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Gold & Silver Outlook 2019

Suki Cooper, Vice President and Precious Metals Analyst Commodities Research, Barclays

 

Gold and silver price risks are skewed to the upside in 2019, despite lacklustre price performance in 2018. Both metals tumbled in 2018, against a backdrop of dollar strength, the Fed tightening rates, and escalating trade tensions. The two main factors dominating relative commodity price performance in 2018 are likely to remain key drivers in 2019. The first is demand prospects amid market concerns about trade wars and China’s economic slowdown. These concerns, along with rising interest rates, have prompted disinvestment. The second key factor is geopolitics; however, this uncertainty has failed to trigger a flight to safety.

We expect gold prices to average USD 1,300/oz in 2019. The macro backdrop is set to unfold more favourably and prices have found downside support from fundamentals, even if this does not stem from the traditional source, i.e., the physical market.

Several headwinds that have capped gold’s upside momentum are set to ease in 2019 or even become tailwinds. Our FX strategists expect EUR-USD to weaken modestly, trading towards 1.20 by year-end. A weaker USD bodes well for gold, given it had been the main drag on prices for much of 2018. The USD rather than gold benefited from escalating trade tensions; as tensions have eased, gold has gained upward momentum. Our FX strategists now expect the USD-CNY to stay below 7.0 throughout 2019, removing another downside risk to gold. The strong correlation between gold prices and the Chinese yuan (CNY) had previously suggested that gold could dip below USD 1,200/oz for longer, had the CNY traded above 7.0 for a prolonged period. Further, our Rates strategists believe that US Treasury yields have peaked.

Although our economists expect the Fed to hike four times in 2019, the market should start to price in the end of the hiking cycle. Should the market scale back hiking expectations for 2019, amid an environment of the USD stalling and rates peaking, gold is likely to find a more supportive footing; particularly as recent price action suggests escalating uncertainty surrounding Brexit, and equity-market weakness could see gold benefit from a flight to safety.

On the downside, the physical market has been weaker than seasonal norms suggest it should be at the end of the year. Gold prices instead found support from central bank buying. Purchases are set to mark the strongest performance in three years, buoyed by new market entrants such as Hungary, Poland and India, as well as regular buyers such as Russia, Kazakhstan and Turkey. ETP investors have proved resilient while tactical investors are underinvested, suggesting scope to the upside when the macro picture turns more favourable for gold.

The silver market has been weighed down by gold’s softer price action but also copper’s weak performance. Industrial nor investment demand has supported silver, driven by heightened uncertainty stemming from trade tensions and the scaling back of subsidies in China and the US. However, it is the absence of retail investment demand that has pressured prices lower. But in an environment of slowing US growth, and US interest rates peaking, silver is more likely to shine again.

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