Gold will continue its climb

Gold prices have climbed this year despite rising U.S. interest rates, a rally in global stock markets and a jump in cryptocurrency prices — and the yellow metal has lots of reasons to stretch its gains into 2018, according to a report from the World Gold Council released Friday.

Gold futures GCG8, +0.62%  have gained more than 9% year to date, garnering support, in part, from haven demand on the back of geopolitical jitters. The precious metal notched a rise of roughly 8.6% last year, after three consecutive years of declines.

John Reade, chief market strategist at the WGC, cited several reasons why gold “could maintain upward trajectory” in the year ahead:

Monetary policy and policymakers

Monetary policy and policymakers will continue to be “significant drivers of gold demand, given that the Federal Reserve is anticipated by many to hike rates further next year and start to allow its balance sheet to contract,” said Reade. “The new staff roster may also change the way the Fed acts and communicates.”

Meanwhile, the European Central Bank may slow its “extraordinary monetary policy action,” and the Bank of Japan may “dial back its quantitative easing.” China may also continue its efforts to “rebalance economic growth and possibly deleverage some sectors of the economy,” he said.

Reade expects monetary policy tightening to be “gentle,” with inflation still subdued around the world, but he also warned of risks, including the Fed’s planned balance-sheet reduction.

U.S. dollar and equities

Ongoing strength in U.S. equities, with benchmark indexes continuing to notch record highs, and the “trajectory” of the U.S. dollar, which has fallen year to date but trades higher for the quarter, may benefit gold as well, said Reade.

“The bull market in U.S. equities has reduced gold’s appeal in 2017 [and] an end to that could reignite demand for gold,” he said.

At the same time, 2017 could mark the end of a multiyear period of U.S. dollar strength and gold may “benefit from that tailwind,” he said.

Physical market trends

The outlook for income growth is “encouraging,” with the economy in China, the world’s largest gold market, avoiding the so-called hard landing some predicted a year and a half ago, said Reade. It’s expected to “grow at a fair clip” next year.

India is also recovering from the “shock demonetization” of 2016 and adjusting to the Goods and Service Tax that rolled out in 2017, he said, adding that it’s expected to be one if the fastest-growing countries in the world next year.

Given all of that, solid income growth in the world’s largest gold markets “would undoubtedly be viewed a good news,” he said.

Over in the world’s third-largest bar and coin market, Germany, the economy is expected to “maintain its momentum and unemployment is anticipated to continue falling, while in the U.S., the jewelry market, the third-largest in the world, “could benefit from continued economic growth and higher consumer confidence.”

Structural changes in the gold market

Structural changes in the gold market may “herald significant changes in the years to come,” though may not have a direct impact on the gold market next year, said Reade.

“Potential changes to the VAT [value added tax] rate currently applied to gold bars in Russia is a case in point,” said Reade. “A punitive 18% has stifled market growth, so a reduction could open up an exciting new market.”

Banks and mints are also continuing to develop gold products that are Sharia compliant, so that part of the market may gain traction, said Reade.

And in India, moves to develop a spot exchange for gold could lead to greater transparency, boosting the country’s gold trade, he said.

Source:marketwatch.com