The COVID-19 pandemic and ensuing economic lockdowns have slashed global growth forecasts for 2020.
With varied expectations around the speed of the economic recovery, we analyse the potential performance of gold across four hypothetical scenarios provided by Oxford Economics:1
1) swift recovery
2) US corporate crisis
3) emerging markets downturn
4) deep recession.
Our analysis shows that higher risk and uncertainty combined with lower opportunity cost will likely be supportive of gold investment demand in 2020. This could offset the negative effect of lower consumer demand on gold performance as economic activity contracts.
Gold’s behaviour thereafter may depend on the speed of the recovery and the duration of monetary policy and fiscal stimuli..
Gold valuation made easy
Gold does not fit within traditional valuation models. Without a coupon or dividend, typical discounted cash flow models fail, and there are no expected earnings or book-to-value ratios either. But our analysis shows that valuing gold is intuitive. Its equilibrium price is determined by the intersection of demand and supply. Understanding the underlying drivers and interactions of gold demand and supply gives investors a robust framework upon which to determine gold’s performance (Focus 1).
In particular, gold's behaviour can be explained by four broad sets of drivers:
- Economic expansion: periods of growth are very supportive of jewellery, technology and long-term savings
- Risk and uncertainty: market downturns often boost investment demand for gold as a safe haven
- Opportunity cost: levels of interest rates and strength of currencies influence investor attitudes towards gold
- Momentum: capital flows, positioning and price trends can ignite or dampen gold's performance.