WisdomTree: Gold on track to reach new highs

WisdomTree: Gold on track to reach new highs

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Nitesh Shah, Director, Research, WisdomTree, comments on the latest developments with regard to gold.

Gold is the only major commodity to post year-to-date gains in the first half of 2020. The COVID-19 crisis has ripped apart the playbook for 2020. The International Monetary Fund, for example, started the year off expecting 3.3% GDP growth[1]. That has been revised down to -4.9%[2]. Cyclical assets experienced sharp drawdowns while defensive assets such as gold and US Treasuries have prospered. However, in recent months cyclical assets have staged a comeback as if these markets are expecting a V-shaped economic recovery. Unfortunately, the hard-economic data does not support such a swift economic recovery. Could the risk-on rally be gold’s undoing? Or will gold continue to remain in favour?

 

Judging by positioning in gold futures markets, sentiment towards gold has come off its all-time highs set in February 2020.

 

Source: WisdomTree, Bloomberg. Data as available 25 June 2020. Historical performance is not an indication of future performance and any investments may go down in value.

 

However, that may not tell the full story. Assets in gold exchange traded commodities are at an all-time high at 103 million ounces[3]. Indeed, positioning in gold futures may have been lower than otherwise would have been expected due to market dislocations at COMEX, where the futures are traded[4]. As these dislocations are easing, we may see futures positioning rise once again.

 

We expect positioning in gold futures to rise for several other reasons:

 

  • The disconnect from the equity markets and the economy could drive investors to seek defensive hedges.
  • The sustainability of rising indebtedness will likely worry some investors.
  • We are in a US Presidential election year. In the last election cycle, speculative positioning rose to what at the time was the highest level in the run-up to the election.
  • Spikes in COVID-19 cases could also drive more investors to defensive positions.

 

Gold prices in a U-shaped economic recovery using WisdomTree’s framework

Using our model framework, explained in “Gold: how we value the precious metal”, we try to illustrate how gold prices could move up to Q2 2021.

 

Source: WisdomTree Model Forecasts, Bloomberg Historical Data, data available as of close 25 June 2020. You cannot invest directly in an index. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties

 

We believe we are in a U-shaped economic recovery. Continued economic stimulus will be required to prop up the economy. That will continue to distort various asset markets and leave them vulnerable to sharp corrections. A continued easing bias by the Federal Reserve will keep downward pressure on the US Treasury yields.

 

We believe that inflation in the U-shaped recovery will be higher than that assumed by consensus. That is largely because supply chains are broken and so input prices for many goods and services are rising. Furthermore, official measures of consumer price index (CPI) inflation may fail to accurately reflect inflation in this COVID-19 crisis. Notably, the consumption basket that statistics are compiled on are based on 2019 consumption, but what people consume today has shifted greatly in this new environment.  We factor this into what we believe is reflective of an inflation experience rather than what will be measured by official statistics.

 

We believe the US Dollar will move back to the upper end of the trading range we have seen in the past 3 months. If there is haven demand for gold in this uncertain environment, there is likely to be haven demand for the US Dollar as well.

 

Our model indicates we could get to a gold price of $2070/oz at the end of the forecast horizon and we pierce the previous all-time high reached in May 2011 by the end of this year.

 

 

U-shaped economic recovery

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Fed policy forecast

Loosening

Loosening

Loosening

Loosening

Inflation forecast

0.8%

0.8%

1.5%

1.7%

Nominal 10-year yields forecast

0.8%

0.8%

0.8%

0.8%

US$ exchange rate forecast (DXY)

99

99

99

99

Speculative positioning forecast

280k

300k

350k

300k

Gold price forecast

US$1820/oz

US$1900/oz

US$1930/oz

US$2070/oz

Source: WisdomTree, data available as of close 25 June 2020. You cannot invest directly in an index. Forecasts are not an indicator of future performance and any investments are subject to risks and uncertainties.

[1] IMF: World Economic Outlook Update, January 2020: Tentative Stabilization, Sluggish Recovery?

[2] IMF: World Economic Outlook Update, June 2020: A Crisis Like No Other, An Uncertain Recovery

[3] Source: Bloomberg 30/06/2020

[4] Due to the COVID-19 crisis, the ability to move gold bars from the big liquidity centres such as London and Zurich to New York (the location of COMEX) was compromised, leaving a large spread between the spot price of physical gold and the futures price.