Economic trends and their impact on gold. The interplay between market risk and economic growth will drive demand in 2019, says the World Gold Council

Economic trends and their impact on gold. The interplay between market risk and economic growth will drive demand in 2019, says the World Gold Council
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As we look ahead, we expect that the interplay between market risk and economic growth in 2019 will drive gold demand. And we explore three key trends that we expect will influence its price performance:

  • financial market instability 
  • monetary policy and the US dollar
  • structural economic reforms.

Against this backdrop, we believe that gold has an increasingly relevant role to play in investors' portfolios.

Gold’s price seesawed in 2018 as investor interest ebbed and flowed despite steady growth in most sectors of demand.

Gold faced significant headwinds for most of the year. The dollar strengthened, the Fed continued to hike steadily while other central banks kept policy accommodative, and the US economy was lifted by the Trump administration’s tax cuts. These factors fuelled positive investor sentiment which, in turn, pushed US stock prices higher, at least until the start of October.

But as geopolitical and macroeconomic risks continued to increase, emerging market stocks pulled back. Eventually, developed market stocks followed, in a selloff led by US tech companies. This resulted in short-covering in gold with its price ending the year near US$1,280/oz (-1% y-o-y).

*As of 31 December 2018. Based on named indices, WTI front Future, BBG Commodities Index, New Frontier Global Balance Index, LBMA Gold Price, Bloomberg Barclays Global Treasury Index, Solactive Long USD Gold Index.

Potential for growth and heightened risk in 2019

We expect that many of the global dynamics seeded over the past two years and the risks that became apparent later in 2018 will carry over. And with them, we see a set of trends developing that will be key in determining gold’s demand. In turn, their interplay will be most relevant for gold's short- and long-term price behaviour (Focus 1). 

We expect: 

  • Increased market uncertainty and the expansion of protectionist economic policies will make gold increasingly attractive as a hedge 
  • While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Fed has signalled a more neutral stance
  • Structural economic reforms in key gold markets will continue to support demand for gold in jewellery, technology and as means of savings.

1.    Financial market instability

Globally, there were net positive flows into gold-backed ETFs in 2018. While North American funds suffered significant outflows in Q2 and Q3, this trend started to shift in Q4 as risks intensified (Chart 2). 

We believe that in 2019 global investors will continue to favour gold as an effective diversifier and hedge against systemic risk. And we see higher levels of risk and uncertainty on multiple global metrics: 

  • Expensive valuations and higher market volatility 
  • Political and economic instability in Europe
  • Potential higher inflation from protectionist policies
  • Increased likelihood of a global recession.

Focus 1: Drivers of gold

Gold has a dual nature: consumption and investment. And gold price drivers can be grouped into four categories:

  • wealth and economic expansion
  • market risk and uncertainty
  • opportunity cost 
  • momentum and positioning. 

As a consumer good and long-term savings vehicle, gold demand historically has been positively correlated to economic growth. As a safe-haven, its demand historically has been strongly responsive to periods of heightened risk. In the short and medium term, however, the level of rates or the relative strength of currencies, as well as investor expectations, can either enhance or dampen gold’s performance. See The relevance of gold as a strategic asset, January 2018



*As of 31 December 2018.

First, despite the recent market correction, many stock valuations remain elevated, especially in the US, after almost a decade of almost uninterrupted price appreciation. Yet bond yields remain stubbornly low (Chart 3). Even in the US the 10-year Treasury yield is 1.5% below its 2008 pre-Lehman crisis level, providing investors less cushion in case of further market volatility. Indeed, volatility metrics have begun to creep up, with the VIX jumping from an average of 13 in Q3 2018 to an average of 21 in Q4.

*As of 30 November 2018.

