gtag('config', 'AW-986975862');   Global Gold Market Outlook | 1 Stop Gold

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

           Traditionally, higher short-term interest rates and US dollar strength has been known to cause a lower demand for gold. However, higher US interest rates alone are not enough to deter investors from buying gold, as evidenced by robust demand between 2016 and the early part of 2018. This year too, the US Federal Reserve (Fed) is expected to adopt an increasingly neutral policy stance.

           On the currency front, the US Dollar (DXY) Index has already appreciated by more than 10% from its 2018 low, and a significant correction followed a similar trend in 2016. Additionally, the Trump administration is known to favour a weaker dollar, has often expressed frustration about the competitive disadvantage of a strong currency.

Structural Economic Reforms

             Emerging markets account for around 70% of gold consumer demand, led by China and India. Both countries are implementing economic changes that will promote growth and income levels over many years.

             India has been actively modernising its economy, reducing barriers for commerce and promoting fiscal compliance. The country is expected to grow by 7.5% in 2019, significantly outpacing most global economies. Gold is well positioned to benefit from this expansion, as there is a clear link between jewellery demand and growing consumer wealth.

             Income levels are rising in China too, with the government determined to deliver long-term growth and claim a growing role on the global stage. The ‘Belt and Road’ initiative, for example, is focused on promoting regional economic development, which should, over time, support demand for gold across many emerging markets.
In the West, economic recovery in recent years has resulted in positive consumer demand in the US and parts of Europe.

           Overall, therefore, we believe that gold jewellery demand will benefit from positive consumer sentiment in 2019. Even if uncertainty affects confidence in certain jurisdictions, global demand should still increase marginally.

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