Factors supporting gold’s new year rally
Previously in this series, we looked at gold prices and how they could be getting ready for a new year rally as we enter 2018. Indicators such as seasonal patterns for the past few years, the recent COT (Commitment of Traders) report, and the physical demand outlook could mean that investors could benefit from a short-term bounce in gold prices, which might continue well into the first quarter of 2018.
There are, however, fundamental factors that could decide the fate of gold prices in the long term.
Factors pointing to a downside
US equities (SPY) (SPX-INDEX) had a stellar run in 2017, hitting higher highs. Volatility, on the other hand, remained low. Tax reform could further boost equities in 2018, which would be a headwind for gold prices. When economic conditions are good and the stock markets are doing well, investors don’t worry too much about hedging their exposure and safe-haven investments.
The Fed has suggested three more interest rate hikes in 2018. While there are fewer chances of it surprising to the upside, any similar situation could cause gold to come under pressure. Moreover, the more-than-expected hawkish tone of the Fed could mar gold’s investment appeal.
Lack of fundamental positive catalysts
As we saw in What Can Investors Expect from Gold Prices in 2018? factors such as the euphoric equity market outlook after the passage of the tax reform bill, a recovering US dollar, interest rate hikes by the Fed, and rosy US economic conditions point to a downside for gold prices in 2018. There are not many catalysts that can fundamentally support the price of gold, and it could come under selling pressure even if a small negative catalyst materializes in the medium term.
Under this scenario, gold (GLD) and gold stocks (GDX) (NUGT) such as Barrick Gold (ABX), Iamgold (IAG), Kinross Gold (KGC), and Newmont Mining (NEM) could fall further. ABX, IAG, KGC, and NEM have returned -11.1%, 44.2%, 30.9%, and 5.8%, respectively, year-to-date.