ING - December 10, 2019 - Warren Patterson & Wenyu Yao
Demand for gold as a safe-haven is likely to remain strong in 2020, but lacklustre physical demand could cap gains. Palladium continues to outperform, and while there are rising substitution risks, there's little evidence of widespread demand destruction. The market remains focused on a deficit environment
2019 has been a golden year for precious metals as escalated trade disputes created a risk-averse environment among investors and demand for safe-haven assets increased. We expect the trend to continue in 2020 as most issues are still unresolved, even though both the US and China have been making efforts to prevent the situation from getting worse.
Increased prices may continue to weigh on physical gold demand, especially in emerging economies including China and India. A stronger US dollar and higher import duties continue to add pressure on consumers here. For platinum group metals, stronger demand from the automobile sector pushed palladium to a record high; however, the Pt/Pd ratio of around 0.4 increase risks of substitution.
"Increased prices may continue to weigh on
physical gold demand"
Total known ETF holdings of gold increased by c.9.8mOz in 2019 as investors poured more money into the safe-haven asset. The escalated trade war and those associated multiple tariff hikes during the year created a risk-averse environment among investors. Falling Fed rates in the US and negative interest rates in Europe further supported the higher inflow of investment money into precious metals rather than chasing Treasuries only.
Physical demand for gold took a knock in 2H19 as price-sensitive Chinese and Indian gold demand dropped. And the trend is likely to be similar in 2020 where the economic slowdown should keep disposable income under pressure. In India, higher duties on gold imports put further pressure on demand. India’s gold imports dropped 5% YoY to 642 tonnes over the first three quarters of 2019 (annualised c.830 tonnes) after falling 11% YoY to 872 tonnes for the full-year 2018 and could stay around 800-825 tonnes in 2020.
In China, the PBoC was a major purchaser of gold in 2019, buying around 3.1mOz of gold; however, the bank appears to have put a brake on its gold buying for now, which may keep Chinese demand under pressure too.