As we've noted in our previous posts, the price of gold has had a peculiar behavior during the 21st century. It keeps growing both during economic downturns, but also during stock market uptrends. The traditional negative correlation – with gold prices growing during a crisis and falling or remaining unchanged while stocks grow – has been completely overturned. The year of 2020 will be paradoxical in the sense that there simply aren't any factors that could cause a fall in the gold price.
The reason behind this claim is that the whole structure of the global economy has changed. For many decades, gold has been growing by 5% to 7% annually. The stock market was also growing at a very similar pace. On the other hand, this growth has been fueled by the increasing labor productivity; on the other, by the growing income levels, especially in the developing world.
However, this traditional economic model has now reached its ceiling and cannot grow any further from a structural standpoint. Thus, it's slowing down everywhere, in spite of the continued attempts of central banks to pump more money into it. We cannot begin to contemplate what is bound to happen if central banks stop printing money.
At the same time, the market is chock-full of liquidity (free and unbacked money), causing stock prices to ignore any negative tendencies within the economy. In most developed countries, real interest rates have long become negative – meaning that the advertised interest rates are lower than the rate of inflation.
Populism and protectionism are both on the rise globally. President Trump keeps on spending lavishly, thus causing a rise in the supply of state bonds. The market cannot digest them all anymore, so the Federal Reserve is forced to buy these bonds in the open market, increasing its balance.
Another effect of the low interest rates and economic growth is that the stock market multiples are getting blown out of proportion. For example, the average current P/E value is unrealistically high, yet everyone understands that this cannot go on forever. To make matters worse, low interest rates cause borrowers to act irresponsibly. The lower the rate, the more willingly businesses and individuals load up on more debt, thus creating an additional risk of default.
The current economic cycle has been going on for too long. Its inevitable end can bring all sorts of financial cataclysms – and it's impossible to say which sector of the US or global economy will be the first to suffer.
This time, things will be very different from the crisis of 2008, when there was hardly any liquidity left on the market. Central bank will flood the market with even more money, trying to put out the fire. And as we noted above, there is a lot of money out there already. Many investors are just sitting on their funds, uncertain where to make their investments.
This scenario might entail that a tremendous amount of free liquidity will be poured into gold. Speculators will likely join the stampede, seeing that it's the only asset still growing in times of crisis.
To summarize: regardless of whether the market will see continued growth or a recession this year, there's no single valid reason why the price of gold should fall. By contrast, there are multiple drivers that can cause the yellow metal to grow faster than ever before.
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In my opinion gold is only driven by speculation...
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