Juan Carlos Artigas – Director, Investment Research at the World Gold Council
2018 was a rollercoaster ride for Gold. The year saw consumer demand rose in many key markets, supported by positive economic growth. However, gold-faced headwinds from investment. President Trump’s Tax Cuts fuelled the long bull market in US equities for much of the year, while a strengthening dollar and rising US Interest rates acted as further brakes on investment demand for gold.
Mr Artigas believes that 2019 will see an increase in the demand for gold which is due to the following factors:
– Structural Economic Reforms
– Financial Market Uncertainty
– Geopolitical Unrest
Mr Artigas comments:
This year, we see higher levels of risk and uncertainty across four key metrics:
a) Global Stock Market Volatility
b) Potential Increases in Inflation
c) Political and economic instability in Europe
d) Increase Concerns about a global recession
Deteriorating Financial Market Stability
Gold-backed exchange-traded funds (ETFs) experienced significant outflows for most of 2018, particularly in North America. However, the pattern started to change in the fourth quarter, as sentiment towards risk began to shift.
This year, we see high levels of risk and uncertainty across four key metrics: global stock market volatility; potential increases in inflation; political and economic instability in Europe; and increasing concerns about a worldwide recession.
First, despite the recent market correction, many stock prices remain elevated, especially in the US, after a decade-long bull run (Chart 1). Bond yields remain stubbornly low. The 10-year Treasury yield, for example, began the year 1.5% below its 2008 pre-Lehman crisis level, providing investors with very little protection against further market volatility. Indeed, volatility metrics have started to creep up, with the CBOE Volatility (VIX) Index soaring in the last quarter of 2018.
Second, while Europe has mostly recovered from the sovereign debt crisis, it remains vulnerable to shocks and faces several significant challenges. Brexit has created persistent unease among investors and clarity is unlikely to emerge anytime soon. Also, France is grappling with social unrest, while populist forces have been gaining momentum in Italy, Spain and Germany. Perhaps in response, Europeans have been steadily adding gold to their portfolios since early 2016.
Third, more and more governments around the world are embracing protectionist policies. While these can have a positive effect in the short term, they are inherently inflationary, driving higher labour and manufacturing costs and/or higher tariffs imposed to promote local producers over foreign ones. To date, investors have taken much of the US/China trade war rhetoric as posturing. However, any restrictions on the flow of capital, goods and labour will create long-term issues.
Volatile markets, European populism and US protectionism, have all increased the risk of recession, possibly led by the US. A significant proportion of the growth seen in 2018 was a byproduct of President Trump’s tax cuts. However, similar measures may be more difficult to enact in future, particularly with a split Congress.
Credit markets are already indicating that the future will be less benign. Spreads have widened, credit conditions have tightened, and the US Treasury curve is very flat, with some economists predicting it will invert over the next few months. While an inverted yield curve does not cause recessions, it has preceded them with uncanny accuracy over recent decades.
The Impact of Rates and Dollar