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Changing Tastes Will Dull Gold Prices

Jewelry won't fill the gap when today's investment demand becomes tomorrow's recycled supply.

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2019 saw the resurgence of gold investment demand, and subsequently, gold prices, which spiked nearly 20% in the third quarter to about $1,550 per ounce. A similar rapid appreciation occurred in early 2016, which, at the time, we said would not last. Though our view proved true in the following months, today's environment is different. With the Federal Open Market Committee cutting the federal-funds rate three times since August 2019, gold's investment case has strengthened. We expect 2020 gold demand to be 8% higher than it was in 2018, leading to our 2020 price forecast of $1,500 per ounce.

However, when it comes to gold as an investment, today's demand is tomorrow's supply. Investment-driven buyers, especially through exchange-traded funds, can quickly sell when real interest rates rise. ETF-held gold has reached record levels equivalent to roughly a year's worth of mine production, and its unwinding would significantly weigh on prices. Furthermore, the vacuum left by declining investment demand won't be filled by other categories. A combination of government initiatives and shifting preferences is driving slower growth in jewelry demand in China and India, the two largest markets, despite rising incomes. As such, we expect midcycle gold demand to be 9% lower than our near-term forecast, leading prices to decline to our midcycle forecast of $1,250 per ounce in real terms by 2022.

Kristoffer Inton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.