Luckily or not, 2017 is behind us. It was a positive year for the gold market, as the yellow market gained more than 12 percent. However, investors are forward-looking, so let’s focus on what the coming months will bring. The next year will be shaped mostly by the following broad economic trends:
- Global activity is improving.
- Labor markets are strengthening further.
- Subdued is finally rising (but moderately).
- Central banks are slowly reducing their monetary policy stimulus.
- are rising.
Let’s analyze them now, starting with the accelerating global growth. In 2017, the global realgrew by about 3.7 percent. It was higher than in 2016 and significantly above the expectations. Indeed, the world economy is outperforming most predictions for the first time since 2010. And, according to the Goldman Sachs, the world’s real economic activity may rise by even 4 percent next year. Importantly, the global growth is broad-based across countries. Gold is a , which shines the brightest during periods of economic malaise, such as . Hence, the solid economic growth likely to occur next year will be a serious headwind for the yellow metal.
With relatively strong economic momentum, the labor markets should strengthen further. In several developed countries, including the U.S., the unemployment rate has already fallen to the pre-crisis level (see the chart below). The advanced economies are thus near full employment, with quickly closing output gaps.
Chart 1: The unemployment rate (red line, right axis) and the inflation rate (CPI, green axis, left axis) in the U.S. over the last ten years.
Hence, the flourishing economy and the tightening labor market should finally raise inflation. Actually, inflation is significantly higher than two years ago, as one can see in the chart above.
Gold is perceived to be a, but a moderate increase in the or the should not boost the price of the yellow metal. Gold shines brightly during periods of high and accelerating inflation, so unless inflation gets out of control, significantly exceeding the Fed’s target, it should not madly. However, we cannot exclude inflation rearing its ugly head again. Actually, this is one of the biggest upside risks for the gold market in the medium-term.
Indeed, the rebound in inflation may actually encourage the central banks to adopt a more hawkish stance. This is what has been happening recently. Thehiked interest rates five times since the end of 2015. It also started to unwind its enormous . And even the reduced the scale of its monthly asset purchases last year. Additionally, the composition of the in 2018 will be more hawkish, so we expect a continuation of policy normalization. The will be gradual, for sure, but three hikes are not unlikely next year. Or they may come earlier, as the U.S. central bank has fewer reasons than in 2017 to pause the rate hike cycle at the beginning of a new year. Tighter and less accommodation imply higher interest rates, which is negative for gold, a zero-income asset.
Importantly, there might be also an upward pressure on the, due to the solid economic growth and rising expectations of the stimulus. This is of great significance, as gold has a strong negative with real interest rates.
The implications of the upcoming economic trends are not good for the gold market. We predict that the global recovery will continue, so we will have basically solid economic growth with low inflation, and balanced risks in the global economy. Thus, the macroeconomic environment is likely to exert downward pressure on the yellow metal. It does not mean that we expect a plunge in gold prices, but we simply consider ato be more probable than the . Surely, if the Goldilocks economy remains in place, the sideways may continue. What we are saying that the downward move is more likely due to the solid economic momentum and rising interest rates.
But a lot will depend on the performance of the. In 2017, the price of gold was supported by the depreciation of the . We believe that a similar sell off is unlikely this year, so there is a more room for declines in gold prices, at least in the short or medium term.
Last but not least, we painted the base scenario above. But future is uncertain and a lot may happen on the way, so it does not need to materialize. If someland, the price of gold may jump. We will analyze the potential upside risks for the gold market in the next part of this edition of the .
If you enjoyed the above analysis and would you like to know more about the most important macroeconomic factors influencing the price of gold, we invite you to read the Januaryreport. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our . If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. .
Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ and Editor