2019 has proven to be a hugely busy year so far with plenty of significant developments across the globe all impacting on bullion prices, outlooks and projections for the year ahead. This week, we’re recapping some of the most notable reports and events so far, so you’re fully informed and totally up-to-date on everything gold as we approach the mid-way point.
Monetary policy, market risks and slowdown of US dollar make gold an attractive prospect so far in 2019
It’s well established that monetary policy impacts on the price of gold and appetite of investors for risk – confirmation earlier this year from the Federal Reserve that it would hold off on further rate hikes in 2019, despite earlier suggestions from the central bank indicating more could be to come, led many to believe that increases in the price of gold could be imminent.
According to historical data analysis, a shift to neutral from tightening corresponds with an increase in gold prices. While the strength and performance of the dollar was a key driver of gold prices in 2018, the move into 2019 saw interest rates and market conditions take precedence.
Goldhub, which performed the data analysis noted, “Our previous research highlighted the fact that interest rates have greater impact on asset price performance (including gold) when there is a shift in policy stance (e.g. from neutral to tightening or vice versa), and our analysis of gold’s performance in January suggests that, indeed, expectations of interest rates are starting to play a more influential role than they did in 2018.”
The research found that while gold prices don’t increase right away, perhaps due to medium or longer term uncertainty, it tends to become stronger over time and statistically, outperformed stocks and other commodities in similar periods of monetary policy.
The change in policy also coincides with several other factors which came together earlier in the year to make gold an attractive prospect – retail sales have started to slow, which suggests that consumer confidence is declining and could hint at a recession. The slowdown of the dollar, thanks in part to an ongoing China – US trade war comes at a time when credit conditions are tightening and corporate debt is booming.
Analysts also point to the potential for volatility in the stock market, potential signs of economic exhaustion and political, social and economic uncertainty around the world – all factors that make gold an increasingly attractive asset.
Brexit fears and uncertainty causes gold prices to fall
The ongoing political wrangling and ever-present uncertainty regarding what Brexit might look like – and if it will happen at all following two missed deadlines – has seen a flurry of gold sell-offs so far this year. With the deadline extended for a second time until the end of October, this is something that we are likely to hear much more about this year but what it has meant so far in Q1 and Q2 intermittently is that pushed back dates led to gold sell-offs in Asia and London. This exodus saw a $12 dip, dropping to $1296 after a period of gains. In the wider arena, it also creates market uncertainty, hits consumer confidence and leads to political turbulence – all things that indicate risk.
As we reported at the time though, this is great news for longer-sighted investors – our expert analysts commented, “For those who sat and watched the price of gold going up, up and up during trading this month, the Brexit-induced panic is great news. It has not only stemmed the steadily increasing price of gold but actually brought the cost down to a price that looks likely to be the best we’ll see in a long time – meaning now is the perfect moment to cash in on Brexit.”
Persistent reports suggest the US could be about to slip into recession
Even back in December last year, we were hearing whispers that the US could be about to slip back into recession. This has been a recurring theme in 2019 with no signs of it going away any time soon.
The Fidelity Asset Allocation Research Team (AART) said the U.S. entered the late stage of the business cycle late last year, suggesting a recession was imminent. Interestingly, the early part of 2019 also provided plenty of evidence of economic slowdown around the world, with Canada, Germany, Brazil, Mexico, France and the UK – on a tipping point due to Brexit – are all in a similar situation.
Market Watch columnist Howard Gold says this could be a particularly difficult one, commenting “…bear markets that precede recessions tend to be longer and deeper, averaging declines of 37%. So if the economy is indeed in the final phase of its long recovery, that’s a warning sign to investors to get more defensive.”
Another key issue to arise in the first half of this year is the soaring level of US deficit, which stands around $691 billion thanks to tax cuts and an aging American population. The deficit has grown 15% above what it stood at last year – something that again can lead to a slowing economy and recession. Fiat currencies of course lose their value in a recession and with the warning signs stacking up already in 2019, gold is increasingly being looked upon anew as a stable, highly desirable asset class.