In its mid-year 2019 gold outlook released today, World Gold Council has said that over the next six to twelve months, financial market uncertainty and accommodative monetary policy will likely support gold investment demand . “Price momentum and positioning may fuel rallies and create pullbacks, as investors continuously reassess their expectations based on new information, but structural economic reforms in India and China will likely support long-term demand of gold,” the WGC report said. It also cautioned weaker economic growth in India may soften gold consumer demand for the near term.
Retracing the first half of 2019, the report said it was quite eventful for financial markets. “Stocks retraced their Q4 2018 losses by the end of April only to pullback again in May. A few weeks later, stocks reached new highs yet again. At the same time, central banks across the globe have signalled a more accommodative stance, bringing global bond yields to multi-year – and in some countries, all-time – lows. As investors looked to balance higher stock prices with an increasingly uncertain environment, gold prices surged, making gold one of the best performing assets by the end of June,” the report said.
Gold’s price increase in June was particularly sharp, driven by falling rates, higher risk and momentum. In addition, central banks reported net purchases of approximately 247 tonnes, equivalent to US$10 billion, continuing their expansion of gold holdings as part of foreign reserves.
Expecting US Fed Reserves to cut rates, the report hints at a general global economic slowdown, that augurs well for gold demand. “The Fed is not alone. The European Central Bank’s (ECB) President Draghi recently announced that they are ready to extend bond purchases or cut rates to sustain economic growth. The Bank of Japan (BOJ) is also expected to make policy more accommodative. And emerging market central banks are likely to follow suit,” it says.
The prospect of lower interest rates should support gold investment demand. Central banks are not acting in a vacuum. Instead, they stand ready to stimulate their respective economies should risks bubble up and a more significant global slowdown occur. These risks include the potential negative long-term effect of higher tariffs amidst trade tensions between the US and its trade partners, geopolitical tensions between the US and Iran, uncertainty surrounding Brexit and other political and economic concerns in the UK and Europe.
In the event of a recession, the outlook fears, central banks – including the Fed – may not be able to rely on cutting interest rates. Instead, they may need to use quantitative easing and, possibly, new non-traditional measures to reinvigorate the global economy. “As we look forward to the rest of the year, we believe that consumer demand may be soft and speculative activity could amplify price movements but, overall, it is likely that investment demand will remain robust and central banks will continue their net purchasing trend,” hopes World Gold Council.