Following the killing of Iranian General Quasem Soleimani by a targeted US airstrike on 3 January, gold prices reached a seven-year high of close to $1,600 per troy oz. or $50,798 per kg. The shock of this event drove investors to buy gold, a so-called safe haven asset, allowing them to safeguard their wealth amidst geopolitical uncertainty.
But even before the assassination of Soleimani, gold had already been rallying during the last days of 2019. This was attributed to a lingering negative rate environment and a weakening dollar. Since the precious metal is denominated in green bucks, a softening dollar drives up gold prices since they are more attractive to investors. Meanwhile, when the inflation rate is higher than the nominal interest rate, creditors are more likely to buy gold since they are losing money.
Another factor that contributed to the gold rally was the underperformance of the US real estate market in December 2019. Since investors see real estate as another safe haven physical asset, an underperforming market tends to cause gold to increase in value.
Supply constraints in the real estate market are due to a lack of previously owned homes for sale, as homeowners find themselves unable to upgrade to new homes due to high prices. In addition, homebuilders find themselves unable to keep up with demand due to a shortage of labor and land.
Also adding to the momentum of increasing gold prices were purchases of the metal by various central banks. In the third quarter of 2019 alone, Russia, Turkey and China bought a combined 120 tons of gold.
The Outlook for 2020
Although the US and Iran were able to avoid going to war, the continuing geopolitical uncertainty could continue to drive investors into buying gold. There is still a possibility that tensions between the two countries could escalate into open conflict unless the US has an appropriate diplomatic strategy.
Some analysts also believe that if gold cleanly breaches the $1,550 level and this becomes its new support level, in the first half of 2020 gold would be positioned for a new rally. In this case, $1,800 and $1,900 could be its next resistance levels. There are even predictions that gold may hit the $2,000 level within the next two years.
Of course, there are also those who believe that the precious metal may not be able to maintain its strength in the coming year. This is due to signs that, in the wake of the global economic slowdown, the world economy may be gathering momentum. Hence, fewer investors would turn to gold as a safe haven for their assets.
Recently released data showed that in December, China’s manufacturing sector continued to increase output, an indicator that its economy is stabilizing. The US and China also seem set to end their trade war as President Trump has said he will sign the first phase of a trade agreement. The deal would see the US lowering tariffs on some of China’s products in exchange for increased purchases of American agricultural goods.
However, there are further brewing concerns that could support demand for gold and other haven assets in 2020. For instance, the US EU trade war may escalate further due to growing tension over France’s imposition of a digital services tax that will affect Amazon, Google and other American tech giants.