Go for Gold

Past 6 months have been really great for gold. Gold prices have surged 14% since late August, when the Nasdaq Composite Index last hit a fresh record, and stand at their highest level since last April (* source- the Journal).

Gold has been influenced lately by many factors clubbed together. All these combined, have been pushing gold prices higher despite last years Fed rate hike, so it’s clear that gold is not dependent on just one factor for its price movement. Though US plays an important role in influencing gold prices, currently there are many other factors that need to be considered where gold prices are concerned.

World economies - The recent increase in gold price is in fact a proof that the slowdown has already started. Interestingly though, the increase is not the result of investors seeking a safe haven in a year that seems financially and economically awkward. That is, there are low interest rates in developed economies, higher rates in developing and emerging ones, and hence relatively higher risks of investments. In addition to the above, an increasingly protectionist trend could undermine the flow of global trade and negatively impact countries with economies highly dependent on international trade for their diversification.

Safe haven - Gold prices have climbed as investors uncertain about global growth outlook hedge their portfolios. Amid global political and economic uncertainty, the precious metal has become a compelling choice for money managers seeking to hedge their portfolios at a time of anxiety over economic growth and trade conflicts between the U.S. and its partners.

Central bank buying - In a report by the “Financial Times”, China purchased gold in late 2018, while its last purchase was more than two years ago. Poland, which hasn’t purchased gold since 1998, has lately added to its gold reserves. According to the same report, countries through their central banks have increased their gold purchases by “almost 75 per cent” in 2018. An increase in demand leads to an increase in prices too.

China, the top gold producer and consumer, is beefing up holdings amid signs of slowing growth and uncertainty about whether the trade fight with the U.S. will get resolved.

US trade war - Though the severity of the trade war is hanging loose, but any progress in this regards immediately affects gold. Trump said on Sunday he would delay an increase in tariffs on Chinese goods that had been scheduled for later this week, citing “substantial progress” in Sino-US trade talks over the weekend, and that he and his Chinese counterpart would meet to seal a deal if progress continued. This statement weakened the dollar against the Yuan.

The offshore Yuan strengthened 0.6 per cent to 6.673 Yuan against the dollar, after hitting its highest level since mid-July, on the news that Trump might not raise tariffs on $200 billion of Chinese imports to 25 per cent from 10 per cent.

As we all know that gold and dollar are inversely related and hence any weakness in the green back pushes the metal prices up.

But what’s interesting to see that annually gold has not generated returns yet, but it still seems to be investors favorite especially when they done know where to park their cash. This favouritism comes amidst the fact there bank deposits are no longer financially viable and other assets in its class aren’t giving that safe haven appeal. 

As a result, the alternative is to go for gold and settle for capital return, an increase in gold price which needs to be high enough to exceed inflation plus profit to make purchasing and holding it worthwhile. The trend in gold price seems to be headed upwards, and it may be a good time to get in, even if the best time to get in was when it was at $1,200 an ounce level.

Gold prices, though hinting at a looming bearish correction on risk-on market sentiments, will remain firmly supported on rising economic uncertainties and heightened geopolitical risks in 2019. Therefore, in light of low interest rates and a lack of clarity with regard to the world’s economic prospects, the gold price is expected to continue climbing. As it does, it may not stop at the $2,000 per ounce level realized two years post the 2008 financial crisis, but possibly higher.

A similar trend was witnessed post the increase in 1971, except that in every cycle, previous records for the highest gold price reached are usually broken. Not only that, the time elapsed between one cycle and the next is getting shorter.

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.

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.

Gold expected to outperform in 2019

Bullion hit a six-month high, nearing US$1,300 an ounce over the following concerns-

• Report showing a contraction in China manufacturing sent global stocks tumbling on 3rd January, 2019. 
• Concern over chains economic outlook
• Sinking factory gauges in Italy and Poland
• Wobbly U.S stock market
• Weaker economic data coming out of the European Union

Volatile stock markets, dollar swings and a global trade war sent gold on quite a market ride in 2018, from a high of $1366 an ounce in January 2018 to $1159 in August. Some were disappointed as they couldn’t make much of the dips or failed to enter the market at the right time.

Gold prices are still stuck in a trading range that it hasn’t broken away from over a couple of years. But analysts believe that this is the time to enter the market and change your strategies. It probably to best time own gold as 2019 brings some positive price rise in the yellow metal; Equity markets will expect high levels of volatility and its wild fluctuation towards the end of 2018 speaks all for it. Moreover the US government is sitting over huge debts and there are grave concerns that the economy will over heat. Moreover the Fed policy makers have been sending mixed messages as to how many times they will increase the rates in 2019. Keeping this in mind, it seems that it’s the perfect scenario for investors to seek safety in gold as it is expected to be the best performing asset in its class in 2019.