Mid-year outlook 2018 Global economic trends and their impact on gold

Transcription

1 Mid-year outlook 2018 Global economic trends and their impact on gold

2 About the World Gold Council The World Gold Council is the market development organisation for the gold industry. Our purpose is to stimulate and sustain demand for gold, provide industry leadership, and be the global authority on the gold market. We develop gold-backed solutions, services and products, based on authoritative market insight and we work with a range of partners to put our ideas into action. As a result, we create structural shifts in demand for gold across key market sectors. We provide insights into the international gold markets, helping people to understand the wealth preservation qualities of gold and its role in meeting the social and environmental needs of society. Contents H2 2018: a sea of economic contradictions 2 A rocky start for the year 2 Gold s dual nature amidst mixed economic signals 2 Economic growth is accelerating albeit unevenly 3 The US dollar's rise may not last forever 3 Rising inflation and an inverted yield curve 4 Momentum may be turning for gold 4 Based in the UK, with operations in India, the Far East and the US, the World Gold Council is an association whose members comprise the world s leading gold mining companies. For more information Please contact: Krishan Gopaul krishan.gopaul@gold.org Mukesh Kumar mukesh.kumar@gold.org Carol Lu carol.lu@gold.org Adam Perlaky adam.perlaky@gold.org Louise Street louise.street@gold.org Juan Carlos Artigas Director, Investment Research juancarlos.artigas@gold.org +1 (212) Alistair Hewitt Director, Market Intelligence alistair.hewitt@gold.org John Reade Chief Market Strategist john.reade@gold.org Mid-year outlook 2018 Global economic trends and their impact on gold 01

3 H2 2018: a sea of economic contradictions Gold investors saw their fortunes change during the second quarter after benefiting from gold s strong performance in Q1. As we look ahead, we have identified three key macro trends that will influence gold s behaviour in the second half of 2018: positive but uneven global economic growth trade wars and their impact on currency rising inflation and an inverted yield curve. Combined with attractive entry levels, we believe that these trends will increase gold's relevance for investors in the months ahead. A rocky start for the year The first half of 2018 proved quite eventful for financial markets. Stocks experienced a few pullbacks during the first quarter as geopolitical tensions rose, but have been generally trading upward since the start of Q2. This was especially true in the US and Asia where tech stocks captured most of the growth (Chart 1). So far, investors seemed to have shrugged off the escalating trade war rhetoric between the US and many of its trading partners or, at least, discounted the effect it may have on long-term economic growth. Chart 1: Tech stocks have led market growth in 2018 EM stocks Silver Commodities Gold EAFE stocks Long USD Gold Index US Treasuries Global Balanced Index US dollar index S&P 500 Oil NASDAQ -10% -5% 0% 5% 10% 15% 20% Return *Calculations based on S&P 500 and NASDAQ total return indices, Bloomberg Barclays US Treasury Index, DXY Index, MSCI EAFE and EM indices, LBMA Gold Price PM, LBMA Silver Price, Bloomberg Commodity Index, Sloactive GLD Long USD Gold Index, COMEX oil futures, and New Frontier Global Balanced Index. Source: Bloomberg, ICE Benchmark Administration, World Gold Council. Gold has thus far moved in the opposite direction. Its price rose by more than 4% in the first few months of the year, only to finish in June down by the same amount. This downward trend has continued during July as gold dropped almost an additional percentage point. But while gold s volatility spiked in February and April, it has been moving in a relatively low range since. Gold s performance has been driven by a combination of factors. Three stand out: A strengthening US dollar 1 Higher investor threshold for headline risk Soft physical gold demand. 2 At the same time, gold s price momentum and investor positioning in derivatives markets has accelerated its descent. We believe, however, that there may be reasons to be more optimistic during the second half of the year. Gold s dual nature amidst mixed economic signals Gold s long-term returns are positively linked to economic growth but its short-term performance is more sensitive to risk and uncertainty (Focus 1). And gold's dual nature could benefit from key macroeconomic trends developing in the second half of the year. We see investors positioned for: positive but uneven global economic growth trade wars and their impact on currency rising inflation and an inverted yield curve. In addition, gold s recent pullback is supportive of consumer demand, as low prices tend to spur buying; at the same, it may provide attractive entry levels for investors. 1 Gold tracks the dollar as rates take a back seat, April Gold Demand Trends: Q1 2018, May Mid-year outlook 2018 Global economic trends and their impact on gold 02

