10 January, 2019
2018 ups and downs
Gold’s price seesawed in 2018 as investor interest ebbed and flowed despite steady growth in most sectors of demand.
Gold faced significant headwinds for most of the year. The dollar strengthened, the Fed continued to hike steadily while other central banks kept policy accommodative, and the US economy was lifted by the Trump administration’s tax cuts. These factors fuelled positive investor sentiment which, in turn, pushed US stock prices higher, at least until the start of October.
But as geopolitical and macroeconomic risks continued to increase, emerging market stocks pulled back. Eventually, developed market stocks followed, in a selloff led by US tech companies. This resulted in short-covering in gold with its price ending the year near US$1,280/oz (-1% y-o-y).
- Increased market uncertainty and the expansion of protectionist economic policies will make gold increasingly attractive as a hedge
- While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Fed has signalled a more neutral stance
- Structural economic reforms in key gold markets will continue to support demand for gold in jewellery, technology and as means of savings.
1. Financial market instability
Globally, there were net positive flows into gold-backed ETFs in 2018. While North American funds suffered significant outflows in Q2 and Q3, this trend started to shift in Q4 as risks intensified (Chart 2).
We believe that in 2019 global investors will continue to favour gold as an effective diversifier and hedge against systemic risk. And we see higher levels of risk and uncertainty on multiple global metrics:
- Expensive valuations and higher market volatility
- Political and economic instability in Europe
- Potential higher inflation from protectionist policies
- Increased likelihood of a global recession.