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Gold in 2019: Lessons for the Year Ahead

Commodities / Gold & Silver 2019 Jan 03, 2020 - 04:11 PM GMT

By: Arkadiusz_Sieron

Commodities

The King is dead, long live the King - 2019 is over, long live the 2020! As tumultuous as they have been, what have we learned about the gold market in the past twelve months? And what can we glean from this knowledge for the times ahead?

Key Lessons For Gold Investors from 2019

Today is the last day of 2019. It was a good year for the gold bulls, as one can clearly see in the chart below. The price of the yellow metal increased from $1279 to $1474 (as of December 18 – yes, we wrote this article before the festive break). It means that gold rose more than 15 percent in 2019. The gold bulls cannot complain!


Chart 1: Gold prices (London P.M Fix, in $) from December 2018 to December 2019.

The main driver behind gold’s success were fears of a U.S. recession and the related dovish U-turn within the Fed, which cut the federal funds rate three times after hiking it four times in 2018.
However, it was not surprising. After four hikes in 2018, it was more than certain that the Fed’s stance would become more dovish and that the price of gold would then react favorably. What could be less expected was that the gold’s appreciation would occur simultaneously with the strengthening U.S. dollar. As the chart below shows, we have not observed the traditional strong negative correlation between the greenback and the yellow metal. Actually, both assets moved in tandem strongly up during the summer!
 
Chart 2: Gold prices (yellow line, left axis, P.M. Fix, in $) and the broad trade weighted US dollar index (red line, right axis) from January to December 2019

Why? The recessionary fears boosted both the U.S.-denominated government bonds and gold. Although the yellow metal is the ultimate safe-haven, the U.S. Treasuries can also behave like a safe haven, at least when compared to other assets – due to the large liquidity flows they’re able to absorb. So, as I always repeat, do not mechanically follow gold’s correlations, but always look at the broader macroeconomic context!

The relationship between gold and the real interest rates seemed to be stronger in 2019. As one can see in the chart below, the peak in gold prices corresponded with the bottom in the bond yields. However, the correlation was far from being perfect. The real rates have been rising since January, while gold remained in a sideways trend until late May. It confirms that gold market is very complex and that gold investors should not count on simple automatic reactions.

Chart 3: Gold prices (yellow line, left axis, P.M. Fix, in $) and the yields on 10-year inflation-indexed Treasuries (green line, right axis, in %) from January to December 2019

Implications for Gold in 2020

Gold showed in 2019 that it can shine even when the U.S. dollar appreciates and the stock prices reach new record levels. So, 2020 does not have to turn out badly for the gold market. However, the Fed is going to be neutral or cut interest rates once at most. It means that the U.S. central bank will be less dovish than in 2019. While this needn’t be a disaster for the yellow metal, investors should acknowledge that gold fundamentals are likely to deteriorate somewhat next year (unless the next crisis occurs). Fundamentals are, of course, not everything, but it seems to me that gold would welcome some ignition to beat or come on par with its performance in 2019.

Anyway, tomorrow will be already January which used to be a positive month for gold prices. So Happy January and the whole 2020! And let all the gold come to you in the New Year… and in the 2020s!

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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