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Gold’s prospects in 2019 are positive, especially during the latter part of the year

Philip Klapwijk Precious Metals Insights Limited

 

Gold’s reboundin December means that its performance in 2018 can be considered merely ‘lacklustre’ rather than full-on ‘disappointing’, which would have been a better description for much of the year.  On the other hand, a tiny gain in the full year average for the US dollar price together with a smallish loss intra-year is not that bad an outcome given the economic headwinds gold has had to cope with in 2018.

 

First and foremost, after its precipitous decline in 2017 that spilled over into the first part of 2018, the US dollar has rebounded strongly.  In particular, from mid-April through to mid-August the American currency appreciated by nearly 8% basis the DXY index.  Over the same period gold slumped by more than $170/ounce to reach its low for the year on 17th August of $1,177 basis the LBMA’s a.m. price.

 

Dollar strength has owed much to tighter US monetary policy and a related boost to interest rate expectations.  The Fed has hiked interest rates four times in 2018 and the cumulative 1% rise in the Federal Funds rate over the year has seen it climb to 2.25%, basis the lower bound of the central bank’s target range.This also means that US short term rates have again become marginally positive in real terms given inflation around the 2% mark. Positive real interest rates are usually a major headwind for gold prices. 

 

Gold has also for much of 2018 had to contend with strong gains in US stock prices.  The S&P 500, for example, after a weak start to the year due in large measure to concerns about US trade policy, had a stellar run betweenearly April and the latter part of September, gaining over 13% during this period.  It is, of course, in contrast the dramatic slide in stock prices during December that has driven gold’s comeback over recent weeks.  Indeed, returning to gold’s performance over the course of the last 12 months, this now looksnot too shabby set against the far larger intra-year loss recorded by the US stock market.

 

Turning to the outlook for gold in 2019, it is probable that US stocks will move at best sideways rather than embark on a renewed bull run over the next 12 months.  One good reason for thinking so is that the US economic expansion, which has been extended by the Trump tax cuts, is now very ‘long in the tooth’.  (In fact, were it to continue through to the middle of next year it would be longest post-WW2 expansion on record.)  There is a high chance, therefore, that by the latter part of next year the US economy will be clearly weakening.  This will have several other consequences that will be gold-friendly.  First, the Fed will halt its interest rate rises and talk will grow of possible rate cuts in future.  Second, prospects of lower growth, if not recession, coupled with rate cuts will weaken the US dollar.  And, finally, the US Federal budget deficit will explode.  It already has hit 3.9% of GDP in Fiscal Year 2018.  Lower tax revenues and higher outlays would see it move much higher still.

 

Gold’s prospects in 2019 are thus rather positive, especially if the focus is on the latter part of the year. Towards the end of the period a breakout above the $1,360 level (early 2018’s high watermark) is eminently feasible.  Were this to occur, sister metal silver could well challenge the $20 mark, taking into account the white metal’s currently ‘over sold’ condition (indicated by the gold:silver ratio well above 80:1) and assuming the general tendency for silver to outperform gold in a rising market for the two precious metals.

 

Disclaimer: Views are personal and not the views of the publisher.