What is in store for gold prices in Q1 2020?

This year prices went up to record levels on the back of recession worries and down with any glimmer of hope on the US-China Trade War

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As a roller-coaster year for gold draws to an end, we turn our attention to expectations for the first quarter of 2020.

At the beginning of 2019, even the most confident gold investor would have had difficulty predicting the precious metal's rapid rise in the second half of the year. Gold was trading under $1,300 per ounce until June when global recession fears based on the US-China trade disputes set in strongly in the markets. From then on, the precious metal pushed upward through several psychological levels, rising to $1,550 per ounce by September.

In October, US-China trade tensions eased somewhat after the their leaders announced a "phase-one" agreement to settle their differences. The gold price decreased along with investor fears, but hovered above $1,450 an ounce. After all, there were delays before the agreement was signed and the markets are more reassured by actions than words.

The reassurance the markets were looking for came last weekend when the US and China said they had reached a partial truce, and will work quickly towards having the deal signed off.

Gold prices reacted by levelling and are likely to face resistance as market worries over a global recession lift. Year-to-date, the precious metal has seen double-digit gains but it may now come under pressure, reflecting an easing level of trade uncertainty. The prospect of lower import/export tariffs between the US and China may lead the way to smoother trade relations.

However, a phase-one trade deal is still supposed to be followed by a final and second agreement, meaning there is still the prospect of tariffs being used in the high-pressure negotiations between the world’s two largest economies.

What has thankfully been averted at the last minute is the December 15 deadline, when a new round of tariffs was scheduled by the US on $160 billion worth of Chinese goods, meaning that most of China’s exports to the US would have been subject to high taxes. By the same token, if the deal had not been confirmed, China might have pulled the trigger on a blacklist of US companies operating in the Chinese markets, escalating the pressure on trading and business.

So much for 2019. Looking ahead, the following factors may be the most influential for gold prices in the first quarter.

US-China Trade War and Brexit

If the phase-one trade deal is not quickly followed by phase two, it is reasonable to expect more uncertainty on an ongoing basis early next year. Any adverse developments in the US-China trade dispute may cause spikes in gold prices.

In addition, Brexit is another source of concern, provoking safe-haven buyers and risk-averse investors to turn to gold when the headlines turn sour. Yet another Brexit deadline looms for the markets on January 31, raising the possibility that gold prices may regain momentum. The possibility that Brexit may actually happen this time has increased as the Conservatives have won more seats in parliament, which makes it easier for the agreement on withdrawal from the European Union to be passed through.

Brexit negotiations are still ongoing and a deal was not yet announced at the time of writing, meaning that any investors nursing "Brexit ulcers" might not be relieved anytime soon.

Economic data

Headlines might be confusing, sentiment might be an overreaction and negotiators might over-promise, but underlying economic data rarely lies.

During the first quarter, full-year GDP data for China and the US will be released, meaning that gold prices may be supported if the numbers are worse than expected.

I am watching for more weak signs in each country's manufacturing sector. Jobs growth is mixed, with some reports coming in better than expected and others coming in worse, so stability in this sector remains a source of concern.

China’s GDP has definitely been affected by the trade dispute with the US. At 6 per cent, it is still growing but would likely be more robust if tariffs were not dampening sales to American consumers.

The phase-one deal is a bright spot for agriculture and manufacturing, but it may take time for the markets to recover and get back to pre-trade war levels.

US dollar strength

The US Federal Reserve has been dovish this year, cutting interest rates three times so far. This has had a temporary weakening effect on the dollar which was followed by a return to strength as the currency competes with gold for safe-haven investment.

If the dollar remains strong in the first quarter, I'd expect this to create resistance for gold prices. By the same token, positive developments in trade disputes would likely squeeze gold prices.

To summarise, gold prices will likely go up if Brexit and trade war uncertainties remain or if weak economic data is released. On the flip side, prices will likely go down if the dollar remains strong or if any deals are signed and delivered in the Brexit and US-China trade negotiations.

Hussein Sayed is the chief market strategist at FXTM