• Saahil Menon

Gold: Is THIS the Best Investment in 2020?

Reasons Behind the Meteoric Rise of Safe Assets

Considering the upheave that Gold experienced in 2019, this asset has attracted the attention of many investors: both at the professional and beginner levels.

From top hedge funds to investment bankers to retail investors, a majority of the finance community has turned a keen eye towards Gold. The question here is: is 2020 the right time to begin building positions on this asset?

Here are several key reasons why TDP thinks it could be:

1. Presidential Elections

With the upcoming elections in November, it is likely that the stock market will face its fair share of volatility. Especially if the leading nominees are particularly pessimistic against the financial market – such as Elizabeth Warren and Bernie Sanders – we might see investors slightly lose their confidence in the stock market's current bull-run.

This loss of confidence in the stock market could trigger recessionary behavior, and would therefore create higher demand for safe haven assets such as Gold.

Figure 1: Economist Predictions on Recession

Source: (WSJ, 2019)

Especially given the results above, we can imply that the sentiment on the market is slightly uncertain this year, and this is particularly why Gold shows some promise of rallying even further.

Key Point: Since the Gold price increase may not occur until later in the year, we could see a small correction (decline) in prices in the short term, once the threat of the Coronavirus has been neutralized. This is because the pervasive impact of this illness (high infection rates, reduced travel and diminished economic growth forecasts) has stimulated fear in investors, and therefore caused lots of capital to be taken out of stocks and put into Gold.

However, once we see economic growth gaining momentum once more, it seems natural that the demand for Gold would slightly decrease for a short period of time, before resuming its growth trajectory.

2. Rate Cuts

In 2019, a total of 49 central banks worldwide had cut their interest rates 71 times altogether: an action that greatly stimulates the demand for Gold. This is because lowering interest rates places downward pressure on currencies, and therefore incentivizes investors to reduce their demand for that particular holding and place their money into safer assets instead. Here's why:

Figure 2: Chain of Events from an Interest Rate Cut in the US

Hence, if interest rates continue to decrease and less money flows into the US economy in 2020, we could be seeing the aforementioned chain of events occurring more often and in different countries, too. The effect of this consistent depreciation is that investors will focus on safe-haven assets instead – since faith in currencies has reduced – and this is another supreme reason why the demand for Gold could substantially increase in 2020.

3. Debt in the Financial System

Credit. Liabilities. Debt. It’s what caused the last financial crisis, and it’s slowly creeping up to concerning levels once again.

The first half of 2019 saw record-levels of debt, with global borrowings exceeding $250 trillion; thats trillion, with a T.

Figure 3: Increase in Global Debt levels

Source: (CNBC, 2019)

This level of debt escalation can be attributed to our last point, as lower interest rates makes borrowing money far easier and cheaper for businesses and individuals.

Although there are arguments that debt is not too detrimental for economies, the International Monetary Fund reported that 40% of the world’s corporate debt is at risk of default if another economic meltdown occurs. This means that over $19 trillion in corporate debt would (potentially)not be paid back, thus causing severe uncertainty in the global financial system.

This debt build-up, as well as the risk of many countries failing to pay back, is another way in which investors may dump their risky investments and move towards safer assets: and here is where Gold tends to be seen as the one-stop-shop to fix investor's uncertainty.

So...Who Is This Investment For?

Overall, we're clearly seeing the merits of Gold becoming more prominent: political havoc, deteriorating currencies as well as lowered faith in the financial system creates intrinsic value for safe-haven assets. This makes Gold a reliable hedge to the market: i.e. something to protect your portfolio returns in case of any market crashes.

While this all sounds favorable, there is one key point to consider: volatility. The dynamic nature of the commodities market makes Gold an extremely volatile asset, and this is something that can unwillingly put new investors on edge.

Nevertheless, understanding the factors mentioned and their ability to impact Gold prices will keep new investors one step ahead of the game; the more you learn, the more you earn...so begin analyzing Gold today and work towards leveraging its volatility to your advantage!