Gold strategy 2020: Amid tension in Middle East, gold may be top bet for investors; check expected level

As an integral part of the portfolio, commodities have always been a great choice of investment, which not only offers great returns but is also an effective diversification tool to balance one’s portfolio. Leaving an eventful 2019 behind, the New Year-2020 brings with it several new opportunities for market participants. For the year 2020, we have selected certain commodities that are poised to draw investors’ attention as they chart their own path of action.

As a recap to the last year, it was a trade dispute between the US and China, concerns about a global economic slowdown, monetary policy easing by the major central banks which formed the macroeconomic landscape and led to episodes of volatility in the commodity markets. We had clear front-runners from the precious metals, energy as well as the base metals space in the form of gold, crude oil and nickel; all of which posted strong gains.

For the year ahead too, Gold seems to maintain its sheen and charm investors as it has broken out of its six-year long-range in international markets. Gloomy economic outlook as a fallout of trade disputes along with an environment of low-interest rates, as well as the uncertainty created by geo-political tensions in the Middle East, favors gold as a safe haven avenue to park funds. While the investment graph is already soaring with interest in gold-backed ETFs-where the holdings hit a new all-time high in the third quarter of 2019, central banks’ buying spree also bodes well for a positive outlook.

One of the key events in 2020 that could heighten volatility in financial markets is the US presidential elections and gold could be the prime beneficiary in a hazy scenario. As a long term strategy, one can accumulate gold on some declines near Rs.36300-36500/10gms zone, for upside territory of Rs.42500/10gms ($1650/oz) in international markets and further Rs.45000/10gms ($1750/oz) for the year 2020. A strong base for prices will, however, be seen at Rs.34200/10gms.

From the base metal pack, Nickel will again grab the center stage after the price exuberance witnessed in 2019, where it seems fortified on account of its own underlying fundamentals, even amid a deteriorating global economic environment. Tight supply, growing demand, and low stocks have been the catalysts driving prices of the metal. Indonesia, the largest producer of nickel, has decided to bring forward a ban on exports from 2022 to 2020, which has raised supply concerns and can accentuate strength in the metal for at least the initial part of the year. Alongside, growing consumption of metal in the electric vehicles market will be a positive factor. Decoding the cues, prices could scale up for an upside projection level of Rs.1180/kg, whereas the metal will find firm support at Rs.930-950/kg zone.

Another candidate which can provide favorable returns for the year is Natural Gas, which is apparently contrarian in nature as prices are trading close to two-year lows, due to high production and low demand in the US. However, as a divergence, total demand has remained elevated for several years. Major economies like China and other non-OCED countries are joining hands with the West and opting for natural gas as an alternative and eco-friendly energy source.

While demand could be seen picking up in Asia, low prices offer bargain buying opportunities. Demand for cleaner fuels has become the theme and natural gas could be the bona fide winner with this global drive. Prices seem to reverse course from lower levels of close to Rs.140-145/mmbtu zone, from where they can witness recovery initially towards Rs.215/mmbtu level, and a breakout of the same would lead to the strapping upside towards Rs.280/mmbtu mark for the year.

(The author is VP-Metals, Energy & Currency Research, Religare Broking. The views expressed are the author’s own.)