2019 could be the year when investors are attracted to gold because of global uncertainty. This could also end up increasing gold prices. See how.
A leading metal consultancy has predicted[S1] that the world will consume 4,370 tonnes of gold this year. It will be the most since 2015 and slightly higher than 4,364 tonnes consumed in 2018. Gold prices are expected to average $1,310 an ounce this year which is the highest since 2013.
Review of 2018
For most of 2018[S2], Gold faced significant headwinds. Dollar had become stronger, the Fed kept hiking rates steadily and the US Economy was given a booster shot by the Trump Administration’s tax cuts. All these factors encouraged investor sentiments. This resulted in a rising stock market at least until the beginning of October.
However, geopolitical risks and negative macroeconomic sentiments kept rising. This resulted in the stock markets losing their sheen and suffering a pullback. A sell-off lead by US tech companies made the situation worse. This resulted in investors short covering in gold. By the end of the year, the price of gold had reached $ 1280/oz
Investors will continue to seek haven in gold due to systemic risks emerging because of the following issues:
Economic Slowdown in the US
Sectors[S3] such as housing and autos in the US are showing signs of deceleration. The fourth quarter GDP growth for US was[S4] 2.2%. This was less than the 2.6% estimated earlier and significantly lower than the 3.4% GDP growth in third quarter of 2018.
Interestingly, analysis[S5] of economic data across the previous seven decades indicates that recession hits the US economy after 32-35 quarters of growth. The current expansion[S6] cycle has already lasted for about 36 quarters. The Fed has also projected slower GDP numbers for 2019 and 2020.
After decades of globalisation, several governments across the world are embracing protectionist policies. Italy has had populist governments for several years which have given importance to short-term interests of citizens rather[S7] than embracing globalisation. In February 2018, India[S8] raised import duties on more than 40 items ranging across auto parts, toys and candles. 2018[S9] also witnessed the Trump administration imposing higher duties on Canadian, European and Chinese goods. China was especially targeted with 10% duties. China also retaliated by imposing tariff on American goods. Year 2017 witnessed[S10] 467 protectionist measures imposed all across the world.
Moving away from the dollar
Central banks across[S11] the globe are stockpiling gold. In 2018, central banks of countries such as Russia, Turkey, Hungary, and Kazakhstan purchased gold in huge quantities to shift their reserves away from the dollar. This significant demand among central banks for the yellow metal is at its highest level since the last fifty years. In fact, Russia has been systematically trying to diversify over the years as it wishes to reduce the dominance of the dollar.
However, gold prices may pick up also because:
Rise of gold-backed[S12] ETFs
The holdings of gold-backed exchange traded funds are the most valuable in seven years. In 2018, the holdings in gold-backed ETFs and similar products rose by almost 3% and reached 2,440 tonnes. According to the World Gold Council, this is equivalent to $3.4 billion of inflows. Since 2012, this was the first time that the value of total gold-backed ETF holdings has finished the year above $100.
Demand in India and China
Firstly, it is important to note that China and India together account for 70% of the global demand for gold. The domestic gold markets of India and China are[S13] expected to rise in 2019 as the two currencies recover from a dismal year. China’s and India’s domestic gold markets are expected to grow next year as the two currencies recover from what has been a dismal year. Also thanks[S14] to job creation and rise in GDP per capita, demand in China for gold jewellery could increase.
India has[S15] jumped from 100 to 73 in the World Bank’s Ease of Doing Business Index. India also[S16] has made structural changes to its economy which could result in a GDP growth of more than 7.5% in 2019. India's jewellery demand[S17] went up by 10 per cent from 134.8 tonnes in the third quarter of 2017 to 148.8 tonnes in the third quarter of 2018 after two consecutive quarters of year on year declines. This has to be seen from the perspective of the global demand for jewellery which has been just 6%.
Federal Reserve will pause its rate hike campaign
The Federal Reserve has ruled[S18] out any interest rate hikes for 2019. Incidentally, after the Fed stops raising interest rates, gold prices go up. However, the period during which it happens could vary.
Investors looking to diversify could take this opportunity to increase their exposure to gold. Read on some factors that affect gold prices in India.