Is 2019 the year for Gold

2018 has a highly volatile and fluctuating year for gold as it faces many headwinds. A strong dollar, rate hikes by the US Federal Reserve (the Fed) coupled with accommodative policy from other central banks and a US economy buoyed by tax cuts, fuelled positive investor sentiment and pushed US stock prices higher through the start of October.

However, as geopolitical and macroeconomic risks increased, emerging market stocks pulled back and developed market stocks eventually followed.

As 2019 begun, have seen a sharp deterioration in risk sentiment following soft macroeconomic data in December and renewed concerns about the future direction of growth, particularly the risk of U.S. growth catching down towards weaker economies. December was a volatile month which generated a safe haven appeal for the yellow metal.

Lately gold has outperformed other assets in its class. Risk assets took a big hit in 2018, with the stock market suffering the worst in December but gold fared much better as it grew around 4 percent.

If we see the demand graph for gold for the next 6 to 8 months, we expect it to rise as it will benefit from the interplay of market risk and economic growth, with key dynamics, such as financial market instability, monetary policy, the dollar and structural economic reforms.

Rising geopolitical tensions- A fragile political alliance in Spain along with fending off secessionism, an instable monetary union in Italy, and internal turmoil in Europe and lastly social unrest in France- all of these clubbed together gave a very instable global picture. This growing uncertainty and the expansion of protectionist economic policies are making gold an increasingly attractive hedge tool.

Slow economic growth- Weak economic numbers coming from the US has spooked the markets. The U.S. manufacturing PMI (Purchasing Managers Index) hit a 15-month low in the same month. Manufacturers' confidence in business also slipped to the lowest level in nearly two years. This in turn affects the rate hike frequency thus influencing gold prices.

Federal Reserve’s monetary policy- The Fed had been tightening monetary policy aggressively. But on Jan. 4 Fed Chairman Jerome Powell signalled Wall Street that policymakers will be patient with policy moves and are attuned to the messages coming from markets. While gold may face headwinds from higher interest rates and dollar strength but currently the effect of the same seems to be limited on gold as the Feds stance is neutral. Any delay in rate hike will push gold prices higher.

Demand for gold as a hedge tool- Globally, there were net positive flows into gold-backed exchange-traded funds in 2018. However, North American funds suffered significant outflows in the second and third quarters, with this trend only reversing in the fourth quarter as risks began to intensify. But in 2019, global investors are expected to favour gold as an effective diversifier and hedge against systemic risk on multiple global metrics

Central Bank Buying- In addition, central banks continue to buy gold to diversify their foreign reserves and counterbalance fiat currency risk, particularly as emerging market central banks tend to have high allocations of US treasuries. Higher demand once again means higher prices for gold.

Time and again it is proved that gold has delivered returns and has performed better than other assets in its class. Moreover, its liquidity and risk adjusted returns makes it an investors favourite and hence its looks more relevant this year.

Gold benefits from equity slide

Reserves Reserves Reserves - it was all about piling up gold in the past week. And when I Say piling I mean in huge numbers.

Peoples Bank China shocked the world when it’s released the figures of gold reserves that it sits on.  China's gold reserves had been steady at 59.240 million fine troy ounces from October 2016 to November 2018, according to data from the People’s Bank of China, and suddenly jumped to 59.560 million fine troy ounces at end-December.

The People’s Bank of China increased holdings to 59.56 million ounces by the end of December, or about 1,853 metric tons, from 59.24 million ounces previously, according to data on the central bank’s website. They had been unchanged since about 130,000 ounces were added in October 2016.
China has long been wanting to reduce its dependency on the US dollar. The ongoing trade war is threatening its economic growth.

Several large emerging economies, which today fuel most of global growth prospects, and major oil exporters, are intrigued by the idea of re-coupling gold with a multilateral currency basket to avoid excessive exposure to US dollar-denominated energy and commodity markets.

 Spot gold had its strongest month in almost two years as those fears spurred a whirlpool in equities and the dollar and boosted demand for the precious metal as a haven. And hence the world’s biggest producer and consumer boosted holdings of bullion.

But it was not an overnight thing. China has been piling reserves since quite some time. It had last released the figures in 2016 and now suddenly. And it’s not just China that has been doing this.  As Bloomberg reports, Poland and Hungary surprised the market in 2018 by adding to their gold holdings for the first time in many years.

Furthermore, there have been interesting shifts in gold reserves. While advanced economies, such as the US and Germany, still own most global gold reserves, the US has increased its gold holdings in the past decade only marginally, while Germany has been forced to cut its reserves. In contrast, China has tripled its reserves, while Russia has nearly quintupled its gold (after dumping billions of US Treasuries), despite rounds of sanctions.

Fresh comments coming in from Federal Reserve Chairman Jerome Powell on Friday, got in a fresh rally in gold prices. The statements released boosted the chances that the central bank will pause interest-rate increases. Speculation that the Federal Reserve may pause its interest rate hikes has given further strength to gold’s rally into the new year and assets in bullion-backed exchange-traded funds are at a seven-month high. Spot gold was trading 0.5 percent higher at $1,291.83 an ounce as the week ended. Strengthening of the yellow metal has further weakened the greenback.

Gold was out of favour for much of 2018 as a result of the strong dollar and interest rate increases in the US. The precious metal traded as low as $1,174 an ounce in August, despite rising geopolitical tensions.

However, sentiment began to improve towards the end of the year, as volatility increased further and US stocks suffered.

THOSE analysts who believe that fear has made a comeback argue that gold is benefiting as equities slide and investors are increasingly concerned about the economic prospects of the United States (US), China, Europe and Japan. Yet, even at $1,290, gold still remains more than 30 percent behind its all-time high of $1,898 in September 2011 amid the US debt-limit crisis.