Speculating The Future: Gold 2018

With fluctuating fortunes in abundance, the gold markets observed a memorable 2017. Having commenced the year at a reasonable $1150.33 per troy ounce before closing at $1302.61 per troy ounce by the end of the year, the bullion performed relatively well given that the global economy picked up coupled with the Federal Reserve hiking the interest rates three times. Against the backdrop of the preceding factors, the price of gold garnered a positive return of 13.24%, the highest annual gain since the merry days of 2010. In hindsight, it also outperformed numerous other asset classes. With 2018 upon us and a month of trading done and dusted, the article dwells on four key themes that could drive the gold markets in 2018.

SYNCHRONIZED GLOBAL ECONOMIC GROWTH

The global economy is returning back to normality since the economic crisis ten years ago. The global growth increased in 2017 and the market pundits expect the trend to continue in 2018. The US and the European economy have expanded with unemployment rates falling in the recent years. China, the largest consumers of gold, will continue to grow with the nature of its growth changing from investment-driven to consumption-led model. Although it can affect the growth rate, the markets expect a more balanced model greatly aided by the One Belt One Road Initiative. After the initial shocks of the demonetisation policy and the new Goods and Service Tax (GST), India is expected to have a good run in 2018 with improving transparency, broadening tax base and incorporation of the informal sector into the formal sector. The perpetual global economic growth will drive the demand for the bullion. As the income rises, demand for gold jewellery among others inclines. Likewise, the income growth will spur savings, which would in turn help increase the demand for gold bars and coins. Although investors often focus on gold and other precious metals as a hedge against financial uncertainties, rising wealth will enhance the demand which will support the prices of gold in the long-run.

SHRINKING BALANCE SHEETS & RISING RATES

With continuation of the global economic expansion, it may result in further tightening of the monetary policy. Along with shrinking its balance sheet, the Federal Reserve is also expected to raise rates further. The markets have already priced in at least two hikes and a small chance of a third. As central banks around the world pumped trillions of dollars, pounds, euros and yen into the global economy and slashed interest rates to zero and in some cases below zero, the market volatility attained record lows with prices becoming increasingly correlated. The potential headwinds to gold may not be as strong as some may fathom. Like in the scenarios before, gold can help investors manage financial market risks. Historical evidence shows that when the rates are between 0-4%, the returns of gold are positive along with below long-run averages in volatility and correlation with other financial assets.

ASSET PRICES

The asset prices hit multi-year highs all around the world in 2017. In the US, S&P 500 was at an all-time high of 2698 by the year-end. Investors have also been forced to take on additional risk to generate additional returns. According to numerous market pundits, the bull market may continue into 2018 with S&P 500 scaling new heights of 2878.25 on January 28. Although market analysts have been ringing the warning bell, the equity markets have surged steadily higher. However, many traders are wary of the impending risks and are becoming cautious on their risk exposures. Should the global financial markets observe a correction, investors could benefit from having an exposure to gold as it has historically reduced losses during periods of financial distress.

MARKET TRANSPARENCY, EFFICIENCY AND ACCESS

The global financial markets have become more transparent and efficient with new products broadening access to investors of numerous magnitudes over the past decades. Likewise, gold markets have undertaken great strides in terms of transparency. Plans are stirring to develop an exchange in India to cater to the needs of the growing gold investors. Although this presents challenges aplenty in the form of quality assurance, price discovery and market liquidity, the momentum is building within the industry to develop and launch a national spot exchange and the government is also coming into act to rid the country of under-hallmarks. This has opened the doors to create a more efficient gold market and ensure that customers are well served by the gold industry. There are also signs of progress in reducing barriers to investing in gold. In Russia, the individual and institutional purchases of gold are subject to 18% VAT, the highest in the world. This might change this year. A draft amendment to the tax code for an exemption for gold has been submitted for consideration by the Government of Russia. Once approved, it may herald the development of a new market for gold investment in Russia.

CONCLUSION

The prices have already scaled $1365.87 per troy ounce on January 25, the highest since August 2016. With all signs pointing towards further bullish territory, we may observe yet another memorable ride in 2018.

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Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]