In the last two months, the price of gold has risen 14% as a result of ongoing geopolitical events such as the trade and currency war between the US and China as well as the uncertainty regarding Brexit. But according to WisdomTree, the value of the yellow metal could rise by a further 20% if these risks remain elevated.
Investors seek haven in gold as international tension causes uncertainty and comes hand-in-hand with volatility. In July, assets in gold-backed ETFs grew by 2%.
The US Federal Reserve has been influenced by the market and the Trump administration to implement a rate cut as the central bank changed the policy course after equity markets faltered earlier this year, according to WisdomTree.
The Fed’s fund futures indicate the markets expects more rate cuts to come, resulting in US treasury yields to remain low.
The price of gold is hovering around $1,500/oz but WisdomTree forecasts this value to rise to $1,550 in Q2 2020. This is indicated by US 10-year treasury yields and the US dollar basket holding around current levels at 1.65% and 97, respectively.
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This prediction is a conservative outlook on the market as speculative positions, which are currently high, don’t remain at this level for long periods. However, if this position was to continue until Q2 2020, WisdomTree’s model indicates the price of gold could be closer to $1,815. If positioning were to rise to 400k contracts net long, then the value could rise even further to $1,875.
The introduction of investment vehicles, such as ETFs, is improving investors' access into gold and is mainstreaming the commodity. ETFs account for 1% of assets invested in gold.
Gold futures speculative positioning
Source: WisdomTree
Current geopolitical and financial risks which could drive the positioning in gold futures further, include:
Trade negotiations between the US and China reaching a stalemate
Fears that the Fed is loosening policy when markets are tight and inflation is stable
The likelihood of a no-deal Brexit
Argentina’s economy is sliding back into a crisis as the equity and bond market falls
Protests becoming violent in Hong Kong with the potential of an extradition bill being introduced between the independent state and mainland China
