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As on: Jan 24, 2019 02:40 PM
Market Speaks: Interplay Between Market Risk And Economic Growth In 2019 Will Drive Gold Demand Says WGC
11-Jan-19   14:31 Hrs IST

The interplay between market risk and economic growth in 2019 will drive gold demand and financial market instability, monetary policy and the US dollar and structural economic reforms would be the three key trends that will influence the price performance of the metal, noted the World Gold Council (WGC), in a latest update. Gold’s price seesawed in 2018 as investor interest ebbed and flowed despite steady growth in most sectors of demand. Gold faced significant headwinds for most of the year. The dollar strengthened, the Fed continued to hike steadily while other central banks kept policy accommodative, and the US economy was lifted by the Trump administration’s tax cuts.

These factors fuelled positive investor sentiment which, in turn, pushed US stock prices higher, at least until the start of October. But as geopolitical and macroeconomic risks continued to increase, emerging market stocks pulled back. Eventually, developed market stocks followed, in a selloff led by US tech companies. This resulted in short-covering in gold with its price ending the year near US$1,280/oz (-1% y-o-y).

Many of the global dynamics seeded over the past two years and the risks that became apparent later in 2018 will carry over. And with them, we see a set of trends developing that will be the key in determining gold’s demand. In turn, their interplay will be most relevant for gold's short- and long-term price behavior. Increased market uncertainty and the expansion of protectionist economic policies will make gold increasingly attractive as a hedge. While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Fed has signalled a more neutral stance. Structural economic reforms in key gold markets will continue to support demand for gold in jewellery, technology and as means of savings.

Globally, there were net positive flows into gold-backed ETFs in 2018. While North American funds suffered significant outflows in Q2 and Q3, this trend started to shift in Q4 as risks intensified. We believe that in 2019 global investors will continue to favour gold as an effective diversifier and hedge against systemic risk. And we see higher levels of risk and uncertainty on multiple global metrics.

While market risk will likely remain high, two factors could limit gold’s upside: higher interest rates and US dollar strength. Higher US interest rates alone are not enough to deter investors from buying gold, as seen between 2004 and 2007 or 2016 and the early part of 2018. And while higher interest rates combined with a strong dollar can dampen gold’s performance, there are reasons to believe that the upward trend of the US dollar may be losing steam. First, the US dollar DXY Index, which measures the relative direction of the dollar against a basket of key currencies, has already appreciated by almost 10% from its 2008 lows. A similar trend in 2016 was followed by a significant correction.

In addition, gold speculative positioning in futures markets remains low by historical standards after hitting record lows in the final months of 2018. CME managed money net long positions stand near record low since 2006 – when data was first broken down by investor type. Furthermore, net combined speculative positions, which go back further, are negative for the first time since December 2001. And large net short positions have historically created buying opportunities for strategic investors, as such positions are prone to short-covering adding momentum to rallies in the gold price.

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