The 4 key factors to drive Bullion in 2018

In 2017, investors added gold to their portfolios as incomes increased, uncertainty loomed, and gold’s positive price momentum continued.

Over the course of the year the gold price rose across many major currencies. The Indian rupee and Chinese yuan gold price rose by 5.1% and 3.5% respectively, while in US dollars the gold price was up 13.5% – its biggest annual gain since 2010 – outperforming all major asset classes other than stocks.

Looking ahead, World Gold Council believes four themes will drive global financial markets and influence gold’s performance in 2018:

Synchronised global economic growth

For the first time since the global financial crisis, the global economy is growing reasonably strongly, with all major economic regions contributing. World Gold Council research shows that continued economic growth underpins gold demand. As incomes rise, demand for gold jewellery and gold-containing technology, such as smartphones and tablets, rises. Income growth also spurs savings, helping increase demand for gold bars and coins.

Increased consumer demand also supports the investment case for gold and highlights its dual nature. Investors often focus on gold’s effectiveness as a hedge against financial shocks. But rising wealth underpins gold consumer demand, which, in turn, supports gold prices over the long-run. The interaction between investment and consumption also results in gold’s lower correlation to other mainstream financial assets, making it an effective diversifier.

Shrinking balance sheets and rising policy rates

Continued global economic expansion will likely result in tighter monetary policy. The Fed will take the lead as it seeks to shrink its swollen balance sheet – it plans to let US$50bn of treasuries and mortgage-backed securities mature each month. But other economies are also contemplating tighter monetary policies, and this shift from loosening towards tightening has been one factor behind the decline in value of the US dollar in 2017 and early 2018. This may continue, potentially helping gold again.

Of course, higher rates increase the opportunity cost of investing in gold, but we believe the implications for gold are more nuanced. We believe that the overall level of interest rates will remain low by historic perspectives: developed market debt remains stubbornly high and emerging market debt has further increased. This should make governments, corporates and households more sensitive to changes in interest rates than during periods of lower debt levels. The performance of gold in 2017 demonstrated that increases in US rates do not automatically mean lower gold prices, and this is consistent with our analysis of gold’s performance during different US real-rate environments. World Gold Council analysis reveals that when real rates are between 0% and 4% gold’s returns are positive, and its volatility and correlation with other mainstream financial assets are below long-run averages.

Frothy asset prices

Asset prices hit multi-year highs around the world in 2017. In the US, the S&P 500 is at an all-time high and its cyclically adjusted price earnings ratio (CAPE) is at its highest level since the peak of the dot-com bubble in 2000. Investors’ hunt for returns has fuelled rampant asset price growth elsewhere: in China, for example, property prices almost doubled in the period January 2015 to October 2017.

Strong global asset markets may continue for a while, however. Although analysts and commentators have been ringing the warning bell for some time, equity markets have marched steadily higher and credit standards have slipped lower. Should global financial markets correct, 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

Over the past decade, financial markets have become more transparent and efficient, with new products broadening access to investors of all shapes and sizes. The gold market is no exception and over the past few years it has made great strides in terms of transparency. The London over-the-counter market – historically opaque – witnessed two key developments in 2017.

The London Bullion Market Association launched a trade-data reporting initiative, which could bear fruit in 2018. And the London Metal Exchange launched LMEprecious, a suite of exchange-traded contracts intended to improve price transparency and efficiency of transacting in the London wholesale market. Plans are afoot to develop an exchange in India too. This, along with the government introducing mandatory hallmarking regulation, is part of efforts to formalise and modernise the world’s second largest gold market, to the benefit of consumers and participants.

In World Gold Council view, these four factors could, on balance, be supportive for gold demand in 2018 and adding the constant potential for a sudden uptick in economic, financial market or geopolitical uncertainty, they believe investors and households could find many reasons to continue to rely upon a trusted asset to protect wealth and diversify their portfolios.

Courtesy: Scrap Register