gold

As the World Gold Council looks ahead, it expects that the interplay between market risk and economic growth in 2019 will drive gold demand.

In this article the World Gold Council explores three key trends that it expects will influence its price performance:

  • financial market instability
  • monetary policy and the US dollar
  • structural economic reforms

Against this backdrop, the Council believes that gold has an increasingly relevant role to play in investors' portfolios.

2018 ups and downs

Gold’s price seesawed in 2018 as investor interest ebbed and flowed despite steady growth in most sectors of demand.

Gold faced significant headwinds for most of the year.

The dollar strengthened, the Fed continued to hike steadily while other central banks kept policy accommodative, and the US economy was lifted by the Trump administration’s tax cuts.

These factors fuelled positive investor sentiment which, in turn, pushed US stock prices higher, at least until the start of October.

But as geopolitical and macroeconomic risks continued to increase, emerging market stocks pulled back.

Eventually, developed market stocks followed, in a selloff led by US tech companies.

This resulted in short-covering in gold with its price ending the year near US$1,280/oz (-1% y-o-y).

Potential for growth and heightened risk in 2019

The World Gold Council expects that many of the global dynamics seeded over the past two years and the risks that became apparent later in 2018 will carry over.

And with them, it sees a set of trends developing that will be key in determining gold’s demand.

In turn, their interplay will be most relevant for gold's short- and long-term price behaviour.

The World Gold Council expects:

Increased market uncertainty and the expansion of protectionist economic policies will make gold increasingly attractive as a hedge.

While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Fed has signalled a more neutral stance.

Structural economic reforms in key gold markets will continue to support demand for gold in jewellery, technology and as means of savings.

Financial market instability

Globally, there were net positive flows into gold-backed ETFs in 2018.

While North American funds suffered significant outflows in Q2 and Q3, this trend started to shift in Q4 as risks intensified.

The World Gold Council believes that in 2019 global investors will continue to favour gold as an effective diversifier and hedge against systemic risk.

And it sees higher levels of risk and uncertainty on multiple global metrics:

  • Expensive valuations and higher market volatility
  • Political and economic instability in Europe
  • Potential higher inflation from protectionist policies
  • Increased likelihood of a global recession

Why gold why now

Gold’s performance in the near term is heavily influenced by perceptions of risk, the direction of the dollar, and the impact of structural economic reforms.

As it stands, we believe that these factors likely will continue to make gold attractive.

In the longer term outlook, gold will be supported by the development of the middle class in emerging markets, its role as an asset of last resort, and the ever-expanding use of gold in technological applications.

In addition, central banks continue to buy gold to diversify their foreign reserves and counterbalance fiat currency risk, particularly as emerging market central banks tend to have high allocations of US treasuries.

Central bank demand for gold in 2018 alone was the highest since 2015, as a wider set of countries added gold to their foreign reserves for diversification and safety.

More generally, there are four attributes that make gold a valuable strategic asset by providing investors:

  • a source of return
  • low correlation to major asset classes in both expansionary and recessionary periods
  • a mainstream asset that is as liquid as other financial securities
  • a history of improved portfolio risk-adjusted returns

A more tactical opportunity

In addition, gold speculative positioning in futures markets remains low by historical standards after hitting record lows in the final months of 2018. CME managed money net long positions stand near record low since 2006 – when data was first broken down by investor type.

Furthermore, net combined speculative positions, which go back further, are negative for the first time since December 2001.

And large net short positions have historically created buying opportunities for strategic investors, as such positions are prone to short-covering adding momentum to rallies in the gold price.