Gold restores faith

The uptrend has once again moved into gold’s life. Gold leaped towards $1365 and the highs of almost a year ago. From the last two quarters of 2018 till date, gold has been climbing up the staircase, leaping higher, then consolidating and then moving up once more.

The middle two quarters of 2018 were bad for gold because the dollar was extraordinarily strong, so was the domestic equity market in the U.S. The influence of all that tended to wane in December, so gold picked up very, very nicely

A weaker U.S. dollar pushed gold up to 10-month highs on Tuesday, with April gold futures last trading at $1,339.70 an ounce, up 1.32% on the day.

With both the dollar and yen sliding, most notably after the BOJ's Kuroda told parliament the Japanese central bank can and will ease far more if necessary, it is perhaps not surprising that gold has surged higher, rising above $1,341/ounce, up over $140 from the early November levels when it was trading in the low-$1,200s, and the highest price since April 2018.

The recent rise in gold prices reflects solid demand from investors and, given that there is a relatively thin supply pipeline of metal between miner, refiner and trader, this is leading to a shortage of physical gold. Gold demand rose in 2018 and, although the US dollar gold price was down 1% over the year, it outperformed many other financial assets. Worries about a slowdown in global growth, heightened geopolitical tensions, and financial market volatility saw central bank demand hit its highest level since.

It is a matter of some speculation, but this story echoes reports that physical gold demand by Central Banks are at the highest since 1967, while institutional gold ETF off take hit an unprecedented 145 tonnes in December and January

Central banks added 651.5t to official gold reserves in 2018, up 74% on 2017 and the second highest yearly total on record. Net purchases jumped to their highest level since the end of US dollar convertibility into gold in 1971, as a greater pool of central banks turned to gold as a diversifier.

Most people are expecting gold to do well this year as gold has restored everyone’s faith in the market.

Gold preserves your wealth

In 2018, gold fought against significant demand for traditional stock and mutual fund investments and weathered tremendous exchange-traded-fund outflows. Gold has been under pressure from a stable and slightly appreciating U.S. dollar. Still, gold has shown incredible resilience all year – especially through the first three quarters.

It rallied at year-end, suggesting a flat or slightly positive trend year over year. Much of this is due to the increase in central bank buying from countries like Russia, China, Turkey, Kazakhstan, Poland and others. It’s all part of a larger move to reduce U.S. dollar reserves in favour of gold.

In 2019, it looked as if gold was cashing on the struggle that it faced in the previous year. Gold prices have risen more than 12% since touching more than 1-1/2-year lows in mid-August, mostly on expectations of a pause in Federal Reserve rate hikes.  Investors have shifted their sentiments from bearish to bullish for the yellow metals over more than one reason-

Data - Soft data released from important economies has created a favourable situation for gold.  Gold and the U.S. dollar, both considered as safe-haven assets these days, gained on Friday in Asia following the release of weak U.S. retail sales and China inflation data.
The precious metal attracted some safe-haven bids last week after the Commerce Department reported U.S. retail sales tumbled 1.2% in December. Economists had forecast a gain of 0.1% for the period.

In Asia, China’s January Consumer Price Index (CPI) and Producer Price Index (PPI) both missed expectations, the National Bureau of Statistics reported on Friday, furthering dampening investor sentiment.

Elsewhere, reports that China and the U.S. have not been making much progress during trade talks this week also supported the yellow metal

Volatility - First, the increased volatility in international markets due to global and economic instabilities will foment the safe haven flows that began in 2018. And gold has a historical record of being a safe haven asset in times of uncertainties thus raised demand for the yellow metal and further pushing its prices.

Fed Rates - Lower rates are disadvantageous to interest-bearing assets such as the dollar, but work in favour of commodities like gold that offer a store of value to investors.

Alternate modes of investment - Alternative assets competing for your investment dollars are not expected to perform well in the coming year. The stock market should continue its descent, either with or without a last hoorah. Interest rates should stabilize in the coming year, so term deposits will continue to generate no real return. Bonds will not be attractive compared with gold.

Central bank buying - time and again central banks have been piling their reserves to reduce their dependency in the US dollar. This once again opens a green window for gold.

Gold’s characteristics - Gold may not give you income but it definitely preserves your wealth. It’s like taking insurance for your finances. And it is expected to play this role to its best in the following months,
Finally, unlike Most investors are waiting to see whether the anticipated rise in gold prices is for real. For them, a breach to the upside of $1,350 per ounce may not be enough. Most will look for confirmation of the breakout above $1,400 an ounce.

 In each of the last three years, gold has gotten off to a strong start only to fizzle as the year moved along.  A good many investors, fund managers and analysts think that 2019 might very well be the year when gold breaks the restraints and pushes to higher ground.

Our own view is that gold is due for a rise and most portents are favourable, but the yellow metal is pretty unpredictable in its price pattern.  Overall it serves as a good wealth protector and as catastrophe insurance.  We are not of the ilk predicting a rapid rise to $10,000 - it may get there eventually but probably not in many of our lifetimes.  However there’s enough geopolitical uncertainty around to carry the price back into the $1,400s this year should some of the more worrying scenarios come about.