December 5, 2019 | By: Steve Bonnyman

Is Gold Back in Favour?

2.5 min read

Prospects for the precious metal will depend on how it acts as a currency as well as a commodity.

Gold has moved back onto the radar screens of many investors following its recent price increase to levels not seen since 2013. And while the price has since leveled off, the rally may not be over yet.

In fact, this could be the start of a longer-term bull market in gold bolstered by growing risk aversion and increased appetite for asset allocation strategies that are more broadly diversified.  

The key to any gold forecast is to figure out how it might perform both as a commodity and a currency. There are no conventional ways of measuring or assessing its “value”, other than recognizing its history as a long-term store of value.

That said, the catalysts that triggered the price move earlier in the year have not disappeared. As a commodity, gold deposits are increasingly difficult to find and costly to extract, and the increasing cash constraints placed upon the industry by the capital markets will slow new production growth (at least until prices improve) suppressing new supply.

Gold’s outlook as a currency, meanwhile, will likely rely on its response to foreign exchange price dynamics and measures of global risk. A corollary to that is how it holds up as an investment, whereby it is influenced by the flows in and out of other asset classes.

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Source: Bloomberg LP, as of November 15, 2019

With that in mind, there is a strong likelihood that central banks will want to diversify their holdings away from the U.S. dollar – a portion of which will likely end up in gold – particularly given the current U.S. Administration’s penchant for wanting to rewrite the rules of global trade.

The likelihood of a recession and/or significant market correction also continues to rise with each year of this already extended cycle. This moves us another step closer to falling economic data, rising equity market volatility, and the requirement for another round of rate cuts – all positive stimulus to the gold price.

Of course, none of these potential headwinds for gold are set in stone. If a trade deal with China is reached, or we get a sustained improvement in the global economic outlook that corresponds with higher rates and/or a rise in the U.S. dollar, the prospects for gold would dull.

The U.S. election cycle also poses both opportunities and challenges for gold—notwithstanding the sideshow of the ongoing impeachment. Opponents of the existing administration will likely focus on recession risks (since incumbents rarely get re-elected when one occurs), while the government may throw additional support at the economy to boost growth next year.

Either way, gold is starting to make a lot more sense in an investor’s portfolio than it has in some time.

Steve Bonnyman is a Portfolio Manager and Co-Head North American Research at AGF Investments Inc. He is a regular contributor to AGF Perspectives.

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