As a safe haven asset, the prospects of gold depend largely upon both geopolitical and market risk in 2018.
The biggest question affecting the price of gold will be whether or not the broad stock market rally in the US can continue through 2018. While opinion is divided, with some prominent voices calling the market’s peak, the general consensus among commentators is that the US market will continue to trend upward, albeit at a much slower pace than last year.
If that is the case, it doesn’t bode particularly well for gold prices.
With US president Donald Trump finally getting his tax reform plan off the ground, the bull market may continue for even longer. Indeed, there’s already evidence that a Trump-induced stock market rally has come at the expense of gold: over the last month gold prices fell by around 3% as investors piled into US stocks.
However, as the stock market continues to climb, investors may be incentivised to increase their exposure to gold to hedge against the inevitable end of the rally. For many investors, gold may prove to be the most attractive defensive investment.
Traditionally in bull markets, defensive shares become cheap – however, in the current rally, even defensive shares are, by historic standards, fairly expensive.
This leaves fewer ‘safe bets’ for investors fearing, or wishing to protect against, a market fall – possibly increasingly demand for gold.
When it comes to geopolitical risks, the outcome is also unclear. Gold saw price upticks in 2017 resulting from the US striking Syrian government targets for the first time in April and increased tensions on the Korean peninsula. These geopolitical risks are likely to continue to influence the price of gold in 2017.
The war in Syria has started to wind down, with Syrian government forces, for the most part, routing Islamic State and other rebel militants. However, a potential flashpoint remains: the US-backed and Kurdish-led Syrian Democratic Forces (SDF) still control large swathes of Kurdish-dominated northern Syria.
This could prove to be a major geopolitical flash point should the Assad government, backed by Russia and Iran, attempt to confront the US-backed SDF to retake territories. If the US continues to support the SDF, such an occasion could cause the price of gold to spike.
At the same time, tensions in the Korean peninsula show no signs of easing. North Korea is still defiantly pursuing its nuclear weapons and missile development programme, while China is still dragging its feet. While China has agreed to place extra pressure on the Hermit Kingdom in hope of finding a peaceful solution o the crisis, it was recently allegedly caught selling oil to the country, prompting outrage from the US.
This is all based on the idea that gold is a good, safe, non-correlated asset whereby investors can protect against risk and instability. However, a relatively new kid on the block is challenging gold as the best non-correlated asset: bitcoin.
Although intended to act as an online payment system, bitcoin has increasingly been seen as a potential alternative safe haven asset. There’s evidence that bitcoin’s recent surge in price has been at expense of gold, as gold-bugs have piled into the crypto-currency.
Prospects for the gold price in 2018, then, depend on the future direction of bitcoin. If it can continue to hold its value, or even see further price rises, that may come at the expense of gold. Alternatively, if the bitcoin bubble does pop, many investors may return to gold as their safe-haven asset of choice.
A final factor to look out for is Federal Reserve monetary policy and the resulting value of the dollar. Low interest rates help the gold price, as there is less lost opportunity cost when it comes to holding non-yielding assets such as gold. Low interest rates also, usually, mean a weaker dollar – so the dollar and gold usually have an inverse relationship.
Jerome Powell, who will replace Janet Yellen next year as chair of the Fed, is not expected to deviate too much from the current Federal Reserve policy of gradual tightening. At most, the Fed is expected to raise interest rates three times – however, by historic standards, rates will still remain incredibly low.
This article first appeared on our sister website Money Observer.