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Global growth concerns, geopolitical issues continue to drive gold prices

Jameel Ahmad/Dubai
Filed on January 26, 2020
Global growth concerns, geopolitical issues continue to drive gold prices


While 2019 will be remembered as a superb year for gold investors, the initial thud in the early trading weeks in 2020, where gold gained a further $100 following the escalation in US-Iran tensions, has investors hopeful that 2020 will be another great year for the price of gold.

Even though 2020 is not expected to carry the same explosive momentum that saw gold prices jump near 20 per cent during its peak in 2019, the door is yet to be fully shut on another positive year for gold. In fact, the unexpected burst in geopolitical tensions has already led to gold prices advancing above $1,600 for the first time since April 2013.

While no one should rule out a potential further escalation in a delicate situation between the United States and Iran, the absence of further escalations and downbeat rhetoric over the second trading week of 2020 suggests that the situation will not get worse. This means for gold price that there should be a consolidation, and we have seen a decline all the way back to $1,535 per ounce as of January 14 - less than $10 away from where gold was trading on the opening trading day of 2020.

Other geopolitical issues for gold investors to contend with include ongoing trade issues, where the US-China trade tension outlook will remain a sensitive point for safe haven assets such as gold. Following the signing of the long-awaited phase one trade deal, anticipation is rising that the next round of negotiations will begin soon. This can encourage a bias to expect near-term declines in gold momentum. A hypothetical break below $1,525 raises the probability that gold prices could be in line to fall below $1,500 for the first time since December 24.

If there are further improvements in the US-China trade relation outlook, coupled with a less pessimistic US Federal Reserve regarding interest rate policy leading to gold falling below psychological support at $1,500, ambitious investors might even begin to consider that gold could decline as low as $1,445. If there is a break below $1,445, weakness towards $1,400 for the first time since July 2019 is a possibility.

What can help support gold prices and spare blushes from additional losses are the comments from US Treasury Secretary Steven Mnuchin that some trade tariffs will remain in place even after phase one of the trade deal is signed, meaning that the agreement doesn't significantly change the pessimistic global growth outlook for 2020.

The Organisation for Economic Co-operation and Development (OECD) has warned in November that world GDP for both 2019 and 2020 will be at the weakest levels seen since the global financial crisis. Even the continuation of multiple record-highs seen in US stock markets do not seal the cracks that appear in the walls of the world economy.

Aside from prolonged US-China trade concerns, there are other reasons to have a positive outlook on gold.

The limitations in what ammunition central banks have left in the tank to combat weaker economic conditions can prevent world stock markets from enjoying another stunning year with advances. The narrative provided by Fed Chair Jerome Powell that US interest rates will not be increased soon is another potential bonus for Gold prices, considering that this should weaken US dollar's attraction and Gold historically enjoys indications of US dollar weakness.

Gold investors can also take into account before the US election countdown begins, closer towards the second half of the year, the condition of relations between the United States and North Korea. The latter went as far to make headlines by testing missiles and suggesting a "Christmas gift" depending on the outcome of nuclear negotiations between Washington and Pyongyang.

All things considered, there are still a number of global issues that remain unresolved as we move further into 2020, and we can expect further turbulence in gold prices as a result.

$1,500 in gold should continue to act as a psychological pivot level in prices, and potential sellers will likely wait for a decline below this level before finding temptation to monitor whether gold can reverse course away from its explosive start to the decade. Should gold prices enjoy a continued stay below $1,500, the range previously seen since November until the end of December 2019 between $1,500 and $1,445 can resume.

- Jameel Ahmad is global head of Currency Strategy and Market Research at FXTM. Views expressed by him are his own and do not reflect the newspaper's policy.

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