Slowing growth fuels demand for yellow metal as safe heaven

Gold bulls are betting there’s more to the metals rally than rates.

Bullion is on its way to a third straight monthly gain, trading near a six-year high as central banks signal easier monetary policy. The Federal Reserve is expected to cut U.S. interest rates by a quarter percentage point on Wednesday. Gold analysts and traders are looking for affirmation from Fed Chairman Jerome Powell that further reductions are in store to justify the run-up, with some saying the precious metal may have gotten ahead of itself.

The market can easily pull back in the wake of a cut without the overall gold rally being altered, and that’s quite likely, said James Steel, chief precious metals analyst at HSBC Securities (USA) Inc. Trade issues are probably still going to be supportive. The general geopolitical background is supportive, and we could see some financial market volatility, which would likely be helpful for gold on safe-haven buying.

With spot gold trading near $1,431 an ounce hours ahead of the Feds decision, the following charts show the broader bullish case for owning bullion:

Haven Demand

Gold is benefiting as signs of slowing economies fuel demand for the metal as a haven asset. There are signs that things could get worse before they get better for global growth. The International Monetary Fund further reduced its outlook, already the lowest since the financial crisis, saying the projected pick-up in 2020 is precarious. Singapore may underscore the IMF’s case, with economic data deteriorating in the export-reliant country, raising the risk of a recession in the former tiger economy.

A Fed Bank of New York gauge puts the risk of a U.S. recession in the next 12 months at the highest since 2008, and Societe Generale SA says bullion provides a bulwark against a recession next year sparked by trade wars and a slump in corporate-profit growth.

Industrial-Strength Weakness

Economies worldwide are under continued strain from slowing industrial demand. Chinas purchasing managers index on Wednesday remained in contractionary territory as pressures on exporters persist. A similar gauge in Europe slipped last week, driven by shrinking factory output in Germany and France.

Powell, talking about what’s going on with growth, said its more than just trade, that there’s something else going on, Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, said in a Bloomberg TV interview earlier this month. From our vantage point, its all about a cyclical downturn in industrial growth, including China. And its not over in China. That industrial downturn is continuing.

Comfort in Conflict

Gold in June posted the biggest monthly advance since the U.K. voted to leave the European Union three years ago. Concerns over Brexit continue to fester. A host of other potential trouble spots are now adding to the global acrimony, keeping investors awake at night. Those include unrest in Hong Kong, tensions over the Strait of Hormuz, and global trade frictions showing signs of spreading beyond the Trump-China fracas.

Bullions gains have come even amid strength this month in the dollar, which can often diminish the appeal of the metal.

Its because theres a high level of uncertainty, HSBC’s Steel said. There are many improbables that I think a lot of the market cant get a grip with, and in a case like that, increasing your gold holdings is probably a judicious thing to do because it is one of the few things you can buy that is liquid and is on nobody else’s credit.

Earlier this month, hedge funds and other large speculators boosted their bullish position in U.S. gold futures and options to the highest since September 2017, government data show. Billionaire investor Ray Dalio, the founder of Bridgewater Associates, said in a LinkedIn post that he sees a paradigm shift in investing coming in the next few years.

Assets that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold, Dalio said in the post.

Set to Cool?

Not all investors are convinced golds rally will stick after the Feds decision on Wednesday.

John LaForge, the head of real asset strategy at Wells Fargo Investment Institute, which oversees $1.9 trillion, said he’s expecting prices to cool because the market is baking in too much negative-yielding debt in the future.

I believe that Fed rate cuts are built into the price of gold and that it is overvalued, LaForge said by phone. If the Fed disappoints, or even if gold buying backs off because Fed cutting is now in the cards, Id suspect that gold will back off to the mid-$1,300s and reset investor expectations.

Kristina Hooper, chief global market strategist at Invesco Ltd., which oversees $1.2 trillion, said that while the gold market may be getting ahead of itself, she remains positive on the metal.

When central banks are looking to buy assets, they are running out of options, she said in an interview. Its like the person who’s got everything: what to get the central bank that’s bought everything? Gold is still an asset class they will look to”