The Price Movement of Gold will be Hard to Pin Down in Near Term

The increase in gold prices for 2017 of about 12 percent, disappointed many investors in the asset class. Many were surprised the price didn’t outperform stock market returns.

Consequently, a number of professionals think the price of gold will be subdued in 2018, and possibly further out.

For the negative outlook for 2017, it didn’t play out primarily because rising short-term interest rates didn’t lead to a huge increase in longer-term bond yields. What that did was keep financing costs low for the gold sector, helping to avert a big hit to the price of gold.

Concerning rising interest rates, it also didn’t work on the expected level of decrease in gold prices, primarily because other central banks are still engaged in quantitative easing.

On the support side, the drop in value of the U.S. dollar strengthened gold.

The general consensus on a price point for gold over the next year or two is mixed, but the majority believe either direction prices take, it’s not likely to be a big annual swing.

As for ongoing interest rate hikes in the U.S., the market should consider that other central banks will have to do the same to generate the downward pressure on gold some are looking for.

That means on a global basis, interest rate hikes by the Federal Reserve won’t have the anticipated negative impact on gold prices than if most major central banks were doing the same.

On the mining side, if activity increases, that could boost supply, which would depress gold prices. Offsetting that could be pressures associated with inflation. Most of the time inflation supports gold. A tight labor market could pressure companies to increase employees’ wages, which would be inflationary. I expect this to happen.

Gold does better under those conditions because it retains its value better than currencies, which are subject to devaluation under that scenario.

The uncertainty of any outlook for gold is the existing or near-term geopolitical situation. It has been filled with risk lately, which lends itself to a flight to safety for investors.

I lean toward gold going higher in 2018, but if it does, it’s likely to be a modest move.

As usual there’ll be some volatility, but barring some major, unforeseen geopolitical event, I don’t see a significant major move on either side of the price by the end of the year.


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