The following is an edited release from Metals Focus in London, based on its annual Gold Focus report. For more information and to access the full report, visit www.metalsfocus.com.
After a good December run, gold has moved sideways in a tight range since the start of 2018, as markets have lacked decisive triggers. Metals Focus says that such range-bound conditions are likely to also persist over the second quarter, as conflicting drivers are at play. However, we expect gold prices to break higher in the second half of 2018, potentially testing US$1,450 before year-end.
Gold is facing a number of challenges, most of which were also present throughout 2017. In addition, investors’ continued preference for equities — despite the volatility spikes that we have seen at times this year — together with rising bond yields, are headwinds for gold prices. The recent resilience of the U.S. dollar and ongoing rate hikes by the Federal Reserve are also negative for gold. However, Metals Focus expects that global market conditions will become positive for the metal as the year progresses.
Nikos Kavalis, director of Metals Focus, said: “Our view that prices will rise is based on our belief that the dollar will resume its secular downtrend. Real short-term rates will also stay negative for some time to come.
“The twin deficits in the U.S. [fiscal and trade] will lower investor appetite for bonds, and the yield curve may flatten further,” Kavalis added. This, coupled with the potential for a correction in equities, will benefit gold. Although U.S. interest rate increases may act as a headwind, their impact on the gold price will be limited, as they are largely priced in.
Macroeconomic tail risks will ensure that the gold price carries risk premium, even if they do not materialize. Among these, rising trade protectionism and the possibility of outright trade wars stand out. Geopolitical risks have apparently dissipated, given the recent thawing in U.S.-North Korea relations, but the potential for the U.S. to pull out of the Iran nuclear deal could unsettle markets.
In terms of gold’s own fundamentals, the consultancy expects jewellery fabrication will touch a three-year high in 2018, backed by growth in India and China. Physical investment is expected to improve 4%, while net official sector purchases could decline marginally. Gold mine supply, on the other hand, will mark a decade of growth, edging higher in 2018, albeit just 0.1%, to a new peak.
Metals Focus says that while global economic growth is optimistic, the consensus is too exuberant, as far as the medium-term is concerned. The consultancy adds that periods of global market turmoil will continue to emerge, accompanied by spikes in volatility. Meanwhile, given past synchronized rallies across different markets, there is significant scope for contagion. Kavalis added that “when, rather than if, equities correct, we will still be faced with depressed yields. At this point, investor rotation back into gold, even on a modest scale, should help take it to around US$1,450 by year-end.”