Gold — Safe haven in times of Uncertainty

19 December 2019

Citi analysts expect gold prices to near $1,525/oz over the next 3 months, but believe that prices could spike to touch 2,000/oz in the next 12-24 months propelled by trade and geopolitical uncertainties. Gold, a safe-haven asset, has returned ~15% so-far this year. Citi analysts maintain a bullish outlook for the yellow metal over the medium-term and set an average target price of $1,625/oz over the next 6-12month period.

Bull case for Gold prices:

  • Central Banks around the world, including India, China, Poland, Turkey and Russia have been adding to their gold reserves at a record pace. Currently, Central Banks purchase ~20% of annual mine production and Citi analysts expect this buying appetite to persist through 2020
  • Central Banks also embarked on a rate-easing cycle in 2019 (US, Australia, India, etc.), while some even cut lending rates into negative territory (Japan, EU), leading to heightened flows – pushing gold prices further up
  • As of early Dec19, year-to-date net inflows into commodities ETFs and index products totaled ~$18.2bn, of which ~$23.7bn was tied to precious metals. Despite the recent rally in gold prices, the percentage share of AUMs in the yellow metal vis-à-vis world equity markets remains low at ~0.2%
  • Citi analysts expect heightened trade tensions and subdued oil prices to persist throughout 2020. Even through periods of trade optimism, Gold prices stayed above the $1,450 – $1,455/oz levels
  • Citi analysts also believe that gold is currently trading at a cheaper valuation than equity or credit assets
Source: IMF, WGC, Bloomberg, Citi Research, *combined index and Global ETFs, subject to revision

Geopolitical concerns, however, have limited effect on the demand for gold in India, where it forms part of the religious and cultural lifestyle. Gold acts as a store of wealth and insurance for India’s rural (~67% of total population), and middle income populace. The Oct-Dec period remains critical for gold demand in India due to a combination of seasonal agricultural profits, weddings and festive gift-giving.

Jewelry forms a large part of total Indian demand

Source: WGC, Citi Research

Given rich equity and credit valuations, Citi analyst believe that investors may benefit from a dynamic gold allocation that applies minimum-weightage to gold during equity market bull runs, while turning defensive with a higher weightage during periods of high volatility.

Investors may continue to stick to their strategic asset allocation as per their risk profiles and ensure diversification in investment portfolios. For more details and implications for your portfolio, please contact your relationship manager.

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