Gold News

2018 Good for Gold Says WGC

Yes, they would say that. But...

IN A YEAR when the S&P 500 hit all-time highs, gold also held strong, finishing 2017 up 13.5%, writes Frank Holmes at US Global Investors.

Gold's annual gain was the largest since 2010, according to the World Gold Council, outperforming many major asset classes.

Contributing to this gain was a weaker US Dollar, stock indices hitting new highs, and geopolitical instability, all of which fueled uncertainty. Investors continued to add gold to their portfolios to manage risk exposure, with gold-backed ETFs seeing $8.2 billion of inflows last year.

The World Gold Council recently released its annual outlook on the yellow metal identifying four key market trends it believes will support positive gold performance in 2018, and we agree. Below I summarize the report for you and add some of my own thoughts on gold's trajectory.

#1. A year of synchronized global economic growth
Economies are on the rise with global growth increasing in 2017 and on track to continue the trend this year.

China and India, two of the world's largest consumers of gold, will see their economies and incomes grow due to the implementation of new economic policies. WGC research shows that as incomes rise, the demand for gold jewelry and gold-containing technology tends to rise as well.

This investment and consumer demand for the yellow metal results in a lower correlation to other mainstream financial assets, such as stocks, making it an effective portfolio diversifier.

#2. Shrinking balance sheets and rising interest rates
Expectations are for the Federal Reserve to raise interest rates three times this year and shrink its balance sheet by allowing $50 billion in Treasuries and mortgage-backed securities to mature each month. Over the past decade, central banks pumped trillions into the global economy and cut interest rates, allowing asset values to break records and market volatility to reach record lows.

With these banks reining in expansionary policies in 2018 and hiking rates as global debt increases, market volatility may go up again, making gold a more attractive asset. According to WGC research, when real rates are between zero and 4%, gold's returns are positive and its volatility and correlation with other mainstream financial assets are below long-run averages.

#3. Frothy asset prices
As the WGC points out, not only did asset prices hit multi-year highs around the world in 2017, but the S&P is still sitting at an all-time high. This rosy environment saw investors seeking out additional risks, hoping for additional returns.

A continued search for yield has "fueled rampant asset price growth elsewhere," the report explains. This includes exposure to lower quality companies in the credit markets as well as investments in China.

Although the bull market could very well continue throughout 2018, some analysts and investors alike are understandably cautious about just how much risk exposure to continue taking on. That's where gold comes in. As you can see in the chart below, the price of the yellow metal tends to increase during periods of systemic risk. Should global financial markets correct, investors could benefit from having an exposure to gold in their portfolio. Historically, gold has reduced losses during periods of distress or instability in the markets.

#4. Greater market transparency, efficiency and access
Financial markets have become more transparent and efficient over the past decade, with new products broadening access for all kinds of investors.

Last year the London Bullion Market Association launched a trade-data reporting initiative and the London Metal Exchange launched a suite of exchange-traded contracts intending to improve price transparency, according to the WGC.

In fact, momentum is building in India to develop a national spot exchange to make the market less complicated and fragmented. In addition, more progress in gold investing might be seen in Russia this year with the current 18% VAT on gold bars possibly being lifted. More easily accessible gold-backed investment vehicles should lead to more gold investors and transactions worldwide.

World Gold Council's Chief Market Strategist, John Reade, said in his 2018 outlook for gold that, "Over the long run, income growth has been the most important driver of gold demand. And we believe the outlook here is encouraging."

We couldn't agree more. Gold has historically helped to improve portfolio risk-adjusted returns. It is a mainstream asset as liquid as other financial securities and its correlation to major asset classes has been low in both expansionary and recessionary periods, as the WGC points out.

I've always advocated a 10% weighting in gold in a portfolio – with 5% in bullion or jewelry and 5% in gold stocks or well managed gold mutual funds and ETFs. If you're interested to learn more about gold, I encourage you to sign up for my blog, Frank Talk. Happy Investing!

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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