Gold Continues to Shine amid Geopolitical Risks


Jan. 6 2020, Published 7:57 a.m. ET

Recently, gold continued to rise amid increasing geopolitical tensions. US gold futures rose for the eighth time in the last nine trading sessions and reached $1,582 levels per ounce today. The last time gold futures witnessed these levels was in March 2013. Spot prices closed at $1,577 last week.

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Gold continues to shine 

Investors turned to relatively safe investments like precious metals as the tensions between Iran and the US continued to mount. While there was some respite for investors after the US and China’s partial trade truce, there are new concerns. After killing Iran’s top general, the US has threatened to slap sanctions on Iran “like they’ve never seen before,” according to a CNBC report. We’ll have to see how Iran retaliates. Will the tensions pave the way for safe-haven investments?

Broader equity markets might exhibit increased volatility amid uncertainties in the short term. Interestingly, the Dow Jones Index (DIA) and the S&P 500 (SPY) had one of the best years in 2019. They rose approximately 24% and 29%, respectively, in 2019.

Gold was among the sweet spots last year and gained approximately 20% in 2019. Central banks across the globe largely relaxed monetary policies in order to boost growth. The Fed trimmed its benchmark interest rates by 75 basis points last year, which helped bullion prices. The escalating US and China trade war and recession fears in the second quarter last year pushed investors towards safe investments. However, the concerns waned towards the end of the year. As a result, investors turned towards relatively riskier assets.

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Prices in 2020

Brokerages have a mixed view on gold for 2020. According to Bloomberg, JPMorgan Chase has a negative outlook on the precious metal and a bullish view on stocks. JPMorgan Chase (JPM) expects the global economy to gather momentum after the recent slowdown. At the same time, Goldman Sachs is positive on the yellow metal for 2020. High political uncertainty due to the presidential election in November could boost the bullion, according to Goldman Sachs. Interestingly, JPMorgan Chase was positive on the precious metal ahead of 2019, which turned out to be true.

Gold miner stocks in focus

Recently, gold miner stocks have also seen upbeat movement. They have a moderate positive correlation with gold prices. The second-largest gold miner, Barrick Gold stock rose more than 6% in the last two weeks. Last year, Barrick Gold’s earnings increased YoY largely due to higher realized gold prices. The expectation for higher gold prices in 2020 could also have a positive impact on the company’s earnings. The stock rose by 40% in 2019. Newmont Goldcorp (NEM) stock was also positive. The stock rose by approximately 24% last year.

Usually, equities and gold have a low correlation. As a result, gold acts as a useful hedge when equities aren’t stable. In the last ten years, gold and the S&P 500 (SPY) had a correlation coefficient of 0.07. A correlation coefficient of -1 denotes a strong negative correlation, while 1 indicates a strong positive correlation.

The VanEck Vectors Gold Miner ETF (GDX), which includes top mining companies globally, rose almost 35% last year. Barrick Gold stock forms 11%, while Newmont Goldcorp forms approximately 12% in the GDX ETF.

We’ll have to see where broad market equities head from their near-record high levels. Geopolitical risks will likely drive the broader markets going forward, which might be an important driver for precious metals.


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