Gold continued to move sideways in the $1450-1480/ounce range as its price moved in tandem with developments on the US-China trade war front. After touching highs of $1550 levels in September, positive developments on the negotiation table put downward pressure on the metal’s price bringing it down to current levels. This optimism also reinvigorated risk appetite channeling flows towards equities in hope of growth recovery causing a double whammy for gold. Gold prices fell by -3.2% for the month eroding some of the gains seen earlier this year.
Unending Trade War supporting gold
Every time the world thinks a US-China trade deal is close, the negotiations suffer another blow. US has now enraged China by backing the Hong Kong pro-democracy protests. Observers are worried this will threaten the already painfully slow negotiations, with Beijing expected to hit back at US with retaliatory measures. However, the country has limited options for hurting US without exacerbating its own economic slowdown. And given that the Chinese economy contributes almost a third of global growth this can have economic implications for the rest of the world.
Adding to the anxiety, the December 15 deadline for the US raising additional tariffs on Chinese goods is fast approaching.
Will they, won’t they? Who knows.
Anyhow, we think gold will remain supported even if a Phase 1 deal is passed because intellectual property protection, which is at the heart of the trade dispute between the two countries, has been pushed down the road and will definitely resurface sooner or later.
Also, with the US leadership’s America First agenda & its tendency of weaponizing trade by using sanctions, and China leading the global phenomenon of non-dollar trade agreements and reserves-diversification away from the dollar, it is becoming clear that a clash for supremacy is at the core of the US-China trade wars.
This Cold-war like conflict between the world’s largest economies manifesting as trade wars can thus be expected to intensify over the long term, rendering these short term ceasefires meaningless.
Global growth concerns have eased, but have not gone
Yes, the US economy is witnessing its longest economic expansion, now in its 11th
year, but real GDP growth in the United States so far this year has averaged at 2.4 percent, somewhat slower than 2.9 percent in 2018. In fact the US yield curve has at various points this year pointed to a recession.
Manufacturing activity in China unexpectedly bounced back in November for the first time in seven months. But whether a single-month data can signal stability is questionable, say experts.
For the Eurozone as a whole, GDP growth has slowed sharply to 1.2 percent in July-September 2019, from 2.2 percent in the same period in 2018. EU’s largest economy Germany, which majorly relies on exports, has only narrowly missed a recession in 2019. And Britain, still undecided on its EU exit, is facing its third general election since 2015.
Hong Kong continues to bear the economic costs of almost 6 months of political unrest. Japanese manufacturing activity contracted again in November, with export orders at their weakest in five months.
Closer home, economic growth in India has slipped to a 6 and a half year low of 4.5% in the July-September quarter. The GDP growth in the corresponding quarter last year was 7%.
What confirms that the global economy has lost steam is that as per International Monetary Fund estimates, trade volume growth in the first half of 2019 came in at 1 percent - the weakest since 2012! And in its October World Economic Outlook, the IMF downgraded its forecast for 2019 global growth to 3 percent - its slowest pace since 2008.
In response to this broad-based slowdown, central banks of economies that make up 70 percent of global GDP have eased monetary policy.
And even though Powell has signaled that rates will be on hold for now, it’s not unlikely for the Fed to “adjust” its course as it has in the recent past - especially with the 2% inflation target and continuous pressure from Trump to introduce negative rates for competitive advantage. Although jobs data continues to point to expansion, a number of other indicators look less rosy. The US manufacturing and services data indicate a contraction. The housing prices index and new housing permit growth has been trending downwards. Tax receipt data has also been weak, with seven out of the last ten reported periods showing negative year-over-year growth. Given the increasing evidence of a slowdown and the U.S closing in on elections to be held in November next year, Fed will be forced to be more accommodative than is currently priced by the markets.
Global debt has hit an all-time high of $250 trillion this year, in an attempt by to reverse the global slowdown. 26% of developed market sovereign debt is trading with negative nominal rates and, once adjusted for inflation, a whopping 82% is trading with negative real rates. This low rate environment is encouraging financial-risk taking in search of yield. Stock markets are touching new highs driven by cheap liquidity.
Gold has become more effective than bonds in mitigating equity-market risk and providing portfolio diversification. Globally, gold demand is in uptrend. Global gold ETF holdings grew by 258 tons in Q3, the highest quarterly inflow since Q1 of 2016. Central banks have purchased net 547 tons in 2019, 12% higher y‑o‑y.
Geo-Political factors at play
Even as NATO, the world’s strongest military alliance, celebrates its 70th
year, its future is uncertain as Trump demands member nations to pay up more, Macron questions US’s commitment to the treaty, and Turkey attacks US allies. This adds to the geo-political tensions. Impeachment enquiries against Trump are in full swing to investigate his “do me a favour” phone call to Ukraine. If POTUS is indeed impeached, economic and geo-political uncertainty will peak pushing up demand for gold.
What’s next for the yellow metal
Despite the recent fall in prices, 2019 has been a good year for gold. Gold is up about 14.16% this year in global markets as the US-China trade spat has shaken up financial markets and intensified the global economic slowdown. In India, prices are up about 17.21% so far this year, tracking a global rally, an import duty hike and the rupee's depreciation against the US dollar.
November ended with losses of -3.2% at $1460.15. Tracking a decline in global rates, gold prices in India have fallen by about Rs 2000 from September highs of Rs 40000/10 grams, and ended the month at Rs 38025/10 grams with losses of -2.40%. Domestic prices have recently been under pressure due to marginal strength in the Indian rupee against the US dollar. Increasing inflows from foreign portfolio investors (FPIs) pushed rupee to end the month at a high of 71.75 after touching a low of 72.14 in mid-November.
We are of the view that, December is going to be an action –packed month for gold with the UK elections, unrest in Hong Kong, Federal Reserve policy meet and of course the trade war developments keeping prices volatile.
The global contraction has increased uncertainty in financial markets and has also shaped the monetary policy of many central banks worldwide causing them pivot to a more dovish stance. In recent years, central banks have deployed nearly everything in their arsenal, including zero and negative interest rates and quantitative easing. Given the macroeconomic backdrop, brace for further aggression on rate cuts and quantitative easing measures. As these unconventional measures run its course, the last stage could very well be extreme currency debasement. For that to happen, rates would need to be taken deeper and deeper into negative territory as economies compete for the weakest currency.
Thus over the long term, augmenting one’s gold holdings would be both risk-reducing and return-enhancing in this high risk-low rate environment. We suggest an allocation of between 10-15% of one’s portfolio. Investors will be benefited by using any price corrections, as witnessed currently, as a buying opportunity and making incremental purchases through the Gold ETF route.
The author, Chirag Mehta is Senior Fund Manager - Alternative Investments, Quantum AMC