2018 OutLook what to expect from Gold

Despite its sharp retreat from the September high, gold looked set to end higher for the second consecutive year when this report was written in mid-December. The trend of the US dollar and investors’ appetite for risk will be the key factors to determine the metal’s direction in 2018. Other factors include geopolitical risks and physical demand and supply dynamics, which are near impossible to predict. 

Demand for gold could also be impacted by investors’ appetite for crypto currencies, if one can assume they are viable substitutes for paper gold. But their extreme volatility and vulnerability means many people will still view gold as the ultimate safe haven asset. As mentioned, the direction of the dollar and stocks is what gold investors and speculators will need to concentrate on the most in 2018. 

The correlation coefficient diagram, below, shows the negative relationship between gold and the dollar remains strong. However, the metal’s negative relationship with stock indices has broken down, except over a 1-month period. In fact, over a year period, gold has correlated positively with stocks, albeit weakly. Thus, any further gains for stocks in 2018 may not necessarily cause gold to go down in a meaningful way, while any short-term rise in risk aversion could help to boost the safe haven metal significantly. 

But ultimately the direction of the US dollar will have the biggest impact on gold, due to their strong negative relationship. If we are correct in our bullish dollar forecasts, this should mean gold may struggle to rise meaningfully next year. However, the ECB may begin tightening its policy in the event the Eurozone economy expands more robustly. This could keep the EUR/USD elevated, which could help to support the positively-correlating gold, regardless of the dollar’s performance against other currencies. So, the euro should have a bigger, indirect, impact on gold in 2018. Taking everything into account, we are neutral on gold’s direction for 2018. 

But as equity prices are severely overstretched we are leaning more towards the bullish rather than bearish argument. Our slightly bullish view is also influenced by the fact gold has broken its central bear trend going back to 2011. The metal would look more bullish if it climbs and holds above the pivotal $1300 level. However, if it were to break below its uptrend and key support at $1200 first then all bets would be off, at least from a technical perspective.