Weekly Update: Will the Upside Stay Intact in Gold Prices?

In 2020, gold prices have been shining due to turmoil in the equity market. The S&P 500 Index (NYSEARCA:SPY) has fallen by 12.4% on a YTD (year-to-date) basis. However, gold has risen by 11.5%. Last week, gold active futures closed at $1,694 per ounce. UBS expects that a target of $1,790 per ounce could be easily achievable. Earlier, UBS advised its clients to accumulate gold.

Will the upside stay intact in gold prices?

Last year, strategists predicted an upside in gold prices. Some strategists expected gold to pass $2,000 per ounce. None of the strategists expected the impact of COVID-19 on gold prices. In 2019, strategists’ views were based on weakening economic growth outside the US. The trade war and other country-specific factors contributed to the global slowdown. For example, many economists think that the Indian government’s decision on demonetization has weakened its GDP growth rate.

During economic turmoil, investors prefer gold over equity. Also, when the growth cycle picks up, investors relocate their wealth from gold to equities. However, this time is different. Until there’s a coronavirus vaccine, it will be difficult for the global economy to resume its previous growth speed. In a recent development, President Trump hinted that there might be a vaccine by the end of 2020. Gold could continue to outperform the S&P 500 in the rest of 2020.

Central banks across the world might try to accumulate gold amid the ongoing economic crisis. According to the World Gold Council, in the first quarter of 2020, central banks and other institutional holders accumulated 145 tonnes of gold—a fall of 7.6% on a YoY (year-over-year) basis. However, in the first quarter of 2020, ETFs that invest in gold accumulated 6.9x higher on a YoY basis. ETFs’ demand pushed the total gold demand by 1% in the first quarter compared to the first quarter of 2019.

Gold ETFs 

The SPDR Gold Shares ETF (NYSEARCA:GLD) invests in gold prices. Also, the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) invests in companies engaged in gold mining. Newmont (NYSE:NEM), Barrick Gold (NYSE:ABX), and Franco-Nevada are GDX’s top holdings. On a YTD basis, Newmont Mining, Barrick Gold, and Franco-Nevada have risen 40.4%, 57%, and 33.4%, respectively. In 2020, GDX has risen 90.6%, while GLD has gained 11.8%. Gold miners have outperformed gold prices by a huge margin. Gold miners could raise their profits more than the rise in gold prices by increasing production. This could explain the difference in the price rise.