2019 was a banner year for gold investors, both in the U.S. and abroad.
The iconic precious metal zoomed 18 percent to a six-year high against the dollar this year — topping levels not seen since 2013, thanks in part to slowing global growth.
Gold meandered lower during the first quarter, but found buoyancy the late spring, climbing from $1,273 in April to break a six-year-old resistance point at $1350. It continued to rise up to $1,553 on September 4. From there, prices sank again and established a support point at about $1,452. However, gold ended the year with a bullish breakout past the 1500-level resistance, closing the year at $1,519.
Image credit: Goldprice.org
Monetary Policy Factors
The biggest single driver of the rise in gold prices was undoubtably the sudden ‘about-face’ at the Federal Reserve early in the year. The Federal Open Market Committee (FOMC) came out of 2018 with a tight money bias — they had just increased the target rate to 2.25-2.5%, and indicated another three rate hikes in the offing before stopping at the 3.0 to 3.25% level. They also indicated they’d continue to sell off their Treasury and mortgage-backed security portfolios to the tune of up to $50 billion every month.
When the Fed sells securities, it effectively takes money out of circulation. The combination of increasing interest rates and constricting the money supply sends a powerful signal to markets that the Fed is serious about protecting the dollar, and staving off inflation.
But just a few weeks later, the Fed announced it was pausing its planned rate hikes.
The FOMC’s move was even more dovish than markets expected. The Fed effectively signaled it was not willing to pay the economic and political price of putting a real squash on inflation. This set up gold and other precious metals for a major move to the upside over the remainder of the year.
By June, buyers were rolling in, and gold surged past a key resistance level at $1,350 on record volume.
2019 also ushered in all-time high gold prices in a number of other economies, including India and South Africa.
Global Economic and Political Factors
Overall, a number of factors gave gold and other precious metal hedges a significant tailwind in 2019:
Gold also got a big boost later in the year thanks to a dovish Federal Reserve, which cut interest rates several times during the year.
Many countries have been actively devaluing their currencies, trying to goose growth through accommodative monetary policy and ‘beggar-thy-neighbor’ economics. While gold prices in the U.S. and Switzerland are still well short of their all-time highs, gold has hit record prices when measured in all the other G-10 currencies.
Large depositors in Swiss banks are revolting against five years of negative interest rates, and pulling massive amounts of money out.
Gold experienced some headwinds as well, during 2019. Investors took a hit in early November as the U.S. and China made progress on a trade deal. Gold investors had been betting on continued trade conflict to slow the economy and dampen stock returns. That didn’t happen, and gold fell 4 percent over the first week of November.
Some major players blinked, and sold their positions, including JPMorgan Chase and Citigroup.
Consumer and industrial demand fell sharply, at least in part due to the increasing price. Total supply also increased two percent, mostly due to an increase in recycling: Consumers attracted by the higher price are selling their gold possessions. Mine production fell slightly, however – the first such decline in more than a decade.
The U.S. dollar remained strong in 2019, relatively speaking — as China allowed the renminbi to weaken in order to gain leverage in the trade dispute with the U.S. This kept a small damp blanket on gold prices when denominated in U.S. dollars.
Moving to the coin market — the U.S. Mint has decreased its annual output of Golden Eagle coins by about 85% — a bullish indicator, given the Law of Supply and Demand. However, the reduction in supply was matched by reduction in demand: Sales for gold coins in 2019 totaled 152,000 ounces — down 38% compared to the prior year. American Eagle silver coins sales were also way down. Even gold’s 18% return in 2019 was not enough to lure investors out of stock markets.
When markets correct from their current all-time highs, however, that could change in a hurry. A “flight to safety” could spark a breakout in gold and silver prices, as investors flee stocks looking for some safe haven. Bond yields are low, which means bond prices are high.
In some markets, where central banks have pushed interest rates into negative territory — especially after inflation — gold is the far superior safe-haven choice.
So once market sentiment reverses gold and other precious metals should benefit strongly.
While gold had a very good year, palladium’s year was stupendous. Prices zoomed 59% over the course of the year as momentum investors piled in. Palladium prices benefit from strong manufacturing: It’s commonly used in catalytic converters, which reduce emissions in vehicles. So strong car sales boost palladium demand. More environmental sensitivity and regulation is also boosting palladium demand well beyond the available supply.
Don’t limit your analysis to the U.S., Japan and Europe. Car manufacturing in China has been revving its engines for years, as millions of Chinese enter the middle class and begin to be able to afford their own cars.
As such, palladium has a stronger pull in up markets than gold, though it could be more sensitive to economic downswings. At press time, palladium is changing hands at $2,336 per ounce.
While silver prices saw much of the same general patterns throughout 2019 that gold did, it did not participate in gold’s final breakout at the end of 2019 and the first month of 2020.
Instead, silver got blocked by a stubborn resistance point at just over $18 per ounce.
Image credit: SilverPrice.org
Silver is an important component in the manufacture of photovoltaic cells. It’s an even better conductor of electricity than gold. Manufacturing therefore is a more important input into silver prices than gold prices, and it may be more sensitive to changes in the overall manufacturing and economic environment. Good news for gold isn’t always good news for silver, though the two metals do tend to move together.
Silver is way off its all-time high of $50 per ounce, set in 2011. It’s still well under its 2016 high of $21.23. Gold now trades at 88 times the price of silver. That’s way over the 47:1 average for the entire 20th century. It’s also way more than the 60:1 average over the past 20 years. This is a major mismatch, and may be an opportunity for alert and imaginative traders.
Platinum is also trading well under its historic ratio with gold, thanks to falling industrial demand. Catalytic converter manufacturers switched from platinum to palladium in 2008, causing a long-term recession in platinum prices. If the price of palladium forces car manufacturers to switch back to platinum, we could see it soar again.
David Schroeder is an investor with more than 25 years of experience, investing in Stocks, Options, Metals, Futures, and Real Estate and is a strategist at Monetary Gold.
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