Earlier this month, we spoke to Jeffrey Rhodes at RAK BANK to find out what his thoughts were for Gold in 2018. This is what he has to say…
OUTLOOK FOR 2018 GOLD On the face of it gold had an uninspiring 2017 with the narrowest trading range (18.40%) since 2012 (17.60%) and before that 2001 (17.34%), and well below the annual average for the period 2001 to 2017 of 32.72%. Certainly, ATM option volatility fell throughout the year with the gold price seemingly stuck between $1200 and $1300 for much of 2017. However the gold bulls will be encouraged by the fact that yellow metal managed to end above the key $1300 level with a solid 13% increase in price despite significant headwinds as global equity markets soared to record levels led by the DJIA with a 25% advance, the US, Eurozone and Asian economies showed robust growth and the Fed raised nominal interest rates by 0.25% on three occasions to double the cost of borrowing.
Against this background gold’s performance was impressive and highlights the fact that since the Global Financial Crisis it has become a mainstream asset class that is an important part of most investment portfolios and is seen as a form of wealth insurance by fund and money managers around the world. Perhaps the key role that gold continues to play in the global financial system is that of a hard alternative currency to all currencies, as it has done for over 5,000 years, and particularly as a hedge against the USD. This was proved to be valid correlation once again in 2017 with the 13% gain in the gold price more than compensating for the 10% decline in the .DXY and this relationship between gold and the US dollar forms the basis for our view on gold prices for 2018. The USD had a difficult 2017 despite rising interest rates, the start of QE unwinding by the Fed and surging stock markets and this seems set to continue in 2018 with the .DXY poised to make a major break lower on the charts that could yield another 10% on the downside, which will support gold prices. Also, Trump’s tax reform plans will help to balloon the Federal budget deficit, while the resulting fall US Treasury prices and rising yields will add to the cost of servicing this debt and make it difficult for the Fed to be too aggressive with its short-term monetary policy.
While it is counter-intuitive to think that gold could stage a major rally in an environment of rising interest rates and bond yields, our view is that the threat of the Fed re-starting the printing presses to help mitigate the cost of servicing the US national debt could lead to fresh safe-haven buying in gold to augment the likely impact of a falling greenback. A look at the long-term charts shows that gold has finally penetrated the downtrend line that has been in place since 2011 when gold posted its all-time high of $1920 and the technical focus for 2018 will be on the upside with $1425 the initial target and $1565 a possibility. On the downside, the price action in 2017 has reinforced the band of support in place between $1225 and $1175 and this should contain any moves lower, while we expect gold to average $1385 in 2018.