Gold will shine far brighter in 2018

Customers look at gold jewellery at a shop in Bangalore.

US interest rates, the dollar value, geopolitical uncertainties and demand from China and India will continue to determine the gold price in 2018, say industry experts.

Despite rising US interest rates and a bull run in equities, gold delivered a double-digit growth in 2017. Looking ahead, analysts believe that gold may maintain an upward trend in 2018.

"Investor attention may have been focused on the US equity markets, technology stocks and cryptocurrencies this year, but gold has still had a decent 2017, delivering a double-digit growth in the first 11 months alone," John Reade, chief market strategist at World Gold Council, said in a recent report.

However, Ole Hansen, head of commodity strategy at Saxo Bank, disagrees, saying that gold has stuck in its four-year range of $1,230 per ounce and needs a spark to jostle it out of this range.

"On that basis, the most prudent thing is to continue to trade the prevailing range. However, we maintain the view that the direction of least resistance is higher but at this stage, we see no clear trigger to propel gold above resistance at $1,380 an ounce, the July 2016 high," Hansen said.

What will drive demand
While a strong dollar, rising interest rates and the bullish run in global equities are putting downward pressure, there are various factors that could drive demand for gold, such as weak global growth, a lower dollar, heightened geopolitical risks and rising incomes in both China and India.

"There are simply too many inputs into any model that would correctly forecast the performance of gold in 2018," Ted Stephenson, CFA, executive director of CFA Society Emirates, said.

"The bull market in US equities has reduced gold's appeal in 2017: an end to that trend could reignite demand for gold. 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," Reade wrote.

Stephenson said the value of the dollar is crucial to determine the gold price.

"If we could correctly forecast the US dollar, we could perhaps make a trading decision on gold based on the inverse relationship," he said.

India + China = gold boom
Reade noted that income growth is probably the most significant factor because over the long run, it has been the most important driver of gold demand.

"We believe the outlook here is encouraging. China, the world's largest gold market, has avoided the hard landing. The Indian economy is recovering from the shock demonetisation of 2016. Indeed, India is expected to be one of the fastest-growing countries in the world in 2018, expanding at an even faster rate than it did between 2012 and 2014," Reade said.

According to data from the World Gold Council, "gold jewellery represents the largest source of annual demand for gold per sector. This has declined over recent decades, but it still accounts for around 50 per cent of total demand. India and China account for over 50 per cent of global gold demand."

Jewellery demand is primarily from India and China. As economic growth continues in India and China, the demand for gold jewellery will increase. "Indian demand is likely to recover strongly following a slump while global investment demand for gold is likely to continue to rise," Hansen said.
 
What to watch out for
Dr Marie Owens Thomsen, global head of economic research for Indosuez Wealth Management, said gold is trading in the middle of a trading range between $1,255 and $1,300 per ounce. If the level of $1,300 is breached, the next target would be $1,375. This would be a reasonable target for 2018.

"Above that level, one can start looking towards $1,500/oz. On the other hand, should the price fall below $1,255, or even more critically below $1,218/oz, one could start talking about a bear market. That would be unlikely because in a lower inflation environment, gold should find support," she said.

In addition, she said an uncertain geopolitical environment should also favour gold.

"The gold price has tended to evolve in line with the rising debt level in the US, and there is a little sign that the US will manage to reduce the debt level over the foreseeable future - on the contrary - the tax reforms may add another $1.5 trillion to the existing $20 trillion debt, thus providing further support for gold investments," Thomsen added.

She said the greatest risk to the gold price is arguably the US dollar's external value.

"Given the four rate hikes we expect the Fed to deliver between now and the end of 2018, it is rather difficult to imagine a marked dollar depreciation. It might be enough for gold that the dollar does not appreciate significantly. This is indeed our scenario, based on our expectations of no acceleration in GDP growth next year, and based on the fact that the US runs the world's largest current account deficit in dollar terms," Thomsen said.

- riaz@khaleejtimes.com