These Four Factors Will Drive Gold Higher In 2018
(Kitco News)- After animpressive run in 2017, the World Gold Council sees four factors that will continue topush gold prices higher in the new year.
In a reportreleased Tuesday, the WGC said that increased market volatility, a rotationinto defensive assets, a growing global middle class and growing markettransparency are all bullish factors that will help drive gold prices higher,after ending 2017 with a gain of more than 13% above $1,300 an ounce.
“Gold’sperformance in 2017 was not an anomaly,” the gold market consultancy group saidin the report. “We believe that the confluence of the key trends we’vehighlighted for 2018 could be supportive of gold demand.”
The goldmarket has taken a bit of a breather Tuesday with prices hovering aroundunchanged levels after hitting a four-month high at the start of the week.February gold futures last traded at $1,334.60 an ounce.
One majorfactor that is weighing heavy on gold investors is the prospect of higherinterest rates as the Federal Reserve plans to raise interest rates three timesin 2018 and continue the reduction of its massive balance sheet . While higherinterest rates are, at face value, negative for gold as it increases theprecious metal’s opportunity costs, analysts at WGC said that investors shouldtake a more nuanced approach to higher interest rates.
“The actionsthat central banks took over the past decade have had substantial implicationsfor the performance of financial markets. As they pumped trillions of dollars,pounds, euros and yen into the global economy and slashed interest rates to -and in some cases below - zero, asset values hit record highs, marketvolatility reached record lows and prices became increasingly correlated,” theanalysts said.
“It isreasonable to presume that as central banks rein in their expansionarypolicies, these trends will reverse. Financial market volatility may pick upand idiosyncratic risk may re-emerge,” they added.
The WGC alsoexplained that although interest rates are increasing, overall they remain wellbelow historical averages and will likely remain low for the foreseeablefuture. They explained that growing government and consumer debt would beunstainable in a higher interest rate environment.
“Our analysisof gold’s performance during different US real-rate environments reveals thatwhen real rates are between 0% and 4% gold’s returns are positive,” they said.
Anotherconcern for the gold market has been synchronized global economic growth.Analysts have noted that gold’s safe-haven appeal has been diminished as theglobal economy improves; however, the council said that a pick-up in the globaleconomy is also favorable for physical gold demand.
“Increasedconsumer demand supports the investment case for gold and highlights its dualnature. Investors often focus on gold’s effectiveness as a hedge against financialshocks. But rising wealth underpins gold consumer demand, which, in turn,supports gold prices over the long-run,” they said.
Whileimproving global growth has boosted equity markets to record levels, the WorldGold Council added that this is prompting some investors to take more defensivepositioning, ahead of an inevitable market correction.
“Analysts andcommentators have been ringing the warning bell for some time, but equitymarkets have marched steadily higher and credit standards have slipped lower.Many investors, however, are understandably wary of these asset valuations and,in the context of changing central bank policy, cautious about their riskexposure,” the analysts said. “Should global financial markets correct,investors could benefit from having exposure to gold as it has historicallyreduced losses during periods of financial distress.”
Finally, theWGC also sees the potential for the gold market as new investment products andtransparency rules come online in 2018.
“Gold-backedinvestment vehicles around the world are making it easier and cheaper to accessgold,” the analysts said.
For Kitco News
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