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5 factors that could drive gold prices above $1900/oz in 2020

We examine gold’s recent price performance as well as the factors that could drive the precious metal to all-time highs.

What volatility truly entails

Even as calm returns to equity markets, volatility remains.

Such a point is likely best illustrated by the recent performance of the WTI May futures contract – which, for the first time ever, plunged into negative territory at the start of the week.

Since rolling over to the June contract, things have improved a shade, but prices remain significantly off the levels achieved just four months ago.

And although optimism has returned to some pockets of the global financial markets – equities in particular – the coronavirus (Covid-19) pandemic remains far from resolved. Recession (and in some cases depression) fears remain, with the economic data filtering out of many countries particularly worrying. In a recession, even the safest assets are sold off, as investors often look to de-disk at any cost.

Indeed, gold wasn’t spared from March’s market madness: from 10-20 March spot gold declined around $200 an ounce, to hit a mid-March low a little under $1500.00 an ounce.

Since then, however, spot gold has rallied strongly, last trading at $1720.20 an ounce.

Futures are a little ahead of that, with gold’s June futures Comex contract last trading at $1735.00 an ounce, according to Bloomberg Data.

Saracen, Evolution, Newcrest share prices outperform

Elsewhere, in the face of extreme market volatility, ASX-listed gold stocks have proven particularly resilient year-to-date (YTD) – far outperforming the ASX 200 benchmark – which is currently down 21%.

By comparison, Australia’s largest gold miners all outperformed the Aussie benchmark YTD, with the Saracen share price gaining around 23%; Evolution Mining rising over 30%; while Newcrest – the largest of the three in terms of market capitalisation, has actually fallen approximately 8%.

Evolution Mining today revealed its March production results. Here the mid-cap miner showed improved cash flow, good safety performance and noted that its previously stated FY20 production guidance of 725,000 ounces remains unchanged.

Looking forward, Saracen is set to hand down its latest set of quarterly production results on 28 April, while Newcrest is set to do so on 30 April.

Gold price outlook: key analyst view

With gold prices rallying strongly from their March lows, investors are likely wondering how much higher the price of the precious metal can run.

Morgan Stanley, in an attempt to answer such a question, currently pegs gold's end-of-2020 base case at $1700 an ounce. However, should a favourable set of factors align, the investment bank argues that we could see gold prices rise as high as $1900 an ounce by the end of CY20.

For this bullish price target to be hit, Morgan Stanley analysts argue that we would have to see five things occur, including:

‘[1] Weakening US dollar and [2] negative real rates, combined with [3] weakening equity markets, [4] central bank buying, and [5] the beginnings of a recovery in fabrication demand.’

In the wake of the coronavirus pandemic, central bank quantitative easing programs have indeed ratcheted up, with Morgan Stanley analysts forecasting that combined, the G4 Central banks’ balance sheets 'are projected to increase by a cumulative $7.2 trillion.'

On that point, the investment bank further notes that ‘as the scale of asset purchases in the US outstrips that in other markets, USD weakens, adding further upside impetus to gold.’

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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