Gold Projected to Beat the Market in 2020: CLSA

Gold will outperform the S&P 500 Index in 2020. That’s one of several projections made by CLSA in its just-released “Global Surprises 2020” report.

The Hong Kong investment firm has an impressive track record when it comes to making market predictions—last year it had a 70 percent hit rate—so it may be prudent to take this one seriously.

I’ll have more to say on this in a moment. First I want to share with you an eye-opening conversation I had this week at Harvard Business School (HBS), where I’ve been attending the annual CEO Presidents’ Seminar and going over case studies involving Netflix, Amazon and more.

As you know, the coronavirus has disrupted day-to-day life in many parts of China and the surrounding region. That includes Hong Kong, whose economy is being served a one-two punch from not just the outbreak but, before that, the months-long protests.

It was the latter topic that I discussed with Patrick Wang, billionaire chairman and CEO of Hong Kong-based Johnson Electric, who happened to serve as my team leader at Harvard. Patrick managed to escape China many years ago with small bricks of gold, and later studied electrical engineering at Purdue University in Chicago.

Patrick brought to my attention that the Hong Kong protests go much deeper than a local spat between young college students and the police. Global forces have gotten involved and are actively financing the side they hope to see “win.”

A large number of the protesters, for instance, received training in Oslo, Norway—at the Oslo Freedom Forum—on how best to mobilize activists, keep ranks, deal with police and more. They returned to Hong Kong with a new set of strategies that perpetuated their demonstrations for months, until the coronavirus outbreak brought things to a halt.

Not only that, but the Hong Kong activists’ strategies are being embraced and mimicked by other demonstrators around the world, including those in Spain’s Catalan region. As Patrick said, young activists there, who seek independence from Spain, have lately copied many of the Hongkongers’ techniques, going so far as to march with umbrellas and occupy Barcelona’s international airport.

Of course, this level of organization and training requires financing from someone with deep pockets. Patrick believes it could be George Soros, who has a history of supporting similar civil movements around the globe through his Open Society Foundations.

At his annual dinner at the World Economic Forum (WEF) in Davos, Switzerland, the 89-year-old billionaire investor praised the Hong Kong protesters, telling attendees that it’s been a “most successful rebellion,” and that it has “the overwhelming support of the population.”

I don’t know if Soros is personally involved, but it’s worth reminding readers that back in 1998, he tried and failed to break the Hong Kong dollar’s peg to the U.S. dollar. Could he be trying the same right now? Again, I don’t know, but it raises additional uncertainty as well as the question of how much is happening behind the scenes.

Gold: A Valuable Portfolio Hedge to Macro Uncertainty

That brings us back to gold. Writes CLSA’s head of research Shaun Cochran: “If investors are concerned about the role of liquidity in recent equity market strength… gold provides a hedge that could perform across multiple scenarios.”

Indeed, gold is one of the most liquid assets in the world with an average daily trading volume of more than $112 billion, according to the World Gold Council (WGC). That far exceeds the Dow Jones Industrial Average’s daily volume of approximately $23 billion.

The yellow metal, Cochran adds, can be particularly useless in an era of perpetually loose monetary policy: “[I]n the event that growth disappoints the market’s expectations, gold is positively leveraged to the inevitable policy response of lower rates and larger central bank balance sheets.”

As I’ve pointed out many times before, gold has traded inversely with government bond yields. The recent gold rally has largely been driven by the growing pool of negative-yielding government debt around the world, now standing at $13 trillion. Here in the U.S., the nominal yield on the 10-year Treasury has remained positive, but when adjusted for inflation, it’s recently turned negative, despite a strengthening economy. What’s more, the Federal Reserve’s balance sheet has begun to increase again. It now holds about 30 percent of outstanding Treasury debt, up from about 10 percent prior to the financial crisis.

I can’t say whether gold will beat the S&P this year or next, but what I do know is that the yellow metal has been a wise long-term investment. For the 20-year period through the end of 2019, gold crushed the market two-to-one, returning 451.8 percent compared to the S&P’s 223.6 percent. That comes out to a compound annual growth rate (CAGR) of 8.78 percent for gold, 4.03 percent for the S&P.

Manufacturing Turnaround Has Begun

U.S. manufacturers started 2020 on stronger footing, a welcome turnaround after contracting for five straight months. January’s ISM manufacturing purchasing manager’s index (PMI) clocked in at 50.9, indicating slight growth. Up from 47.2 in December, this represents the biggest month-over-month jump since August 2013, when the PMI increased to 55.4 from 50.9 in July.

This may also mark the end of the recent manufacturing bear market, prompted by the trade war between the U.S. and China. Although relations between the world’s two biggest superpowers remain strained, to say the least, we’ve seen improvements lately that hint at better days. Both sides signed a “Phase One” agreement in mid-January, and this week, China announced it would be cutting tariffs in half on as much as $75 billion of U.S.-imported products.

The coronavirus is a new development that has disrupted global trade, but there’s reason to be optimistic, as the PMI makes clear.

To read my full comments on the coronavirus, and its impact on Chinese and Hong Kong stocks, click here!

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Gold Market

This week spot gold closed at $1,570.44, down $18.72 per ounce, or 1.18 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 3.34 percent. The S&P/TSX Venture Index came in off just 0.18 percent. The U.S. Trade-Weighted Dollar surged 1.36 percent.

