Why Is Bank of America Bullish on Gold?

BoAML is overweight on precious metals

BoAML (Bank of America Merrill Lynch) is overweight on precious metals in 2019. It believes that gold could be the big winner of the trade war between China and the US, as there’s no end in sight to the tensions. BoAML analysts expect gold (GLD) to push through $1,400 per ounce by this year on geopolitical tensions and trade uncertainty.

BoAML analysts also believe that trade tensions will get worse before they get any better. At the start of June, they downgraded the 2019 US GDP growth forecast to 2.4% from 2.5% and the 2020 US GDP growth forecast to 1.5% from 1.8%. The analysts wrote, “Beyond a certain point, tariffs do reduce welfare in the large, open economy imposing them.” They added, “The year-on-year U.S. tariff increases are unprecedented and likely highly deflationary, creating major risks to the macro economy.”

Fed to provide support

Analysts also expect the Fed to provide support to the economy by cutting rates. They expect rate cuts to total 75 basis points by early 2020. Gold, as a safe-haven metal and a non-income-bearing security, stands to benefit from these expected changes.

In addition to the Fed, central banks worldwide, including the European Central Bank and the Bank of Japan, are making dovish statements regarding the state of the global economy. Lower interest rates increase gold’s attractiveness despite the market’s higher highs. The S&P 500 (SPY) closed June 20 at an all-time high of 2,954, while the Dow Jones Industrial Average (DIA) hit a record high on June 21 before slipping at the end of the day.

Despite the stock markets’ reaching highs, gold prices are gaining traction. In the last month alone, the SPDR Gold Shares ETF (GLD) has gained 9.7%, while SPY and DIA have gained 2.6% and 3.2%, respectively. Safe-haven assets’ outperforming risk assets as the market peaks implies bullishness on gold.

Read Stock Markets Reach Highs but Won’t Stop Gold’s Bull Run for more on this topic.