Macro economic factors to drive gold demand: WGC

Increased market uncertainties, expansion of protectionist policies, Federal Reserve’s neutral stand and its impact on dollar, inversing yield curve and increasing investments in gold ETFs will positively impact gold’s demand in 2019, finds World Gold Council. These trends will be relevant for gold’s short and long-term price behaviour.

Increased market uncertainty and the expansion of protectionist economic policies will make gold increasingly attractive as a hedge, finds WGC. “We believe that in 2019 global investors will continue to favour gold as an effective diversifier and hedge against systemic risk. And we see higher levels of risk and uncertainty on multiple global metrics,” it said.

Expensive valuations and higher market volatility, political and economic instability in Europe, potential higher inflation from protectionist policies and increased likelihood of a global recession are some of the uncertainties that are engulfing the globe. 

More and more governments around the world seem to be embracing protectionist policies as a counter movement after decades of globalisation. And while many of these policies can have a temporary positive effect, there are longer term consequences that investors will likely grapple with in the coming years like higher inflation.

Protectionist policies are inherently inflationary – either as a result of higher labour and manufacturing costs, or as a result of higher tariffs imposed to promote local producers over foreign ones. They are also expected to have a negative effect on long-term growth. And although so far investors have taken some of the trade war rhetoric as posturing, it is not without risk to restrict the flow of capital, goods and labour. Gold’s role as an inflationary hedge is well accepted and gold will stand to gain in such a scenario.

The inversion of bond yield curve too is a precursor to difficult times. There has been a deterioration of credit markets with yield spreads widening by more than 70bps since the January 2018 lows. The US treasury curve is very flat: the 2-year yield /10-year yield curve currently stands at 13bps, a level of curve flattening last seen before the 2008 financial crisis, with some economists predicting its inversion in the first half of 2019. While an inverted yield curve does not cause recessions, it has generally preceded them – albeit with a long lead. And it indicates that bond investors are concerned about the sustainability of long-term growth.