Date Event Survey Actual Prior
Feb-2 Caixin China PMI Mfg 51.0 51.5 51.5
Feb-3 ISM Manufacturing 48.5 50.9 47.8
Feb-4 Durable Goods Orders 2.4% 2.4% 2.4%
Feb-5 ADP Employment Change 157k 291k 199k
Feb-6 Initial Jobless Claims 215k 202k 217k
Feb-7 Change in Nonfarm Payrolls 165k 225k 147k
Feb-13 Germany CPI YoY 1.7% 1.7%
Feb-13 CPI YoY 2.5% 2.3%
Feb-13 Initial Jobless Claims 210k 202k


  • The best performing metal this week was palladium, up 1.44 percent as Jeffrey Currie, head of global commodities research at Goldman Sachs, commented he sees the potential for palladium to test $3,000. With Friday’s gain, gold saw a third straight day of positive momentum as concerns of economic fallout surrounding coronavirus outweighed stronger-than-expected U.S. job gains. Holdings in gold-backed ETFs surpassed the record set in 2012, hitting 2,573.9 tons on Monday, according to Bloomberg data.

  • Russia’s gold reserves grew in January to $562.3 billion, up from $554.4 billion in December. China’s gold reserves remained flat over the same time period. Turkey’s holdings in gold rose $680 million from the previous week to now total $27.5 billion as of January 31.
  • Calibre Mining Corp announced initial drill results from its El Limon project in Nicaragua, including 18.65 grams per ton of gold over 5.1 meters. CEO Russell Ball said in the press release: “We ramped up the program significantly in January and I am confident that our 2020 drilling campaign will deliver positive results in this world-class, low sulfidation epithermal district.”


  • The worst performing metal this week was silver, down 1.89 percent despite hedge funds boosting their bullish positioning in the metal this past week. The price of gold fell early in the week over fears that the coronavirus would hamper Chinese demand for the yellow metal. Analysts at Citigroup Inc. wrote in a note this week that “retail coin and jewelry demand in Asia is a negative risk for gold markets, particularly in China where gold premiums have started to soften given GDP downgrades and coronavirus risks.” China is the world’s top consumer of gold.
  • India’s gold imports fell to 21.7 tons in January from 45.9 tons a year earlier – a drop of 53 percent. Bloomberg writes that record-high domestic prices and a slowdown in economic growth are behind dramatic decrease. The World Gold Council (WGC) recently showed that full-year purchases fell 14 percent in 2019. Americas Gold and Silver Corp., a North American precious metals producer, said that it has temporarily stopped mining and processing at its Cosala Operations in Mexico due to a blockade by workers at the facility. JPMorgan Chase & Co might face criminal charges and be subject to fines regarding its involvement with alleged manipulation in the precious metals market, reports Bloomberg News.
  • According to a report by law firm Bryan Cave Leighton Paisner, private equity investments in mining fell to $500 million in 2019, down from $2 billion the year prior – a drop of 75 percent. The firm said private equity is now focused on raising additional funds for existing investments rather than looking for new deals.


  • The London Bullion Market Association (LMBA) released its gold price forecasts for 2020 and the consensus is looking for double-digit increases. The average forecast is $1,558.90 an ounce, with the highest at $2,080 and the lowest at $1,300. Analysts are expecting more volatility, as the range between the high and low prices is $780, much bigger than last year’s range of $325.
  • Anglo American Platinum Ltd. CEO Chris Griffith said in an interview this week that the rally in palladium isn’t a bubble because there is still a supply deficit of about 1 million ounces. “That’s a massive shortfall, and that’s making prices rise.” Griffith added that prices will be supported until automakers start substituting palladium with platinum.
  • Bloomberg reports that AngloGold Ashanti Ltd. is moving away from South Africa and instead toward the Americas. The world’s third largest gold producer is looking at projects in Colombia and Nevada, according to CEO Kelvin Dushnisky. “The market will always be receptive to good projects, and there are quality assets. The reason we want to bring them into production is part of our objective to bring new, longer life, lower-cost operations.” AngloGold has just one mine left in South Africa and is looking for a buyer. Angolan state-owned diamond mining company Endiama EP is looking at selling as much as 30 percent of its shares in an IPO in 2022, reports Bloomberg.


  • Barrick Gold CEO Mark Bristow confirmed that the company is not planning on merging with Freeport-McMoran, but that he is interested in Grasberg mine in Indonesia. Bristow said “if you’re going to be a world-class gold miner, you’re going to have to accept copper. In ten years’ time the most strategic metal on this planet is copper, if you believe the EV story, and I do.” The Freeport Grasberg mine in Indonesia is a tier-one copper asset because it is high grade and has a long life. However, the mine might not be the best potential acquisition, as Indonesia likely would not be considered a tier-one location by the market.
  • Sibanye Gold Ltd. CEO Neal Froneman expressed that South Africa’s president is running out of time to attract investments in the country’s mining industry, reports Bloomberg. “There has been a distinct lack of turnaround, if anything we have gone backward.” Sibanye is increasingly looking at doing business in West Africa, the Americas and Australia due to the risks of weak economic growth and high debt in his home country.
  • The Commerce Department announced on Monday that the Trump administration is moving ahead with new rules that would clear the way for the U.S. to apply punitive tariffs on goods from countries accused of having undervalued currencies, reports Bloomberg News. The rules would allow the U.S. to impose duties on goods from countries accused of manipulating their currencies, even in cases the country hasn’t been found guilty of doing so by the U.S. Treasury.

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Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 3.00 percent. The S&P 500 Stock Index rose 3.17 percent, while the Nasdaq Composite climbed 4.04 percent. The Russell 2000 small capitalization index gained 2.65 percent this week.
  • The Hang Seng Composite gained 4.58 percent this week; while Taiwan was up 1.02 percent and the KOSPI rose 4.39 percent.
  • The 10-year Treasury bond yield rose 7 basis points to 1.583 percent.

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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