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Could Market Risks Restore Investor Confidence in Gold in 2019?

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Uncertainty rising

As we’ve discussed in this series, market uncertainty is increasing after an unusually calm 2017 and part of 2018. The major sources of uncertainty are expected to be the looming trade war between the United States and China (FXI), the coming earnings and margins deceleration, the Brexit deal, and the Fed’s policy path.

The factors that weighted negatively on gold prices (GLD) in 2018 aren’t expected to remain bearish for gold in 2019. One key factor was the Fed’s rate (TLT) hikes and aggressive stance on future hikes. After the market sell-off in October and soft economic data, the Fed’s stance has tempered. Economists now expect just one rate hike in 2019, compared to three previously. If the Fed’s dovishness materializes, it would be a huge positive for the non–income-yielding metal.

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US dollar strength waning

The second-most-important pressure on gold was the strength in the US dollar (UUP), which is a factor behind the prevailing interest rates and expected rates in the United States. If the Fed decides to go slow and eventually stop raising rates before expected, the US dollar (USDU) would decline. Moreover, the divergence in the United States’ (SPY) and the rest of the world’s performance has strengthened the US dollar, and many market participants now believe emerging markets’ (EEM) weakness is about to end. Combined, these factors could lead to the United States’ and the rest of the world’s performance converging, which may not give the US dollar much incentive to rise.

Equities and gold

The solid equity performance has been another factor weighing down gold in 2018. However, as we’ve seen since the middle of October, volatility is on the rise along with market fear of a coming slowdown in US corporate (VTI) earnings and margins. As we’ve discussed in this series, earnings growth, margins, and economic growth could be peaking, which could limit future gains and accompany increased volatility. All these factors, plus gold and miners looking less expensive than broader markets, could prompt investors to keep a portion of their portfolios invested in gold (JNUG).

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