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Factors Affecting the Gold Price in 2018

Posted on: 19 January 2018 , by: Darren Sinden , category: Market Review

In an age where Cryptocurrencies threaten to usurp the precious metal - Gold, and many alternative assets, what can we expect and what should we look for, from Gold in 2018?

In this piece, we will look at some of the fundamental and technical factors that could influence the Gold price over the year ahead.

Fundamental Factors

Gold has historically been seen as a store of value and one that was immune to the ravages of inflation, and the tendency of national governments to print increasing amounts of their so-called Fiat or paper currencies. In modern times those facets have, to a large extent, been peeled away. For example, the paper and Gold derivatives markets are far larger than the total amount of gold that has been mined throughout human history. 

The relationship between gold and inflation

Inflation, on the other hand, once the scourge of developed and developing economies, has been receding for almost 50 years. Over the last decade, in Japan and Europe, inflation effectively evaporated (though as we shall see later, it may be making a comeback). Despite these apparent contradictions, Gold has retained its allure among private investors, institutions and central banks alike. Gold finished 2017 with a move higher, breaking back through $1300.00 per troy ounce and extended its gains into the New Year. What happens to the price in the balance of 2018 may largely depend on a couple of macroeconomic factors.

Inflation can be thought of as excess demand. That is, too much money chasing too few goods and services. Inflation is a cause for concern among investors because it erodes the value or purchasing power of money. What's more, investors have little remedy to this undermining of value besides moving their money elsewhere. As we noted above, inflation has been falling for decades, and that trait can be seen in the chart below, (sourced from the World Bank), which plots global inflation (as measured by consumer prices) over the period between 1981 and 2016.

Inflation versus consumer prices (annual%)

 

Despite spikes in the mid-1990s and again in the aftermath of the 2008 GFC, inflation has been trending lower. But interestingly it bottomed out in 2016, and over 2017 it has started to pick up once more. Our second chart (below) shows the Gold price (in red) versus expectations about future rates of inflation in the USA (in blue) since January 2015. 

 Gold price vs expectated future rates of inflation

Gold prices and expectations about US inflation have broadly moved in the same direction over the last two years. Interestingly they have started to move more in line with each other, over the last seven to eight months, as investors around the world anticipate a rising rate of inflation.

Oil prices and how it affects the price of Gold?

One of the main drivers of inflation and the feeling that it will continue to rise has been the oil price. The correlation between these items can be seen below. In this case, the chart plots the price of US crude oil (red line) against those future expectations around US inflation (blue line).

 

US crude oil price

A continuation of the rising Gold price could well be contingent on rising and sustained levels of inflation in the world's major economies. Rising inflation would represent rising global economic demand. That rising demand is likely to be expressed via increases in commodity prices and in particular that of oil. Rising oil prices would heighten expectations about future levels of inflation, which in turn would be positive for Gold prices and so on. Now of course this a simplified version of a more complicated model, which has more inputs than we can discuss here. But it does show us what data we should keep an eye on, to help determine which way Gold prices may move over the course of 2018.

Technical Outlook

The Performance of Gold in 2017

As we noted above, Gold finished 2017 on a positive note. It posted a hammer formation on the daily candle chart on the 12th of December, under which the price is said to be beating out at bottom. Gold posted a low of $1236.49, and then it rallied in a straight line to end the year a fraction over $1303 per ounce, and traded above $1320 early in the New Year. This was a textbook bounce after a hammer formation. It was also accompanied by a pair of golden crosses, as the 20 day EMA moved up through it's 200 and 50-day counterparts, a sure sign of rising price momentum. 

That Rally has however taken the daily RSI 14 for Gold into overbought territory, from where a short-term correction now seems likely. A pullback in Gold to $1305 and perhaps the Jan 2nd low of $1302.20 could be accommodated without completely derailing the rally I feel. Not least because there has been historic support/resistance at and around these levels during 2017.

London Spot Gold

What These Trends Mean for Gold in 2018

 

To the upside, Gold will need to move to and through $1347.20; the high in the week of 15th of September, and then $1357.64; the high from the prior week (the area shaded in blue above), if it is to make further near-term gains. The one obvious negative in the recent rally, from a technical standpoint, is the fact that it happened against a backdrop of declining volume. Though perhaps we can excuse that given the time of year and the fact that volume has been picking up again post-Christmas. 

Gold is one of the instruments I track in my medium term model. The model tells me that the yellow metal is in a mid to low strength bull trend. A trend that has the potential for price to reach as high as $1430.00. What is interesting is that this bullish trend was triggered as recently as January 2nd, and encouragingly both Platinum and Silver have also moved into bull trends in 2018. This leads one to think that the other members of the precious metals complex may be moving out of Palladium’s shadow, which had such a storming 2017. 

The chart below plots spot Gold, and it's ratio to the Palladium price, in the lower window. I find it very telling that this ratio has declined over the turn of the year.

Spot Gold versus Palladium

Particularly as Palladium itself has not sold off materially. I also note that Gold has moved higher in line with CRB Index; a benchmark that tracks the performance of widely used commodities. Many of which are benefitting from an increasingly bullish backdrop, as far as global growth and associated demand are concerned.

In summary, the scene has been set for Gold to appreciate further in the first couple of quarters of 2018, but to achieve that we will need to see the price remain above $1300.00, and for the global growth and inflation story to continue to play out. The early omens look promising, however, as with all signals and indicators, traders would be wise to look for confirmation before pulling a trigger, and to periodically re- test these assumptions having done so. 

 

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