Global Economic Concerns
It is worth noting that gold traded at 2018 lows of $1,178 an ounce on August 17, 2018. In less than 5 months, gold has trended higher by 9.5%. One of the key reasons for the rally is global economic concerns, which has translated into gradually increasing risk-off trade and higher exposure to the precious metal.
My point on GDP growth related concerns is backed by the following economic data –
- For 2019, the IMF had earlier projected GDP growth of 3.9%. This was revised downwards to 3.7% when the IMF “World Economic Outlook” report was released in October 2018. The global economy has been negatively impacted due to ongoing trade wars and the IMF data backs my view that investors are increasingly concerned about the global economic health.
- China’s manufacturing PMI for December 2018 was 49.4. A reading below 50 indicates contraction in the manufacturing sector. Clearly, the world’s largest consumer of industrial commodities is slowing down and this is likely to impact GDP growth for all major commodity producing countries.
- The IHS Markit Eurozone Composite PMI date that was released on January 4, 2019 came at 51.1. This is the lowest reading for the Eurozone in over 48 months. Therefore, in addition to China, Eurozone is also facing weak growth into 2019.
- In addition to China and the Eurozone, I would also like to mention that new investments in India have plunged to a 14-year low. India has been in the race for the fastest growing economy in the world, but the Indian economy is witnessing considerable slowdown as indicated by the data.
Overall, these data clearly indicate that the global economy is in a downturn and explains the reason why gold has been trending higher in the last 3 months.
Policy Stance Reversal
The Federal Reserve has been pursuing contractionary monetary policy and that has translated into relative liquidity tightening and a strong dollar, which is negative for gold. However, I believe that the fed is likely to pause in terms of contractionary monetary policy and there could be a potential reversal in policy stance in 2019 towards renewed expansionary monetary policy. The first sign of pause in contractionary monetary policy is already evident as Jerome H. Powell has indicated that low inflation allows the fed to be “patient” in deciding on any further rate hike.
Besides the view of the fed, the following economic factors are pointing towards pause in contractionary monetary policy stance –
- I don’t see any recession in the United States in 2019. However, the probability of recession indicator as predicted by the Treasury spread shows that recession probability is at its highest level since the great recession of 2008-09. This Treasury spread is an indication of the fact that investors are turning more cautious and diversifying into relatively risk-free asset classes.
- The US manufacturing PMI has slipped to a 15-month low. While the services sector PMI still remains strong, I believe that a slowdown in composite PMI is likely in 2019 as other major economies witness sluggish growth. This is likely to keep the fed away from pursuing further contractionary monetary policy.
- The US consumer confidence index declined sharply in December 2018 with the index falling by 8.3 points to 136.4. This is the largest one-month decline in the index since July 2015 and is a clear indication that US consumption spending can potentially be impacted due to global slowdown fears.
Considering these factors coupled with the global economic scenario, I believe that the fed is likely to pause in terms of contractionary monetary policy in 2019. Further, if global factors remain unfavourable for a sustained period, I expect reversal in policy stance and that can translate into a weaker dollar, which would take gold higher.
Positive Trend In Gold Investment Demand
My view that the trend might finally be turning bullish for gold is underscored by the following facts from “Gold Demand Trends 3Q18” report from the World Gold Council. The following points are worth noting from the report –
- The demand for gold from central banks in 3Q18 was at the highest level since 4Q15. This surge in demand is likely to sustain as trade wars translate into diversification of reserve holdings. This props-up demand for gold.
- The investment demand for bar and coin for 3Q18 has surged by 28% on a year-on-year basis. While ETF demand still remains weak, the demand for bar and coin is a clear indication that investors are mopping-up physical gold as global economic risk escalates.
Gold has been in a sustained period of sideways movement and I believe that 2019 is likely to be a year when the bullish momentum is back for gold.
With global economic downturn, trade wars and recent dovish comments by Powell, I expect positive inflows to sustain in gold and this is likely to take the precious metal higher.
I would therefore recommend fresh exposure to physical gold. Investors can also consider gold mining stocks. Among gold miners, Newmont Mining (NEM) is interesting with a low all-in-sustaining-cost and a robust cash buffer for growth projects.