As we enter the new year, it is time to take a look at how gold has performed as an investment class and how it is likely to behave in the coming year. One of the reasons why we keep an eye on gold is that unlike other commodities whose prices depend on simple demand and supply, the price of gold has many more variables to it. The state of the world economy and the interplay of political and economic forces have a major role in determining gold price and its direction. Therefore, any meaningful analysis must take into account all these wider issues and it is precisely this aspect which makes the exercise difficult but enlightening and worthwhile.
Our view at the beginning of 2018 – Positive on gold, not so for the US economy
Last January, when predicting gold prices for 2018, we expected prices to nudge higher. Instead gold price ended the year marginally down by 0.93 percent. Our expectation was based on anticipated increase in US fiscal deficit following President Trump’s USD $1.5 trillion tax reform, rising geo-political risk, and uncertainty over the pace of normalisation of interest rates by the US Federal Reserve during 2018. We further saw rising risk from a flattening yield curve in the US which is considered an early warning signal of an economic slowdown or recession. A slowing economy was expected to slow down growth in corporate profits and negatively impact stock markets which had scaled new peaks following the passing of Trump’s tax plan. All these factors were expected to support gold price. However, the year 2018 turned out highly volatile for gold investors. Gold touched a high of USD $1,355 per troy ounce and a low of USD $1,178 before closing the year at US $1,279, to register a fall of 0.93 percent over the year.
Snapshot of gold price movements over last five years
The international price of gold experienced a steady and continuous upward trend from US $271.04 per troy ounce in 2001 to its all-time high price of around USD $1,900 per troy ounce September 2011. Thereafter, gold price remained range bound for some months and subsequently started declining steadily from 2013 to reach USD $1,060 by the end of calendar year 2015. Here is a tabular summary of gold price movements in the international markets over the last five years.
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Price movements in 2018
The price movements during the year can be divided into three distinct phases.
Phase I: Range Bound
Gold fluctuates within a narrow band of USD $50 per ounce
The year started with strong support carried over from 2017, with gold price rise from $ 1,291 to quickly cross the key resistance of $ 1,300 level. The rise in price was mainly attributed to depreciating US dollar since last year, which registered its biggest annual drop since 2003 in the first (Jan-Mar) quarter of 2018.
Thereafter, gold started to lose its sheen with rising political uncertainty in Europe leading to gains for the US dollar. In addition, the Federal Reserve kept its policy rate unchanged in its February monetary policy but hinted at hikes in later reviews. A higher interest rate leads to higher bond yields which dampens investors demand for the non interest yielding gold. The weaker dollar during early part of the year and the expected hike in Fed policy rate kept gold price within a narrow range of $ 1,300 and $ 1,350 per ounce in Q1 of calendar year (CY) 2018.
Phase II: Declining trend
Gold price declined 13 percent from April to August
The US Fed increased its policy rate by quarter percentage in its March monetary policy which push gold price lower. In addition, the Fed also increased the US economic growth forecast from 2.5 percent to 2.7 percent for 2018, and from 2.1 percent to 2.4 percent for 2019. The increase in the forecast growth raised expectations of more aggressive hikes in the policy rate which lowered demand for gold as investors shifted to dollar denominated instruments for higher returns. Moreover, with the rise in interest rates, dollar strengthened against a basket of six major currencies pushing gold price to hit its lowest for more than 19 months. The rising dollar index resulted in gold price declining by around 13 percent during April to August 2018.
Phase III: Growth
Gold recovered 7 percent during final quarter of 2018
After declining for five straight months to the low of USD $1,178 per ounce in August 2018, gold price recovered from the lowest point by about 8 percent but eventually ended with its first annual decline since 2015. Looking back over the year, the fall in gold price during the year can be attributed mainly to strengthening of the US dollar amid the Sino-US trade conflicts and the US Fed hiking interest rates.