Gold gaining popularity

Gold ended 2018 on a high note, beating global equities and commodities for the fourth quarter. Gold is a highly liquid asset and hence investors are majorly diversifying their portfolio towards gold as it proves to be a hedge tool and a safe haven asset in times of uncertainties.

There is quite some scope for the yellow metal and commodities in general in 2019 because investors believe that the current rate hike cycle has peaked and the U.S. dollar looks to be in retreat, having lost about 1.7 percent over the past month.

After four rate hikes in 2018, the Federal Reserve pausing interest rates in 2019 could also result in a weaker dollar and stronger demand for gold.

Gold is currently trading at $1,290 and moved in the high and low range of $1,295 and $1,287 on Tuesday. But this pullback is expected to be short lived as China is stepping up monetary and fiscal stimulus efforts to support its sagging economy. The People's Bank of China (PBOC) injected a record CNY 560 billion via reverse repo operations earlier today. Further, China is reportedly planning large scale tax cuts to boost spending.

History shows that monetary and fiscal stimulus has a positive impact on gold. Further, current unrest and political uncertainty in the UK could boost demand for the yellow metal.

Though strong U.S. dollar might have thwarted gold, but global growth concerns and other broad market worries could give the precious metal a boost.
Currently the markets are uncertain, economic numbers are dipping and stock markets are volatile.  All these clubbed together are bound to give a push to the precious metals as investors look up to them as safe haven assets. 

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.