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The Long Story Short
Time for Gold to Shine?
Gold investors remember the good old days, the period from 2001 to 2011 when gold prices climbed 475% from $272 per ounce at the end of 2000 to $1,563 per ounce at the end of 2011. During that period, gold reached a low of $255 per ounce, peaked at $1,901 and averaged $705 per ounce. The key drivers for the “Gold Rush” were: 1) selling among central banks abated, 2) gold production was constrained, 3) new investment vehicles, such as exchange-traded funds, made it easier to invest in gold, and 4) the U.S. dollar weakened during much of the period. Since that time, gold prices have languished and seem to be stuck in a trading range for the past 4 years between $1,051 and $1,366.
During the first three quarters of 2018, the price of gold declined 8.5% to $1,191. After a 1.7% increase during the first quarter that provided a glimmer of hope, gold prices declined 5.4% and 4.9% during the second and third quarters, respectively. According to the World Gold Council, third quarter gold demand grew less than 1% on a year-over-year basis to 664.3 tonnes. While bar and coin demand increased 28%, central bank demand increased 22% and jewelry demand increased 6%, outflows in gold-backed ETFs offset much of this growth. 1
During the fourth quarter through November 14, gold prices rose 1.6% to close at $1,211 per ounce. Gold’s strength at the beginning of the fourth quarter may be attributed to increased financial market volatility driven by geopolitical tensions and concerns about domestic and global economic growth. Additionally, reports that central banks may increase purchases of gold, especially among those representing emerging markets, may have provided a boost to investor sentiment. In the comparable time frame, the performance of the broader market indices was volatile with the S&P 500 posting a 7.3% decline during the period. Gold may have performed its role as a “safe-haven” investment.
Gold investors may be wondering if the promising start to the fourth quarter will signal continued gains for gold or will it turn into a head fake?
A Golden Opportunity. The World Gold Council in its “Mid-Year Outlook 2018: Global Economic Trends and Their Impact on Gold”, cited three key macro trends that could influence gold’s behavior in the second half of 2018. They are: 1) positive but uneven global economic growth, 2) trade wars and their impact on currency, and 3) rising inflation and an inverted yield curve. In their report, the authors state “Combined with attractive entry levels, we believe that these trends will increase gold’s relevance for investors in the months ahead. 1
The Debbie Downers. Some market participants believe there could be further downside for gold based on the outlook for higher interest rates which could lead to continued strength in the dollar and provide an incentive for investment in government securities. Another bearish view for gold prices is anchored in the belief that the Federal Reserve will be able to keep inflation tethered to its 2% target and economic growth remains strong for several more years. 2
More Bull than Bear. The dollar could weaken, particularly if inflation picks up, economic growth expectations temper and concerns mount about increasing government deficits and rising debt levels. According to the U.S. Treasury’s Final Monthly Treasury Statement for fiscal year 2018 through September 30, the deficit climbed 17% to $779 billion compared to the deficit during the prior year period. While we think these factors point to a favorable drift higher in gold prices, it would take a convergence of the above-mentioned factors to lead to a sharp increase in gold prices. While most of the key sources of gold demand were positive in the third quarter, investment demand represented by ETFs and similar products remain a wild card. 2
- World Gold Council, Mid-Year Outlook 2018, Global Economic Trends and their Impact on Gold, July 19, 2018.
- U.S. Department of the Treasury, Bureau of Fiscal Service, Final Monthly Treasury Statement of Receipts and Outlays of the United States Government, For Fiscal Year 2018 Through September 30, 2018, September 2018.
Photography credit: Michael Steinberg