What to expect for gold in 2018 - World Gold Council
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What to expect for gold
in 2018
The gold price has moved ahead John Reade
this year, despite rising US Chief Market Strategist
interest rates and a persistent World Gold Council
bull market in equities. Looking
ahead, there are several reasons
to believe that gold could
maintain upward trajectory,
as John Reade, Chief Market
Strategist at the World Gold Investor attention may have been focused on US equity
Council, explains. markets, technology stocks and crypto currencies this
year, but gold has still had a decent 2017, delivering
double-digit growth in the first 11 months alone. The
strong performance is particularly noteworthy in a year
when the US has been hiking rates and equities have
remained in favour. Gold’s range has been relatively
narrow and, apart from the geopolitically-inspired move
above US$1,350/oz in September, the moves have been
extremely orderly.
So, what are we watching for next year?
Gold Investor | December 2017 27
What to expect for gold in 2018
Financial market drivers Physical market drivers
Monetary policy – and policymakers – will continue to What physical market trends should investors pay attention
be significant drivers of gold demand, given that the to in 2018? Income growth is probably the most significant
Federal Reserve (the Fed) is anticipated by many to because, over the long run, it has been the most important
hike rates further next year and start to allow its balance driver of gold demand. And we believe the outlook here is
sheet to contract. The new staff roster may also change encouraging. China, the world’s largest gold market, has
the way the Fed acts and communicates. Jerome avoided the hard landing that many were predicting 18
Powell, nominated as the next Fed chair, recently aired months ago and is expected to grow at a fair clip in 2018,
his views on Fed communications and any changes with the consensus forecast at around 6.4%.
that he makes could lead to a period of adjustment by
The Indian economy is recovering from the shock
fixed income and other markets. Other staff will change
demonetisation of 2016 and adjusting to the Goods and
too, most interestingly the suggestion that Mohamed
Service Tax rolled out in 2017. The slowdown in GDP
El-Erian – a known supporter of gold as an investment
growth last year is expected to moderate, as businesses
asset – may become vice-chairman.
Of course, it is not all about the US central bank. Over
the next 12 months, we may see a slowdown in the
ECB’s extraordinary monetary policy action, while even
the Bank of Japan may dial back its quantitative easing.
Finally, China could continue its efforts to rebalance
economic growth and possibly de-leverage some
sectors of the economy.
With inflation still subdued around the world, we see
monetary policy tightening as likely to be gentle, but
there are risks, not least the Fed’s planned balance
sheet reduction – the first time such an action has
been attempted.
Away from monetary policy, we view two other factors
as potentially important for gold. First, the ongoing
strength – or otherwise – of already expensive US
equities. And second, the trajectory of the US dollar. We
believe that the bull market in US equities has reduced
gold’s appeal in 2017: an end to that trend could reignite
demand for gold. The direction of the US dollar could
also be important: if 2017 marks the end of a multi-year
period of US dollar strength, gold could benefit from that
tailwind, unlike the headwind that it has experienced
since 2001.
Over the long run, income
growth has been the most
important driver of gold demand.
And we believe the outlook here
is encouraging.
Gold Investor | December 2017 28
What to expect for gold in 2018
and consumers adapt. Indeed, India is expected to be Structural changes in the gold market are also worth noting.
one of the fastest-growing countries in the world in 2018, These may not have a direct impact on the gold market in
expanding at an even faster rate than it did between 2018, but they can herald significant changes in the years
2012-2014. to come. Potential changes to the VAT rate currently applied
to gold bars in Russia is a case in point. A punitive 18%
Solid income growth in the world’s largest gold markets
has stifled market growth, so a reduction could open up
would undoubtedly be viewed as good news. But other
an exciting new market. Elsewhere, banks and mints are
countries are making progress too. Germany’s economy is
continuing to develop Shari’ah-compliant gold products, and
expected to maintain its momentum and unemployment
we may see this part of the market gain traction. And in
is anticipated to continue falling, providing support for
India, the move to develop a spot exchange could result in
the world’s third-largest bar and coin market. Across the
greater transparency, boosting India’s gold trade.
Atlantic, the US jewellery market, the third-largest in the
world, could benefit from continuing economic growth and
high consumer confidence.
The bull market in US
equities has reduced gold’s
appeal in 2017: an end to
that trend could re-ignite
demand for gold.
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