THE gold market could be due a major breakout in the coming year as fears escalate the US economy will slide into recession, according to a report by JP Morgan Cazenove.
The bank’s gold analysts John Bridges and Siddharth Mishra, writing ahead of the Denver Gold Show, scheduled to begin on September 15, said economic conditions may see gold purchases similar in scope to 2008 when the metal’s price moved through $1,900 per ounce. Gold is trading at $1,553/oz following an unsurprising burst of profit-taking.
“While the sector may face short-term trading risk after its sharp move,” said Bridges and Mishra in a report issued on September 4, “… we feel gold’s upward break has strong fundamentals”. This “upward break” could manifest in three distinct phases, they said.
The first would see a lowering in interest rates as is already being forecast followed by a second phase in which the US Federal Reserve would be compelled to implement strategies to stimulate the economy.
In 2008, the Fed embarked on a period of quantitative easing. Former chairpersons such as Ben Bernanke don’t believe those exact measures will be adopted this time, but JP Morgan Cazenove analysts said debt was high as in 2008 which could precipitate a third phase in which new money was printed.
Monetary policy of this ilk is favourable for gold which is seen as a store of wealth during periods of economic hardship and recession.
Gold supply might also fall, the analysts said. “We feel the combination of increased demand for the yellow metal and reduced supply could easily be setting gold on its next decade-long bull market,” said Bridges and Mishra.
Gold has soared this year on increased demand for havens as the US-China trade war damages global growth, prompting central banks including the Fed to adopt a more accommodative stance. In July, US policy makers reduced borrowing costs for the first time in more than a decade, and they are widely expected to do so again at their September 17-18 meeting. Against that backdrop, investors have boosted holdings in bullion-backed exchange-traded funds, said Bloomberg News.
Gold will average $1,400 an ounce in 2019, up $60 from an earlier forecast, and $1,560 in 2020 following a rise of $130 in the outlook, said BNP Paribas in the note.
The Fed’s easing cycle should push average prices above $1,600 in the first quarter of 2020, it said, adding: “We expect gold to rise significantly,” that bank said.