Gold prices soar on back of tensions

Geopolitical tensions and low interest rates have driven the price of gold to a six-year high, but there are warnings it may not last.

Sunday, January 26th 2020, 3:58PM

Gold is currently trading for just over US$1,570 an ounce, compared to less than US$1,100 in 2016.

Chris Smith, of CMC markets, said the price had been pushed up at the start of the year by tensions in Iran and had stayed at that level. It had risen at the same time as share markets rallied.

“They don’t usually rally together. Usually if someone is predicting a recession it gets a lot of attention.”

He said because interest rates were low the opportunity cost of holding some cash in gold was not high. Central bank stimulus had also made gold more attractive, he said. “If interest rates stay low it will boost the appeal of gold.”

Morningstar said the price of gold had lifted 20% in the third quarter of 2019.

It said it was more likely that this spike would last than a similar spike at the end of 2016, which preceded a slump.

“With the Federal Open Market Committee cutting the federal funds rate three times since August 2019, gold’s investment case has strengthened. We expect 2020 gold demand to be 8% higher than it was in 2018.”

But it warned that “today’s demand is tomorrow’s supply”.

Investment-driven buyers, especially through exchange-traded funds, can quickly sell when real interest rates rise. ETF-held gold has reached record levels equivalent to roughly a year's worth of mine production, and its unwinding would significantly weigh on prices. Furthermore, the vacuum left by declining investment demand won't be filled by other categories.”

It said demand for jewellery was also slowing.

“As such, we expect midcycle gold demand to be 9% lower than our near-term forecast, leading prices to decline to our midcycle forecast of US$1,250 per ounce in real terms by 2022.”

Smith said the weakness of the New Zealand dollar against the US also made gold less appealing to Kiwi buyers at present.

Tags: CMC Markets gold Morningstar