Gold News

Gold 2019: 3 Charts Prised from 2018's Cold, Dead Hands

Doom, gloom and risks ahead...
 
"GLOOMY gold pundit forecasts chaos, says you must buy gold today!"
 
Hardly a headline worth reading, I know, writes Adrian Ash at BullionVault in the third and final part of this festive series.
 
But next year could well bring several things to the boil...
 
...from the US-China trade war (now moving to medieval-style hostage-taking)...
 
...to the long-simmering "populist" backlash against globalization and the "elites" who run it...
 
...plus a serious risk of conflict returning to the former Yugoslavia...
 
...and of course a long overdue setback to world stock markets and financial assets more broadly.
 
No, the art market hasn't blinked so far. Auction prices set fresh records in 2018.
 
And no, gold isn't guaranteed to rise in price if these issues do spark trouble for investors.
 
But on balance, owning a little physical bullion...securely stored at low cost in perhaps a different country...and ready to sell the moment you need...looks as wise as ever as 2019 comes into view.
 
To recap, gold prices have held pretty firm in 2018. Trading just 5% lower versus the Dollar, gold has now risen back to last New Year's Eve for Euro and UK investors.
 
Hence the first of our 3 charts today.
 
It shows gold priced in the Dollar against how gold has traded for everyone outside the US currency...rebased to that cold day in January 2017 when Donald J.Trump took office in Washington DC.
 
Chart of US Dollar + non-Dollar gold prices, 2017-2018. Source: St.Louis Fed
 
As you can see, the price of gold in 2017 surged in US Dollar terms compared to how it moved for non-Dollar investors.
 
By the start of 2018 this "Trump bump" reached more than $120 per ounce.
 
But over the rest of 2018 the Dollar rose sharply on the FX market, pulling the gold price for US investors back into line with where the metal now stands for all non-US investors.
 
Given this year's strong Dollar in fact, gold has been remarkably strong in 2018...
 
...especially as global consumer gold demand weakened towards a 10-year low...
 
...while output from gold mining set a new all-time high...
 
...and interest rates rose while world stock markets set or approached new all-time record highs.
 
Little wonder that hedge funds and other "hot money" traders bet against gold prices like never before this year.
 
Odd their bearish betting did so little to dent the price.
 
Chart of Managed Money net betting on Comex gold futures and options. Source: BullionVault via CFTC
 
That's why gold's price split from silver looks telling.
 
The grey metal is down around 12% for the year versus the Dollar...more than twice the 2018 drop in gold prices.
 
And silver, of course, finds far more of its demand from industrial uses.
 
Platinum has its own issues (the diesel scandal, a lack of output cuts in South Africa, and the runaway train of sister metal palladium).
 
But tracking the drop in silver, platinum prices have lost some 15% in USD terms since New Year's Eve.
 
That also suggests industrial activity worldwide is weaker than when we began this year.
 
The gold price in contrast has found support from 2018's worsening geopolitical backdrop.
 
Hence the reluctance of current owners to sell. But strong new buying remained absent.
 
So what might spur a fresh surge of investment?
 
"War," says more than one cheerful soul responding to our Weekly Update email's end-2018 survey.
 
"Systemic crisis...recession...Brexit calamity...monetary collapse," add other care-free readers.
 
And against those happy reasons to buy and hold, what might drive Update readers to sell all of their precious metal?
 
"The second coming," says one wag.
 
"World peace," says another.
 
But in the main, it will take a strong price rise...or an ugly price drop...for many Update readers to sell their entire holding...
 
...while the single most common response was "Death".
 
Pending that joyous release meantime, one new trend born in 2018 already looks as tired and spent today as the old year itself:
 
Rising interest rates.
 
You'll remember, for instance, how no central bank anywhere cut interest rates in September...the first such month since before the global financial crisis.
 
No one cut rates again in October...nor November.
 