Second, while European growth has recovered from the aftermath of the sovereign debt crisis it has failed to reach the level of the US economy, making it more vulnerable to shocks – and explaining why Europeans have been adding gold to their portfolios steadily since early 2016. Today, Europe is facing major challenges. The most obvious is Brexit. Not only has it imposed a continuous level of unease among investors, but its timing and implications – both for the UK and for continental Europe – are best left to diviners. What is certain, however, is that clarity will not come any time soon. In addition, continental Europe continues to face internal turmoil. France is grappling with social unrest; Spain is fending off secessionism and fragile political alliance, and Italy's populist government continues to highlight the inherent instability of the monetary union – to name just a few.

Third, more and more governments around the world seem to be embracing protectionist policies as a counter movement after decades of globalization. And while many of these policies can have a temporary positive effect, there are longer term consequences that investors will likely grapple with in the coming years; for example, higher inflation. Protectionist policies are inherently inflationary – either as a result of higher labour and manufacturing costs, or as a result of higher tariffs imposed to promote local producers over foreign ones. They are also expected to have a negative effect on long-term growth. And although so far investors have taken some of the trade war rhetoric as posturing, it is not without risk to restrict the flow of capital, goods and labour.

*As of 30 November 2018.

Combined, these trends have increased the risk of recession. For example, in the US there are a few signs that investors are becoming wary. A good percentage of the growth seen in 2018 was a byproduct of tax cuts. But similar measures may be more difficult to enact with a split congress. There has also been a deterioration of credit markets with spreads widening by more than 70bps (+50%) since the January 2018 lows, while credit conditions for consumers are tightening. In addition, the US treasury curve is very flat: the 2s/10s curve currently stands at 13bps, a level of curve flattening last seen before the 2008 financial crisis, with some economists predicting its inversion in the first half of 2019. While an inverted yield curve does not cause recessions, it has generally preceded them – albeit with a long lead. And it indicates that bond investors are concerned about the sustainability of long-term growth.

2.    The impact of rates and the dollar 

While market risk will likely remain high, two factors could limit gold’s upside: higher interest rates and US dollar strength.

Higher US interest rates alone are not enough to deter investors from buying gold, as seen between 2004 and 2007 or 2016 and the early part of 2018. And while higher interest rates combined with a strong dollar can dampen gold’s performance, there are reasons to believe that the upward trend of the US dollar may be losing steam. 

First, the US dollar DXY Index, which measures the relative direction of the dollar against a basket of key currencies, has already appreciated by almost 10% from its 2008 lows. A similar trend in 2016 was followed by a significant correction. 

*As of 30 November 2018.

Second, the positive effect of higher US rates on the dollar will diminish as the Fed policy stance becomes neutral, especially since the recent US dollar strength was fuelled in part by the more accommodative monetary policy maintained by other central banks (Chart 5).

Third, the Trump administration has often voiced frustration about competitive disadvantage caused by a strong US dollar.

Finally, emerging market central banks continue to diversify exposure to the US dollar.

3. Structural economic reforms

Emerging markets, making up 70% of gold consumer demand, are very relevant to the long-term performance of gold. And among these, India and China stand out. 

These two countries have begun to implement economic changes necessary to promote growth and secure their relevance in the global landscape. 

China’s Belt and Road initiative, for example, is focused on promoting regional economic development, boosting commodity markets and upgrading infrastructure (see The economic outlook for China, Gold Investor, October 2018).

India has been active in modernising its economy, reducing barriers to commerce and promoting fiscal compliance. In fact, India’s economy is expected to grow by 7.5% in 2018 and 2019, outpacing most global economies and showing resilience to geopolitical uncertainty. 

Given its unequivocal link to wealth and economic expansion, we believe gold is well poised to benefit from these initiatives. We also believe that gold jewellery demand will strengthen in 2019 if sentiment is positive, while increase marginally should uncertainty remain.

Similarly, efforts to promote economic growth in western markets are expected to result in positive consumer demand, as has been observed generally in the US since 2012. 

