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Gold prepares to continue the bullish move, remain in trend

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Gold is preparing to complete the current year with an increase of more than 13%, which will mark the highest annual increase since 2010.

The outgoing year will be remembered by investors for the escalation of the trade conflict between Washington and Beijing, the threat of a future recession in the United States and the dovish reversal of the Federal Reserve.

The US central bank intended to raise rates twice in 2019, but in the first quarter it revised its mood.

Gold initially reacted to this with a growth of only 0.76% in the first quarter, but strengthened by 9% in the second quarter.

In addition to changing the Fed's monetary rate, throughout 2019, markets nervously reacted to news headlines on the subject of US-Chinese trade relations, which went from one extreme to another. Growing uncertainty and volatility played into the hands of the yellow precious metal.

In addition, the Treasury yield curve was inverted in August, which fueled fears of a recession in the United States. In addition, the German economy slowed down significantly, which also attracted the attention of the "golden bugs."

What to expect from precious metals next year? Will it be able to maintain an upward trajectory?

Growth factors

1. Dovish mood of the Fed

At the end of the December meeting, the US central bank made it clear that it was going to take a break in the cycle of easing monetary policy in 2020. This raised concerns that the next year may not be easy for the bulls in gold.

In the near future, the Fed does not plan to raise interest rates. For this, inflation in the country should confidently gain a foothold over the 2% mark, which so far seems unlikely.

Thus, it is hardly worth for the precious metal to wait for tricks from the regulator: it still adheres to a slightly dovish mood.

2. Fed balance

The Fed continues to build up its balance sheet. According to some estimates, its volume may exceed $4.516 trillion in May 2020 and reach a record high if the regulator continues to increase the balance at the pace observed over the past three and a half months.

In mid-September, the US central bank began to buy treasuries in order to calm the markets. Since then, the size of assets on its balance sheet has increased by more than $330 billion and currently stands at about $4.10 trillion. Many experts consider this a hidden quantitative easing.

Historically, all previous Fed expansion programs have boosted gold demand. When the Fed first launched such a program in 2009, its balance sheet was less than $1 trillion, and by 2014 it had grown to $4.5 trillion.

During this period, the precious metal rate increased from $800 to $1,200, noting in September 2011 a record high of $1,921.

3. The threat of recession in the United States

"Manufacturing problems, a near-full-time labor market, and periodic inversions in the yield curve suggest that the longest period of economic growth in the US seems to be drawing to a close," said Bloomberg analyst Eddie van der Walt.

According to a consensus estimate of economists recently surveyed by the agency, the likelihood of a recession in the next 12 months in the United States is 30%.

"Since 1960, the S&P 500 index reached its pre-recession peak on average six months before the start of the fall in GDP. This means that such safe havens like gold can go up even in anticipation of a recession," said Eddie van der Walt.

"Economic downturns tend to lower nominal and real rates, lowering the opportunity cost of gold ownership, which is seen as a hedge of inflation. Since 1990, the correlation of precious metal on a monthly chart with the yield on two-year bonds of the US Treasury was -0.3. Gold bullion vaults must be filled, because negative nominal rates will affect everyone: from institutional investors to wealthy individuals," he added.

"If the markets begin to be laid for a recession in the United States, then the levels of $1,700- $1,800 per ounce will be quite achievable," the expert predicts.

4. World central bank runs out of ammunition

The Bank of Japan and the ECB have long lowered interest rates to negative values and seem to have reached their limits.

So, the BOJ has been implementing the QE program for seven consecutive years, but inflation in the country is still far from the 2% target.

In this regard, fears are growing more and more: when the next global recession breaks out, regulators will have no choice but to helplessly watch what is happening. Of course, they can try to plunge interest rates into the zone of negative values even more, which will push investors to gold more strongly.

The global bond market has a similar picture. The yield of many securities slipped into a negative, and this also plays in favor of precious metals.

Potential obstacles

1. Trading optimism

Washington and Beijing recently reached an agreement on the first phase of a trade deal.

Many experts continue to consider the agreements reached by the parties on the abolition of part of trade tariffs as a symbolic gesture that does not solve serious fundamental problems.

However, the presidential elections in the United States will be held in November 2020. This circumstance may force Trump to conclude a full-fledged deal with China. Even if such an agreement is not reached, the head of the White House will have to stop the hostilities on this front, which will contribute to increasing the risk appetite for investors and hit gold demand next year.

2. Recovery of the global economy

According to a number of reputable organizations, the state of the global economy should improve somewhat in 2020. The IMF and OECD forecast that next year global GDP growth will accelerate to 3.4%.

Hopes and markets also rest on global economic growth.

Recently published macro statistics provides reason to believe that the drawdown of the global economy is ending. However, it has not yet begun to gain momentum. Perhaps, as often happens, investors are again over-enthusiastic and run ahead of the engine.

Thus, next year the situation as a whole will be in favor of gold, and the decline in precious metals due to the growth of trade optimism is unlikely to be long-lasting.

The material has been provided by InstaForex Company - www.instaforex.com