Névine Pollini, Senior Commodity Analyst at Union Bancaire Privée (UBP), shares her insights into the progression of gold’s value and the drivers that will define its future.
Gold on the rise
The new year started with fireworks for gold, reaching top levels from mid-September 2017. This was driven by various factors: constant geopolitical tensions between the US and North Korea, Donald Trump’s decision to recognise Jerusalem as Israel’s capital and the uproar that followed, and more recently, the threat of an economic and political crisis in Iran. These destabilising events pushed concerned investors to seek refuge in gold, although its impermeability to geopolitical turbulence has proven unreliable in recent times. Nonetheless gold remains a rather safer asset if one of these three situations should turn into an actual crisis. Factors supporting gold’s rally include the latest slump in the dollar to its lowest in the past 3 months and the flattening of the revenue curve.
The impact of the Fed’s reform
Weirdly enough, gold started its hike in mid-Dicembre straight after the Fed’s increase of interest rates, while American 10-year government bonds saw its revenue near 2.5%. This was not only a sign of a continuous and synchronised global economic growth but also indicated that the fiscal reform could give momentum to the American economy and inflation. High revenues have kept steady despite the potentiality of a debt rise to finance the reform which, according to the Congressional Budget Office, would increment the deficit/GDP ratio from 3.5% in 2018 to 5.5% in 2020.
The FOMC’s meeting minutes from 12th December confirmed that the majority of the Committee’s members remains optimistic over the state of the US economy and maintains a gradual approach to increase the reference goals. In 2018, the Fed should continue to reduce its balance sheet and proceed with three rate hikes, as it is currently planned by the dot plot.
However, some members of the FOMC expressed concerns over the risks linked to a faster increase rate growth. For instance, the possibility that the inflationist pressures grew excessively if the production augmented over the maximum sustainable level. This could happen following fiscal stimuli (the reform plan should indeed encourage consumption and investment) or be made more likely by the favourable conditions that still dominate the financial markets.
Caution is advised
For all these reasons, we maintain a very cautious attitude towards gold, since we believe its progression will be driven mainly by the Fed’s hardening approach and by its consequential impact on the dollar. Lately geopolitical tensions and the uncertain development of cryptocurrencies, alongside the traditional shopping spree preceding the Chinese new year, have sustained gold’s reputation as a safe asset. On the longer term, we are convinced that gold will stabilise itself in a range between 1.100 and 1.350 dollars, with a limited rise in the next years.