US dollar and gold
While gold might benefit briefly from the new year rally, a large portion of the remaining performance will depend on the outlook for the US dollar (UUP). Dollar-denominated assets such as gold and oil become cheaper when the value of the US dollar falls, and vice versa.
Will US dollar strengthen in 2018?
This year didn’t turn out so well for the US dollar. Until September 2017, the dollar was low and then started showing signs of bottoming out. Factors such as the rise in other currencies, the disappointment over President Trump’s agenda, and political uncertainty with North Korea and Russia led to a steady fall in the dollar. The rise in the fourth quarter came on the back of the Fed’s interest rate outlook, Congress passing the US tax reform bill, and other US economic factors.
Most market participants believe these factors could keep supporting the US dollar into 2018. Better-than-expected inflation figures could lead the Fed to raise the interest rate three times in 2018. That would be beneficial for the US dollar and detrimental to gold.
The negative sentiment for gold could also affect miners such as Royal Gold (RGLD), Barrick Gold (ABX), Kinross Gold (KGC), and Coeur Mining (CDE), which are leveraged plays on gold (JNUG). Although royalty companies such as RGLD have done well in 2017 year-to-date, other miners have lagged. ABX and CDE returned -11.1% and -14.2%, respectively. KGC has been an outlier with returns of 30.9% year-to-date.
Some analysts, however, are predicting that the US dollar will extend its 2017 decline into 2018. BMO Capital Markets believes that as growth in the rest of the world catches up with the United States, the tax benefit may not materialize. As the performance differential between the United States and the rest of the world shrinks, the US dollar might come under pressure. ING Group has a similar argument regarding the rest of the world strengthening and extending the decline of the US dollar. If these arguments prove to be true, contrary to the above arguments, gold could be in for a great year in 2018.