Market risk, economic growth to drive gold demand this year - report

Saddle up, gold is bound to head north. Credit: Winston Shull | Flickr

The interplay between market risk and economic growth is expected to drive gold demand in 2020, the World Gold Council (WGC) says in their latest market report. The major driving forces include financial uncertainty and lower interest rates, a weakening in global economic growth, and gold's price volatility.

Last year, gold had its best performance since 2010, rising by 18.4% in US dollar terms. It also outperformed major global bond and emerging market stock benchmarks in the same period. In addition, gold prices reached record highs in most major currencies except the US dollar and Swiss franc.

The WGC expects this trend to continue in 2020 as many of the global dynamics seeded over the past few years will remain generally supportive for gold. In particular, lingering financial and geopolitical risks combined with impending interest rate cuts are likely to bolster gold investment demand.

"The very low level of interest rates worldwide will likely keep stock prices high and valuations at extreme levels. And although investors may not step away from risk assets, anecdotal evidence suggests they are increasing exposure to safe-haven assets like gold as a means to hedge their portfolios," the WGC says.

Net gold purchases by central banks are expected to remain robust, the WGC added, even if they are lower than the record highs seen in recent quarters. Momentum and speculative positioning may keep gold price volatility elevated as well.

Volatility and expectations of weaker economic growth may result in softer consumer demand in the near term, while structural economic reforms in India and China will support the long-term demand.

The WGC does not anticipate a reduction in gold volatility in the near term

The Council does not anticipate a reduction in gold volatility in the near term, but says that should the economic and political environment deteriorate, it may even rise, especially as "gold volatility historically exhibits a positive skew in such circumstances, tending to increase as stocks pull back."

The WGC points out that as the gold price significantly rose in 2019, so did volatility, but similarly to other assets, it remains well below its long-term trend.

In regards to the recent tensions in the Middle East, the Council says investor positioning related to this specific event will likely influence gold's performance in the near term, but over the medium term, broader financial and geopolitical uncertainty and developments in monetary policy will play a more important role.