. In a world dominated by uncertainty, Chief Powell holds on to a “hawkish” stance on monetary policy. The dollar is the cleanest shirt in the dirty laundry pile.
Given the mentioned Fibonacci levels, a critical support, and a line in the sand comes at 1,379.70, where spot gold has the 38.2% retracement of the yearly decline. Once below it, the precious metal has room to slide toward 1,250.00 in the first half of the new year.
If panic unwinds, the level to watch will be the mentioned 61.8% retracement at 1,584.50, as once above this last, spot would have to room to extend its rally up to the 1,790.00 price zone, where it has multiple monthly highs between 2011 and 2012.
This article was originally posted on FX Empire
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