Gold
– A review of 2018 and what to expect in 2019
Robin Bhar Head of
Metals Research SocieteGenerale CIB
Summary
Gold prices remained
under pressure in 2018 from a stronger US dollar and a lack of safe-haven
buying, but a floor around $1,200/oz has emerged. The divergence in monetary
policy between the US and the rest of the world, and the resulting strength in
the USD, is keeping a lid on gold prices for now, but we suspect prices could
start moving higher as the economic cycle matures and investors seek to
diversify their portfolios out of equities and into safe-haven assets, such as
bonds and gold. Our economists continue to expect monetary tightening to pause
after June 2019 as the risk of a recession in the US, if only mild, causes the
Fed to stop raising rates. While the physical market is likely to record yet
another year of supply surplus, central bank buying, and producer de-hedging
could help prices weather the market imbalance. Finally, given the significant
speculative short position in the futures market, we continue to see a
favourable risk-reward balance. We forecast gold prices to average $1,300/oz in
twelve months and to average $1,275/oz for 2019.
Our moderately bullish
outlook is premised mainly on the fact that managed money positioning is
vulnerable to short covering (record short) and to the building up of currently
low long positions. The main trigger for higher gold prices could come in the
form of a gradual asset rotation from equities and other risky assets into
bonds and safe-haven assets such as gold, as mainstream investors seek
protection from market turbulences and growing bearish sentiment. Moreover, the
downside is somewhat limited, with current gold prices representing a floor, as
bearish drivers are lacking, and fundamentals are neutral. We perceive the
current price as a floor that is reinforced by supply-side fundamentals, as
miners’ all-in-sustaining costs are rising and getting closer to declining gold
prices.
In 2018, we project
total gold output to reach 4,145t (95t up from 2017), moving even higher to
4,160t in 2019. This jump comes from scrap supply, which is forecasted to
increase by 135t (+11.2%) versus 2017, while mine supply is virtually flat. Two
factors partially offset the supply increase. Producers are forecasted to
de-hedge 50t, slightly more than last year, and central bank activity should be
more negative (net purchases). Combined, these two bullish forecasts decrease
2018 supply only by 43t yoy, which is not enough to mitigate the bearish scrap
supply.
Ignoring ETF flows, we
forecast a 117t decrease in total demand in 2018 to 3,505t and modest rebound
to 3,540t in 2019. Taken by itself, this has a neutral and possibly bearish
influence on prices. Nevertheless, we project a quite stable physical demand,
with jewellery and industrial demand representing a solid foundation. This
stable demand should protect gold prices from a sharp decline.
Since the beginning of
the year, the main fundamental driver of gold prices has shifted from real
interest rate expectations towards USD relative strength. The world is
currently experiencing a myriad of geopolitical and economic risks, including
Middle East tensions, several European political issues, and the US position on
global trade. We believe the influence on the gold price is asymmetric, and an
escalation of tensions would have a more bullish effect than the bearish effect
implied by an easing situation.
Over the next 12 months,
appreciation of EM currencies, after their recent weakness, against USD is the
biggest upside risk (+$140/oz), while Chinese retaliation to US tariffs through
the FX market is the biggest downside risk (-$50/oz). Other upside risks to our
outlook mainly relate to escalating tensions in the Middle East, weaker USD
against EM currencies, slower US monetary tightening and European economic
policy uncertainties. Other downside risks to our outlook mainly come from easing
political tensions and increases in US real interest rates. We view the upside
risks and downside risks to our base case forecasts as balanced.
Disclaimer: Views are
personal and not the views of the publisher.