We hope that central banks will do whatever it takes to rescue the world economy with renewed monetary stimulus, which make financial markets vulnerable to stress and reiterates the need to hold gold.
Just when investors had started discounting the history and economics of holding the precious metal, gold delivered stellar returns and made a comeback as a mainstream asset in 2019. Prices touched highs of $1550 levels in September on the back of trade war tensions. Gold’s rally was fueled by an array of mutually reinforcing factors—trade war, slowing growth and Central bank dovishness—sapping the appetite for risk assets.
The repercussions of the trade dispute between the world’s largest importer and largest exporter hurt business sentiment and had a spillover effect on the global economy. The global contraction increased uncertainty in financial markets and also shaped the monetary policy of central banks worldwide causing them to pivot to a more dovish stance in which they boosted accommodation and cut interest rates.
Peaking at $17 trillion and still standing tall at $11 trillion—the heap of negative-yielding government debt, stock markets driven by central bank-funded cheap liquidity, and currencies subject to devaluation wars made gold a better bet for investors seeking a store of value. Geo-political developments around the world like the decision paralysis on Brexit, unrest in Hong Kong, tensions in the Middle-East also resulted in safe haven demand for the metal.
Outlook for the metal
There are good reasons President Trump is more willing to strike a deal now. The president, facing impeachment proceedings at home, and with the election looming, needs to boost US activity. Trade tensions between the US and China will be a lingering headwind regardless of any positive near-term developments. There will be continued and deepening financial fallout until the trade war comes to an equitable and fair resolution. Both the upcoming elections and deteriorating growth add to the uncertainty. Trump may be compelled to drum up a new approach in a last-ditch effort to steal back the protectionist narrative. This will largely shape up how financial markets behave and keep gold well supported.
Whatever happens with respect to trade policy, the US economy will continue to slow down as waning fiscal stimulus is overwhelmed by the negative impact of uncertainty plagued by the trade conflict. We see equity markets torn between these risks and hope that central banks will do whatever it takes to rescue the world economy with renewed monetary stimulus, which make financial markets vulnerable to stress and reiterates the need to hold gold.
If the monetary experiment embarked on by central banks over the last decade has proven anything; it is that a policy that was designed as a temporary measure due to exceptional circumstances has become the new norm. The so-called normalisation process lasted only a few months in 2018, only to resume asset purchases and rate cuts. Despite the largest fiscal and monetary stimulus in decades, global economic growth is weakening and leading economies productivity growth is close to zero. The unconventional policies of the central banks have only been able to boost asset prices increasing the inequalities.
If the global economy is indeed trapped in a subpar growth environment and looming deflationary threat, then it will likely translate into central bankers getting further aggressive in building ever-greater balance sheets with ever-greater negative consequences down the road. This could be incredibly bullish for gold.
(The writer is senior fund manager, Alternative Investments, Quantum Mutual Fund)