Gold has fared better than expected after the recent "phase-one" trade deal between the U.S. and China; however, improving market sentiment and further headway in trade talks may put additional pressure on the precious metal.
Analysts at UBS believe that investors building gold allocations amid a lack of confidence in the stock market, as well as a weaker dollar, may provide support to prices, though it may not be enough to justify the investment bank's base case gold price of US$1,600 per ounce for 2020.
"The boost in sentiment, the potential for better growth than we expect, the risk that the Fed keeps rates unchanged and real rates rise, and the possibility of further progress on trade talks would all weigh on gold," UBS analysts wrote in a Dec. 18 note.
The lack of significant movement in gold prices after the phase-one deal, which quashed the 15% tariffs on US$160 billion of Chinese goods that were scheduled to go into effect Dec. 15, suggests that the market had already priced in the optimism and was considering the remaining uncertainty, according to UBS.
In the near term, January has generally seen gold prices strengthening over the past decade, thanks to more physical demand from China ahead of the Lunar New Year holidays as well as some investors building up positions as part of portfolio rebalancing.
However, UBS believes that the demand for physical gold in China is likely to underwhelm, while the outlook for 2020 is uncertain. Any progress in trade talks between China and the U.S. and its effect on economic growth as well as possible movements in the yuan are likely to have a notable impact on prices.
"Demand expectations onshore seem to be quite subdued — participants are not expecting much improvement from this year's levels and flag risks to the downside," the analysts said.
RBC Capital Markets remained positive on gold prices in 2020, expecting them to come in higher than current levels and be sustainable around US$1,500/oz, though this is "not an impressively bullish story by any stretch."
"Underpinning this view is a great appreciation of risk set against the backdrop of an ongoing economic expansion," RBC analysts wrote Dec. 19.
RBC's U.S. equity strategy chief believes that U.S. stock markets are likely to be dominated by "moderation, turbulence and transition," which the bank's analysts believe make it prudent to maintain some level of gold holdings.
BMO Capital Markets downgraded its rating for Canadian gold producer Continental Gold Inc. to market perform and marked it a speculative investment, with a target price of C$5.50, which is equal to Zijin Mining Group Co. Ltd.'s all-cash takeover offer of C$5.50 per share.
Analysts at BMO said in a Dec. 16 note that the stock has potential to re-rate higher as construction at its Buritica gold project in Colombia continues to advance, but issues with local artisanal miners may present downside risk.
Another Canadian gold producer, Victoria Gold Corp., retained its "Outperform" rating from BMO Capital Markets, with an increase in the target price to C$14.00 from C$12.00 following a recent feasibility study for its Eagle gold project, part of the Dublin Gulch property in Canada's Yukon territory, where construction completed in September.
BMO expects a re-rating of Victoria Gold in 2020 as it looks to achieve commercial output in the second quarter and start producing over 200,000 ounces by year-end.
"We see the company positioned to benefit from the strength in the precious metals sector as it transitions to a producer or attracts a takeover offer," BMO wrote.