In this publication: 2017 was a strong year for gold prices, which rallied by 11% mainly on US dollar weakness. 2018 will probably be less rosy as we expect US dollar to recover and 10y US Treasury yields to rise. Gold prices will probably move towards USD 1,250 per ounce but a short wave of position liquidation could push it to USD 1,200. This would be an opportunity to position for a gold price rally in 2019.171205-Gold-Outlook.pdf (360 KB)
So far this year, gold prices have rallied by 11%. The main reason behind this rise has been US dollar weakness, despite Fed rate hikes and range-trading in the 10y US real yield. Occasionally, the impact of higher US real yields on the gold price was dampened by US dollar weakness (because real yields elsewhere rose at a faster pace). Gold prices have managed to break and stay above the 200-day moving average (since July) signalling a positive long-term future trend. However, prices have remained relatively close to this level and this moving average has been tested several times. As gold prices have remained close to this technical indicator, the uptrend could be questionable.
What will 2018 bring for gold prices? In short, some downward pressure
We no longer expect gold prices to rally in 2018. There are several reasons for this. First, it is unlikely that the US dollar will be aggressively sold off in 2018 for reasons ranging from higher US nominal yields, upside momentum in the US economy and two more 25bp rate hikes in 2018 by the Fed (one is priced in). In fact, we expect a modest recovery in the dollar.
This brings us to the next dominant driver for gold prices, namely 10y US real yields. In 2017, the 10y US real yields ranged from 0.2% to 0.7% and it was at the time of writing around 0.45%. For 2018, our US economist expects 10y US real yields to stay close to the current level.
Third, the largest central banks around the globe are moving towards tighter monetary policy or less accommodation. This is a negative for zero-income assets such as gold.
The net-long speculative positions in gold are currently not at extreme levels but they are substantial and they pose a risk to the gold price outlook. If investors downscale their expectations about the gold price outlook, prices will most likely suffer.
There are not only negatives for gold prices. We think that a deterioration in investor sentiment from time to time on the back of waves of political uncertainty will support gold prices. Moreover, we expect gold jewellery demand and industrial demand to improve. Taking everything together, we think that gold prices will likely ease towards USD 1,250 per ounce. It is likely that prices will fall to below the 200-day moving average but we expect it to remain relatively close. If there is a short wave of position liquidation, USD 1,200 per ounce could be reached but we think this is an opportunity to position for a price rally in 2019. For 2019 we expect US dollar weakness to return as drivers for the US dollar will become less favourable. However, the Fed and other important central banks will probably continue to tighten monetary policy and this remains a negative for gold prices. All in all we think that gold prices can rally towards USD 1,400 per ounce in 2019.