Why gold why now

Gold’s performance in the near term is heavily influenced by perceptions of risk, the direction of the dollar, and the impact of structural economic reforms. As it stands, we believe that these factors likely will continue to make gold attractive.

In the longer term outlook, gold will be supported by the development of the middle class in emerging markets, its role as an asset of last resort, and the ever-expanding use of gold in technological applications.

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. Central bank demand for gold in 2018 alone was the highest since 2015, as a wider set of countries added gold to their foreign reserves for diversification and safety.

More generally, there are four attributes that make gold a valuable strategic asset by providing investors: 

A more tactical opportunity

In addition, gold speculative positioning in futures markets remains low by historical standards after hitting record lows in the final months of 2018. CME managed money net long positions stand near record low since 2006 – when data was first broken down by investor type. Furthermore, net combined speculative positions, which go back further, are negative for the first time since December 2001. And large net short positions have historically created buying opportunities for strategic investors, as such positions are prone to short-covering adding momentum to rallies in the gold price (Chart 6).

*As of 18 December 2018.

This article is a re-post from here. The original article also has detailed Notes and Sources.

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Would not surprise me if gold hit new highs during the next couple of years.

Bitcoin and other cryptocurrencies created a lot of interest in non-fiat money. With Bitcoin's (and others') collapse, gold looks like a good alternative for anyone worried about currency collapse.

Quite a few investment sites suggest every investor should have a little bit of gold in their portfolio. Why is this? Is it just for the sake of owning yet another asset class (i.e. for extra diversity)? How much is sensible? And lastly, where is the place to get the stuff here in little old NZ?

NZ Bullion or just buy coins privately. But my pref is is via shares in mining company's eg Newcrest, Oceana Gold. Gold has unique & valuable qualities in industrial engineering etc, some forget this.

The industrial uses of gold are trivial. In the year to September 2018 only 339 tonnes were used for this purpose, from supply of 4,486 tonnes in the same period. So only 15% of it is for a real, economic purpose, the rest pure speculation (greater fool theory). Hardly a reason to buy. Industrial use of gold isn't growing - in fact it has been declining since 2007 (from 39 tonnes/mth to 28t/m now and has slipped well below 1 tonne/day. (all data is from World Gold Council.)

Does Jewelry fall into pure speculation or Industrial use?

..I'm fine with greater fool theory on it has been enduring since 3000 bc or so and no indication at all that the 'fools' will wake up one day and decide it has no value.

The US went to war over Gadafis' gold and his attempt to create an African gold backed currency. More fools I guess..


Do you own any gold? If so,what are the costs of buying and holding it? There is of course,the opportunity cost,given that it offers no yield.
In order to obtain any return,you must sell some,whereas with shares or property,there’s a regular and steady return.
Speculative holdings like gold are not for me.

..not physically. Looked at at physical several time over last 12 months. Holding physical gold didn't appeal. There is a buy sell differential with the traders, plus no income. Also the holding cost or risk (if its under the bed). So I went for mining stocks instead. Dividends plus potential cap gain. have been in OGC for maybe 8 years, more recently Newcastle.

I know its speculative. But my theory is that more greater fools (As David calls them) will pile in behind me.

I think you're being a bit harsh, David, by saying that gold is predominantly pure speculation. In reality it is just another asset class like any other and it is subject to the same speculative forces that drive property, shares, etc. If people can value companies that have never turned a profit in the billions and send crypto currencies sky high, then how is gold any different? While the snake oil gold bug salesmen touting $5k-10k an ounce gold are nothing but frauds, it still is a legitimate asset class that is more liquid than many others. And in this age of a precarious global monetary system, one would be a fool arguably to completely dismiss it.


Then, I am happy to be one of those fools. To me,anything with no yield is not an investment,but pure speculation. when I buy shares,my primary interest is in the yield they offer and the potential for that to increase in future. That doesn’t depend on guesswork as I can look at the balance sheets and past performance. Capital gains do not feature in my decision.the same holds true for property.
I am happy to leave gold to others.