But this month, hyperinflation basket-case Argentina pulled its key interest lower...
 
...and Mozambique did the same.
 
A straw in the wind? Gold and the other precious metals pay no interest. So other things equal, higher returns on cash-in-the-bank make gold look less appealing.
 
Other things rarely stay equal however. Most important for bullion is the pace of inflation in the cost of living.
 
So here's our third and final chart for 2018...
 
It shows gold versus the rate of interest offered by 10-year US Treasury bonds, adjusted by how interest-rate traders think inflation will run.
 
Chart of 10-over-10 US Trsy yields (inverted by deducting from zero) vs. gold priced in Dollars. Source: St.Louis Fed
 
To show how it tends to move with gold prices, the real 10-over-10 rate is inverted...crudely...by deducting it from 0.
 
So a negative reading on the left-hand axis is in fact positive...
 
...meaning that real interest rates, where they peak on the chart, actually slipped below zero for brief periods in 2015 and 2016...
 
...but falling on the chart in 2018 means they actually crept above +1%  this autumn for the first time since 2011.
 
Still with me? Pay attention then to gold's response. Because after hitting its strongest correlation with real US bond yields on record in 2017 – moving almost perfectly inverse (or in lockstep on our chart) – gold then rose even as real rates rose in early.
 
Yes, the gold price then played a bit of catch up with that move in spring and summer, but gold finally held its ground even against the rising US Dollar when real rates again pushed higher (shown above as a move down, remember) from August to November.
 
That said gold didn't buy the idea of higher US rates ahead...
 
...a doubt also expressed by the different rates offered today by shorter and longer-term US government bonds...
 
...with the so-called "yield spread" getting "inverted" on 3-year versus 5-year Treasuries...
 
...and with the more closely-watched spread of 10-minus-2 year yields falling nearer to zero than any time since right before the global financial crisis.
 
When longer-term interest rates fall below short-term rates, that means that investors think short-term rates will have to fall in the future. And central banks tend to cut interest rates when the economic slows or shrinks.
 
Lots of other economic indicators are saying that the long US expansion starting with the huge QE and zero-rates stimulus of New Year 2009 is starting to flag.
 
The Federal Reserve also sees weaker US growth in 2019, trimming its outlook in this month's "dot plot" forecasts even as it raised short-term rates to 2.50%.
 
Now the Fed says it's likely to raise twice more next year, rather than the 4 and then 3 hikes previously forecast for 2019.
 
But like the bond market, speculators think 2 rate hikes in 2019 looks less likely, cutting the chances forecast by betting on interest-rate futures by one-third over the last month to barely 1-in-7 according to data from the CME derivatives exchange.
 
"Things could change between now and next year," said New York Fed president John Williams to CNBC just before Christmas, apparently trying to stem the stockmarket plunge.
 
"What we're going to be doing going into [2019] is reassessing our views on the economy, listening to not only markets but everybody that we talk to." No doubt including the Commander-in-Chief in the White House, too.
 
Over in the Eurozone, great comic timing yet again, with Mario Draghi's team at the ECB finally ending new QE – and threatening maybe to raise interest rates sometime next year – even as inflation slows and the ECB itself cuts its GDP forecast for the 19-nation economic bloc.
 
The Bank of England here in London meantime faces a certain "risk event" in March 2019 which will only stop UK interest rates falling back if the Pound hits a genuine currency crisis...sinking on the FX market as everyone tries to get their money out prior to the election of radical socialists Jeremy Corbyn and John ' Exchange Controls' McDonnell.
 
So net-net in 2019 for gold?
 
It's hard not to expect continued or rising support from geopolitics – plus a weaker challenge from stock markets or rising interest rates – both of which failed to dent the metal much in 2018 anyway.
 
December's end to the Managed Money's big 2018 bearish betting against gold also looks important.
 
Or so it seems peering down on the glistening Thames from here at BullionVault as 2018 coughs its last.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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