Game planning for December gold markets

Gold markets

The iffy outlook for a US-China trade deal and the weaker US economic data has seen an increase in Fed rate cut bets are nearing in on a  50 % chance of a rate cut in  June 2020.

While the tight inverse correlation with trade talk headlines will continue to ping-pong prices around current ranges. With the equity market at the highs and valuations starting to look stretched, it makes sense to consider buying gold as the SPX index has gained nearly 25 % this year and it would suggest profit taking will remain on the cards.

In addition, there could be a reluctance for bond desks to short markets given the seasonality drop in primary issues in December and that should keep top side US yields in check.

The Macro risks remain elevated even though some green shoots are starting to emerge in China and the EU. And also, if there is a trade deal, the initial tariff roll back part of the equation might not be enough to the right the economic ship and may force the Feds hand to cut interest rates. If more policy easing and dollar weakness unfold, global investors in 2020 may look back to current prices at $1475 with a sense of nostalgic longing.

 

Game plan into 2020

Given uncertain Macro conditions heading into  2020, there is a strong case for investors to hold gold as critical asset allocation, but the significant risk are a comprehensive trade deal, better growth, and higher rates which  remain the essential factors for a considerable downside squeeze

But in the current environment where uncertainties remain high, and rates are low, especially with equities at all-time highs, fortunately, many investors now recognize golds necessity in the current climate.

I still expect gold to trade through 1600 supported by my views that trade war will linger, and the economic drag from tariffs will force the Fed to cut interest rates 2-3 times in 2020 and weaken the dollar. All enormous positives for gold

As mentioned, the critical risk on this view would be a comprehensive trade deal with a significant chunk of tariffs rolled back that would stimulate trade flows and economic growth, cause the Fed to raise rates and strengthen the dollar. In this case, it wouldn't make sense to own gold as the economic outlook would be much brighter, and the cost of owning haven assets like gold become much higher.

Ultimately when it comes to glittering gold appeal, it's all about the opportunity cost of Risk-free asset returns as measured by the real 10y Treasury yield. As such a higher bond yield is hugely negative for gold.