What the WGC thinks of gold in 2018

2018 is a good year for gold, That is what the World Gold Council (WGC) says. According to economic analysts, the S&P 500 struck an all-time highs but gold prevailed and finished stronger by 13.5%. This is the biggest annual gain since 2010. Gold outperformed a lot of other major assets.

The weak US Dollar, geopolitical instability and higher stock indices has contributed to the gains in gold. Investors have continued to buy gold and add it to the portfolios to hedge against risk. More people bought physical gold as well as gold-backed ETFs. Gold ETF’s rose by as much as $8.2 billion of inflows this year alone.

The World Gold Council just released its annual outlook on gold. They identify four key market trends that will support positive gold performance this year. There are four important points highlighted in the report:

1. 2018 might be the year of great economic growth worldwide, which will affect the price of gold. The report also addresses the scramble for gold by Russia and China, which may imply that the countries are either preparing for something spectacular to impact the price of gold. It could be that or it may be a tentative move away from the dollar.

2. Balance sheets are shrinking whilst interest rates continue to rise as they were doing over the last 12 months. The US Federal Reserve is expected to raise interest rates at least three times this year. The Fed may also attempt to shrink its balance. Central banks have put trillions of dollars into the global economy and cut interest rates over the last decade allowing asset values to reach new records while reducing market volatility to record lows. However, when these banks stop their expansionary policies and hike rates in 2018, the market volatility may go up again, especially with the amount of debt that government carries. This would make gold more attractive to investors.

3. When asset prices went up in 2017, they did not knock the S&P which still sits at an all-time high. This situation promoted some investors to seek out additional risk in the hope of making additional returns. This search for more yields has fuelled asset price growth in other places, including exposure to low quality credit markets and investments in countries like China. The bull market may continue throughout 2018 which makes prudent investors more cautious about the level of their exposure to risk. This is where gold comes in. As we know, gold does well during times of systemic risk. It can reduce losses in times of instability and distress in the markets.

4. It is important for markets to be more transparent, accessible and more efficient. This has been the case for the past decade. The London Bullion Market Association (LBMA) launched an initiative for trade-data reporting. The London Metal Exchange launched has also launched its own program of exchange-traded contracts to improve transparency. Even India has launched its own national spot exchange in the interest of transparency and ease of use. There is talk of Russia lifting its 18% VAT on bullion bars. The more accessible and transparent the market is, the more attractive it will be to investors.

In general what the World Gold Council report on the outlook for gold in 2018 is positive. It should encourage investors to take a closer look at gold as a viable asset to diversify their investment portfolios.

Sources:

  1. https://www.gold.org/goldhub/research/gold-market-2018
  2. https://www.bullionstar.com/blogs/ronan-manly/lbma-trading-volume-data-confirms-the-paper-gold-casino-in-london/

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