4 Focus 1: Drivers of the gold price Broadly speaking, drivers of the gold price can be grouped into four categories: Wealth and economic expansion: periods of growth are very supportive of jewellery, technology and long-term savings Market risk and uncertainty: market downturns often boost investment demand for gold as a safe haven Opportunity cost: the price of competing assets, such as bonds (through interest rates), currencies and other assets, influence investor attitudes towards gold Momentum and positioning: capital flows and price trends can ignite or dampen gold s performance. Economic growth is accelerating albeit unevenly Global growth has generally been increasing over the past couple of years. But this growth has not been consistent across regions. As we look forward, however, we see support for gold from key regions. As China has transitioned from an investment-driven to a consumption-driven economic model, its growth rate has slowed slightly. However, as it becomes less dependent from foreign investment and solidifies its leading role in Asia, China s economic expansion will likely be more robust. This confidence, combined with the size of the Chinese local market, is likely to prove positive for gold. 3 In India, the second half of the year is usually positive for gold as the harvest and wedding seasons during the autumn provide seasonal support for the market. In addition, the economic policies rolled out by the government to draw the informal, cash-based economy into the formal sector are starting to translate into stronger economic growth: India s Q1 GDP growth rate was close to 7.7% making it one of the fastest growing economies in the world. The US economy has also been expanding, making consistent gains since mid-2016 even if at a more modest pace than either India or China. With this expansion comes an increased demand for gold jewellery and we expect this pace to continue. By contrast, the European market may remain soft, as there are signs that political turmoil and increased uncertainty regarding Brexit may slow the acceleration the eurozone experienced last year. The US dollar's rise may not last forever The dollar has strengthened over the past few months, making its most significant appreciation since the last quarter of It would be easy to apportion this trend to higher US interest rates, but rates have been increasing consistently since the end of 2016 a period during which the US dollar generally depreciated. Instead, the dollar strength is due to a combination of two factors: continued easy monetary policy in other parts of the world a perception that the US may be better placed to benefit from trade wars, at least in the short term. Interest rate differentials matter, and the strength of the US economy has allowed the Federal Reserve to continue its path to policy normalization at a fairly consistent pace: raising its Fed funds rate mostly every other meeting since December In addition, in the face of ongoing rhetoric over trade agreements, the market seems to have taken the view that the US will likely benefit from renegotiations. Even if this turns out to be the case, many economists believe that an increase in tariffs will eventually have a negative impact on economic growth. And while this could decelerate gold consumer demand somewhat, its effect may be lessened by a weakening in the US dollar. 4 Historically, a weak dollar tends to provide a stronger boost to gold s performance than the drag created by a strong dollar (Table 1). Table 1: Gold prices rise twice as much during weak dollar periods than they fall when the dollar strengthens Average monthly gold returns under different dollar environments* US dollar environment Long term Weakening Flat Strengthening Avg. monthly return 0.6% 1.5% 0.9% -0.7% *Based on monthly returns from January 1971 to June A flat US dollar environment is defined as a 12-month rolling window when the US Dollar Index (DXY) return is between -4.5% and 4.5%; a weakening dollar is when DXY falls by more than 4.5% and a strengthening dollar is when it rises by more than 4.5%. Each environment contains approximately 180 monthly observations. Source: Bloomberg, ICE Benchmark Authority, World Gold Council. 3 China's jewellery market quietly improving, June Martin Murenbeeld, Global imbalances and the implications for gold, Gold Investor, October Mid-year outlook 2018 Global economic trends and their impact on gold 03

5 Rising inflation and an inverted yield curve Inflation has been slowly but surely increasing over the past years and is now close to 2% in Europe and China, 2.9% in the US, and 5% in India, to name a few examples. Looking forward, the expansion of protectionist economic policies has significantly increased the risk that inflation will accelerate further. And companies facing higher tariffs will likely pass the bill to consumers. Historically, investors have used gold as an inflation hedge, with the result that its price has increased substantially when inflation rises above 3% (Chart 2). The combination of high inflation and a deceleration of economic growth can create a complicated scenario for central banks. This is especially true for the Fed, as its mandate includes price stability, full employment and moderate long-term interest rates. In the face of continuing stock price rises, US bond markets seem to be placing greater probability on higher inflation and lower growth. On the one hand, TIPS and TIPS breakevens (a proxy for inflation) have continued to rise, but the nominal yield curve has flattened significantly and is close to becoming inverted. An inverted yield curve has been shown to be a precursor to recessions in the US. And while it s impossible to time the market, investors have generally benefitted from holding gold during periods of economic deceleration. Chart 2: Gold has historically rallied in periods of high inflation Gold returns as a function of annual inflation* Annual return 16% 14% 12% 10% 8% 6% 4% 2% 0% Low inflation ( 3%) High inflation (>3%) US CPI %y-o-y Nominal return Real return** *Inflation computed using annual US CPI y-o-y changes between 1970 and **For each year on the sample, real return = (1+nominal return)/(1+inflation)-1. Source: Bloomberg, World Gold Council. Momentum may be turning for gold We believe that the confluence of key trends, as highlighted for the second half of 2018, could be supportive of gold demand. In addition, gold s recent pullback will likely support consumer demand as lower prices have historically increased jewellery buying. For investors, gold's current price range may offer an attractive entry level, especially since net longs 5 linked to COMEX gold futures are at their lowest level since mid And money manager net longs, a subset of the broader metric, are close to zero a level not seen since 2015 when gold hit a multi-year low. Historically, such a scenario has coincided with a rebound in the price of gold, as even a small catalyst for investment demand may caught speculative investors with a large exposure to short positions. Finally, while the summer period tends to be a quiet period for gold buying and trading as seen by softer seasonal demand, lower trading volumes and sideways price movement the gold price has tended to increase in September as consumers prepare for a traditional buying period and investors rebalance their portfolios before the end of the year (Chart 3). Chart 3: The gold price has tended to increase in September Gold return seasonality* Avg. return Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average Median 90% confidence band *Based on monthly returns for the gold price from December 1982 to December Source: Bloomberg, ICE Benchmark Administration, World Gold Council. 5 Net longs represent reportable non-commercial positions in futures markets that are often considered to reflect speculative positions in the market. Mid-year outlook 2018 Global economic trends and their impact on gold 04

6 Copyright and other rights 2018 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates. All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other third-party content is the intellectual property of the respective third party and all rights are reserved to them. Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below. The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus, Thomson Reuters or other identified third-party source, as their source. World Gold Council does not guarantee the accuracy or completeness of any information. World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly from the use of this information. This information is not a recommendation or an offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, Services ). Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments. This information contains forward-looking statements, such as statements which use the words believes, expects, may, or suggests, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. We assume no responsibility for updating any forward-looking statements. Mid-year outlook 2018 Global economic trends and their impact on gold 05

7 World Gold Council 10 Old Bailey, London EC4M 7NG United Kingdom T F W Published: July 2018