As gold ends a relatively strong year, Glint takes expert analysis on market trends, interest rates, the dollar and bitcoin, and finds good reason for cautious optimism in 2018
As gold finishes the year up approximately 8% in dollar terms, investors are predicting a steady 2018 for the yellow metal. Potential headwinds, notably rate rises and cryptocurrency expansion, are not seen as significant enough to prevent gold price growth. Additionally, geopolitical uncertainty throughout 2017 has enhanced gold’s “safe-haven” status.
Although gold ended the year poorly, such a drop-off could now trigger buy positions for many traders. “I believe the selling in gold has finally stopped and speculative positions are now light enough to assume the market will trade up in the next 2 weeks,” Mark Mahaffey, CIO of gold hedge fund Hinde Capital, told Glint. 2017 was the second least volatile year since 2005 in total price range terms and the six-month rolling monthly change (modular) is back to 2%, says Mahaffey.
Mahaffey described the pattern over the last few years, as that of a late November into December sell-off, before a rally into the first quarter. “The technical position shows a very light speculative positioning to strengthen the argument for price advances despite the low volatility.”
“The dollar’s weakness has not lead to general gold strength, as is the norm over the last six months but while interest rates have risen, the pace and projections lie firmly within expectations.”
However, Mahaffey said major price rise triggers remained elusive for now. “Until such times as the stock market gives up the ghost of extreme price/earnings multiples or crypto-currencies have a blow up, gold will probably remain contained under $1350/1400.”
An uptick is still expected despite recent interest rate rises on both sides of the Atlantic. Following the US Federal Reserve’s (the Fed) December rate rise of 0.25%, to 1.5%, markets and policy makers are forward-planning another three rises throughout 2018, all at 0.25%. However, although gold often reacts negatively to such movements, spot gold enjoyed its biggest gain for three weeks in December. Investors looked to macro-economic variables such as the US employment rate and lack of slack in global economies. “Gold moved up in its initial reaction because the Fed is dovish in terms of a rate hike vision for 2018, and it sees only three rate hikes, not four,” said Naeem Aslam, chief market analyst at TF Global Markets, in a note.
Longer-term, gold could gain throughout 2018 as ongoing economic growth remains limited, with analysts saying gold prices should build a bottom above $1,200 per ounce. “The short-term rate cycle headwinds should fade as the year progresses. With the dollar expected to roll over and upside pressure to bond yields easing, medium to longer-term bottom-fishing opportunities should open up,” said Carsten Menke, Commodities research analyst at Julius Baer. “Sustainable upside to gold should materialise once growth concerns creep into financial markets and revive investors’ demand for gold as a safe haven.”
Menke believes the Fed’s rate rise announcement acknowledges it is moving above inflation and that sluggish inflation could pressure real growth and the dollar, attributing it to 0.9% price rise for gold. Gold miners, a bellwether for gold futures, were also up as Australia’s ASX All Ordinaries Gold index jumped up by almost 1.4%.
The bitcoin factor
Bitcoin’s phenomenal price surge, to over $17,000, within the last month has drawn comparisons with many historic bubbles. However, the cryptocurrency’s position as a competitor for gold’s market is unfounded says Goldman Sachs’ global head of Commodities research, Jeffrey Curry. The two markets are “vastly different,” he told the Financial Times, pointing towards the absence of regulation in cryptocurrency trading. Curry also contrasted the volatility of bitcoin with gold’s traditional hedging position. As well as drawing a comparison between market valuations of $275 billion for bitcoin versus gold’s $8.3 trillion. Hinde Capital’s Mark Mahaffey emphasised the contrast in markets: “The gold stock in the world may be some 180,000 tons, roughly $7 trillion in value, cryptocurrencies are almost $0.5 trillion in total. The world gold value is 14 times more than crypto currently. It took us 5000 years to mine that gold, but only a year to ‘mine’ that crypto value.”