Gold had a sizzling 2020, thanks to the flare-up in equity market volatility and the resultant safe-haven rally. The volatility ETN iPath Series B S&P 500 VIX Short-Term Futures ETN VXX has added 2.5% so far this year, while the largest gold ETF SPDR Gold Shares (NYSE:GLD) (TSXV:GLD) is up 7.5%, thanks to the coronavirus scare.
The coronavirus impact seems to be more crucial than estimated. As a result, gold prices approached a 7-year high. Last week, gold touched $1600 for the first time since 2013. GLD added 3.3% last week as bullion made way for the biggest weekly gain in more than six months. Holdings in bullion-backed ETFs rose for 22 successive sessions last week, the longest-ever run, according to data compiled by Bloomberg.
Gold’s Near-Term Price Target (NYSE:TGT)
Citigroup (NYSE:C) analyst Aakash Doshi expects gold to top $2,000 an ounce over the next year or two, marking a roughly 22% rise from its current price of $1,645. Goldman expects gold to touch $1,850 if the virus threat lingers.
Let’s take a look at why gold could rule in 2020?
Coronavirus Outbreak & Return of Global Growth Worries
Trade war worries may have had subsided at the start of 2020 but fears of a global economic slowdown have returned, thanks mainly to the coronavirus outbreak. The International Monetary Fund (IMF) recently said that the virus will likely dent global growth by 0.1% and drag down China’s economic growth to 5.6%, which is 0.4% lower than IMF’s January outlook.
IMF had lowered the global growth forecast in January too. The organization warned that further severity of the virus contagion may worsen the global growth picture (read: Play These Dividend Growth ETFs to Combat Coronavirus).
Global Policy Easing, Negative Yielding Debt
Most developed (including the United States) and emerging economies have been on a policy easing mode.An easy monetary policy has been adopted by central banks of countries that form about 70% of global GDP. The pool of securities with a yield below zero jumped by $1.16 trillion at late-January.The World Gold Council points indicated that as much as 90% of developed market sovereign debt is trading with negative real rates.
The ECB and the BoJ have benchmark interest rates in the negative territory. The 10-year U.S. yield is near the low end of its five-year range and is “poised to break down”. Right now, real U.S. rates are negative, which cuts the opportunity cost of holding bullion, per Bloomberg. Gold in euros touched an all-time high last week. The Commonwealth Bank of Australia expects the Fed to slash rates twice in the second half of this year as virus fears loom large.
The latest rally in gold came despite an uptick in the U.S. dollar. The dollar index nearly hit 100 for the first time since March of 2017. A safe-haven rally, higher demand for bonds and the resultant decline in yields actually benefiting non-interest-bearing asset gold.
2020 an Election Year
Investors should note that 2020 is a U.S. election year, which is likely to induce volatility in the market. Gold normally rises 8.99% in an election year. In the previous election year as well, GLD had gained about 8%.
Inflation Doesn’t Hurt Gold
Though still-muted, U.S. inflation has been on an uptrend of late. Annual inflation rate in the United States jumped to 2.5% in January 2020 from 2.3% last December and beat market forecast of 2.4%. This marked the highest rate since October 2018, mainly boosted by a 12.8% rise in gasoline costs. But then, gold is viewed as an inflation-protected asset. So, if inflation picks up at any point of time, there is no threat to gold.
How to Tap Gold Strength With ETFs?
There are leveraged gold ETFs like VelocityShares 3x Long Gold ETN (TSXV:GLD) , ProShares Ultra Gold UGL and DB Gold Double Long ETN (BS:DGP) .
As far as regular ETFs are concerned, investors can play products like GLD, iShares Gold Trust IAU, Aberdeen Standard Gold ETF Trust SGOL, SPDR Gold MiniShares Trust (TSXV:GLD) and GraniteShares Gold Trust (TSX:BAR) (see all Precious Metals ETFs here).
Investors can also play gold mining ETFs like VanEck Vectors Gold Miners ETF (NYSE:GDX) (TSXV:GDX) . Miner stocks scaled a five-and-a-half month-high on Feb 21. The fund has gained 6.9% in the past month.
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SPDR Gold Shares (GLD): ETF Research Reports
iShares Gold Trust (IAU): ETF Research Reports
Aberdeen Standard Physical Gold Shares ETF (SGOL): ETF Research Reports
ProShares Ultra Gold (UGL): ETF Research Reports
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
VanEck Vectors Gold Miners ETF (GDX): ETF Research Reports
DB Gold Double Long ETN (DGP): ETF Research Reports
VelocityShares 3x Long Gold ETN (UGLD): ETF Research Reports
GraniteShares Gold Trust (BAR): ETF Research Reports
SPDR Gold MiniShares Trust (GLDM): ETF Research Reports
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