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Gold to keep shining in 2020 amid economic uncertainty, analysts say

After rallying in 2019, gold is set for a solid performance in 2020 amid economic uncertainty and the emergence of monetary stimulus, analysts said.

Gold began the year trading a little under US$1,300 per ounce but has rallied by about US$200/oz and exceeded US$1,500/oz in August, buoying interest in the yellow metal as a safe-haven investment and optimism in the gold mining sector.

"Gold prices and other precious metals are likely to remain supported as long as (real) yields remain low or even negative and economic uncertainty persists. While speculative long positions in gold are high, we see no clear catalyst to trigger a major unwind of these positions," Credit Suisse analysts said in a 2020 investment outlook.

RBC Dominion Securities analysts Josh Wolfson and Melissa Oliphant took a similar view, noting that economic uncertainty and monetary stimulus have driven greater interest in gold, while alternative safe-haven investments have become less attractive.

"In our view, policy response and its impact on markets will remain an overwhelming price factor for the foreseeable future, and constructively, the ability to reverse ongoing policy stimulus represents a challenge for central banks. However, real rates, a key driver for gold prices, are already at extreme lows and further compression from today's levels from this response could be limited in scope," RBC Dominion said in a Dec. 4 note.

With a supportive outlook for gold, Wolfson and Oliphant outlined a positive view on the gold mining sector. They said gold miners have made strides in recent years to repair balance sheets, drive down operating costs and return capital to shareholders. These factors limited downside risks for gold equities, according to the analysts.

Indeed, several gold miners reported surging profits in the third quarter on the back of strong gold prices and steady operating costs. Among larger miners, Barrick Gold Corp. and Newmont Goldcorp Corp. swung year over year from net losses of US$412 million and US$145 million, respectively, to net profits of US$2.28 billion and US$2.18 billion.

Stronger gold mining profits have also come amid sector consolidation. Bigger deals over the past year include Barrick acquiring Randgold in late 2018 and Newmont merging with Goldcorp in early 2019. More recent merger and acquisition activity has included Zijin Mining Group Co. Ltd. offering C$1.33 billion for Continental Gold Inc. and Kirkland Lake Gold Ltd. and Detour Gold Corp. signing a C$4.9 billion deal to merge. Barrick and Newmont also combined key Nevada assets in a joint venture announced earlier this year, aiming to drive down costs.

Pointing to profitability in the sector, BMO Capital Markets' precious metals equity team cast 2020 as a decent-looking year for gold and gold miners.

"This is now an industry that is profitable for the vast majority of producers, despite a drop in traditional retail and jewelry demand," the BMO analysts said in a Dec. 18 note.

Gold prices in the range of US$1,500/oz were well supported, according to the BMO team. They said that for gold to trade significantly higher, investors would need to rotate their portfolios driven by panic selling in other sectors, for example. As a downside risk, the analysts pointed to a possible risk-on rally with investors liquidating gold to fund it.

"While we do see a nascent industrial recovery in 2020, we do not see this as enough on its own to derail gold," the BMO analysts said.