However that is what gold is, as it earns no income. Its primary purpose is really a store of wealth which it does admirably. A secondary purpose is speculative however this seems to have become the main reason most ppl buy it (and indeed bitcoin) gambling it will earn via capital gain.

NZ Mint sells bullion directly. They would be the most reputable place.

i'd buy sovereigns on trademe, they are easy tradable, and recognisable. Krugerrand would be just as good. Someone on here told me it's the way to go about 8 years ago, he also said if you want to buy gold go to the Perth mint, it's backed by the Western Australian govt.

yes agree. That is the same advice I received from a colleague who is active in the area..

Andrewj... I believe the fact that the Perth mint is backed by the WA govt is only relevant if you don't want to take physical possession of the gold personally. The WA guarantee is probably because the mint doesn't hold the total amount of the gold it assigns to owners (just as banks don't hold as much cash as they have in deposits). Anyone who remembers Ray Smith's Goldcorp will know why that is an important guarantee!

IMHO anyone who doesn't take physical possession of their gold is an utter fool.

Great discussion, thanks for all the tips and pointers folks!

"The gold lending market’s opacity is further supported by regulators who protect the secrecy of the central banks, and mainstream financial news agencies whose editorial policies seem to forbid any market investigations, in-depth or otherwise.

It is in the gold lending market that the central banks of the world lend out their gold holdings to commercial bullion banks, where the physical gold is sold and shipped out, and where the central banks then claim to hold interest-earning ‘gold deposits’ with the bullion banks. These gold-deposits (which are merely a claim on a bullion bank) then mostly roll over short-term, passed around indefinitely between the clubby LBMA cartel of bullion banks, in a totally opaque behind the scenes network.

The physical gold bars lent out are long gone to Switzerland and the Far East, and the central banks then deceptively claim that they still hold the gold on their balance sheets (due to an ) when in fact all they have is a liability to the bullion banks. In the middle of this market sits the Bank of England, offering gold custody and storage to other central banks (in the vaults under the Bank of England headquarters in London) and offering gold accounts to the bullion banks concerned."

David Chaston... I'm interested that gold is always fool's gold in your mind, despite the fact some of the world's biggest economies have most of their reserves in gold (China, 80%; Japan, 78%; Switzerland, 59%). Gold has has been a store of value since ancient civilisations, and continues to be. As Alan Greenspan put it two years ago..."I view gold as the primary global currency. It is the only currency, along with silver, that does not require a counterparty signature. No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the credit worthiness of a counterparty. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC." Is someone who buys a Picasso a fool because it doesn't generate income or someone who readily understands that the scarcity of a prized object will always hold value, even if prices fluctuate?

The manipulations of the gold and silver price by the bullion banks are well known, however, this practice is coming to and end. In the Shanghai Gold Exchange, you have to trade the physical, which ultimately will lead to the true discovery of the gold price, rather than the digital gold price you get from the Comex. You can track it here
One would have thought with the various geopolitical risks currently coming to the surface, Italy, France, Trump and his wall, USA Govt shutdown, and massively rising debt levels thought the world having a little bit of the metal above and below the ground we be rather astute at the moment, I would have thought. Certainly, the market thinks so, with stockmarkets heavily selling off in December, Gold and silver miners rallied strongly up on average by 15% for December alone. Combined with the fact that over the last 40 years before every recession you normally see a strong rally in commodity prices, so owning some precious metals and other commodities possibly make good sense at this juncture. As they say, the only time gold performs is when everything else doesn't. Maybe that is 2019-2020!


I don’t know where you got your figures,but there is no way that 80% of China’s forex reserves are in gold. Officially,the figure is around 2%,but could be much more,perhaps 10/11%,which would make it No1,ahead of the US.

Thanks for spotting my error. Unfortunately, I misread a Forbes chart.