Gold started 2020 with a surge, hitting its best levels in almost seven years, with a brief trip above $1,600 an ounce. Is this just a flash in the pan − or a sign that this may be another stellar year for the precious metal?
US/Iran tension boosts safe havens
Anyone expecting a gradual easing into the new year by financial markets had a rude awakening in the very first week of January 2020. The airstrike that the US carried out on Baghdad airport, which resulted in the killing of Iran’s most powerful general sent investors scurrying for so-called safe-haven investments – the best known of which is, of course, gold. It’s no secret that uncertainty – whether political or economic – is a ‘friend’ to gold. This action by the US and the subsequent ratcheting up of tensions between the two countries over the next few days caused the price of gold to soar, hitting its best levels since March 2013.
Gold – November 2019 to present
The chart shows an impressive move by gold, which meant that at the peak, where it briefly traded above $1,600, it had gained 10% in little over a month. Experienced investors and traders are used to markets overreacting in both directions to shock news − but it does not necessarily mean that the market in question is going to continue that momentum over the medium term. However, I think with gold, 2020 could be another year of good gains for some of the reasons discussed below.
Gold is in a recovery
The first of these reasons is a chart-based technical assumption – which has served me well over the past 12 months as an investor in gold. Since the August 2018 lows ahead of $1,160 per ounce, the trend for gold has been up.
Gold price – August 2018 to present
One of the simplest ways of spotting a trend (which I can’t claim to have invented) is to pin the chart on a wall and walk to the other side of the room. If there is a trend there, you should be able to see it. Of course, not many of us may print our charts off anymore, but obvious trends should still jump off the screen at you. I think the chart of gold has fitted that description since at least May of last year.
Since then the trend has accelerated – gold and silver both enjoyed a strong boost into the summer of 2019 before cooling off. But it hasn’t changed that broader picture of recovery. From a technical point of view, the price of gold would need to fall to approximately $1,350 to change that trend. At the moment, any weakness in the gold price still looks to be a buying opportunity.
The dollar may be due a slide
In theory, gold can be priced in any currency of course, but traditionally the main market convention is to quote it in US dollars. If the dollar weakens then gold usually rises – and vice versa.
The US dollar has had a good couple of years, as we can see from the chart, which shows the dollar against a basket of other currencies.
US dollar index – January 2018 to present
After a dire performance in 2017, the last couple of years have seen a solid bounce back for the dollar – but it has struggled in recent months. Concerns about growth in the US economy for 2020 have prompted some analysts to forecast a slide for the currency. The US economy has certainly outpaced the eurozone, but perhaps it is time for these to converge again. The euro has been recovering against the dollar in recent months and further pressure should help the price of gold. This year of course also sees the US presidential election; while, at the moment, markets are expecting Donald Trump to win again, any uncertainty in the long run up to the vote could also put pressure on the US dollar.
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Gold holds onto its crisis gains
I also think we could expect more gains for gold this year as a result of the wider political backdrop and market psychology. You do not have to be a genius to expect the price of a safe haven like gold to rise on the back of military action between the US and Iran. That really should come as no surprise and is a widely expected knee-jerk reaction by investors and traders.
But given that the threat of further action was ruled out fairly quickly, markets returning to normality would be expected. Of course, gold did drop back from that early January high at $1,611 – but not all the way back to where it was at the beginning of the year.
In addition to this, the middle of January saw the US and China agree a trade deal. The trade war between the two economic behemoths has concerned investors for some time and contributed in part at least to gold having such a good performance last summer. China appears to be less enthusiastic about this agreement than the US – but at the very least it does take away some uncertainty. However, looking at the reaction by the gold price, you would not necessarily see it that way. There was some slight volatility on the announcement, but gold held steady and did not suffer a sharp sell-off. Given its stability in the light of these two major events, it suggests that investors still have a healthy appetite for gold at the current levels.
$2,000 an ounce next?
Gold price – June 2011 to present
Let’s not get too carried away! The most recent high for the gold price was briefly above $1,900 in the summer of 2011. I think a medium-term target of $1,700 at some point this year is not too over-optimistic and while that recovery continues to hold, investors are still expected to be buyers of dips.