U.S. Dollar Will be Key to Gold’s Future
As we explained last week, the gold performed well in 2017 despite an unpleasant macroeconomic environment and the Fed’s interest rate hikes because of a greenback’s depreciation. The price of gold is closely tied to the fate of the U.S. dollar not only because bullion is prices in greenback, but mainly because gold is considered to be the bet against the U.S. dollar. It is the ultimate safe-haven, purchased as a hedge against the collapse of the greenback. In 2017, the U.S. dollar fell about 15 percent against the euro, as one can see in the chart below.
EUR/USD exchange rate over the last year
On the one hand, the depreciation could continue this year. There are three reasons for that: first, the strong economic momentum in the Eurozone; second, the expectations that the ECB will tighten its monetary policy in the near future; and, third, the investors’ distrust in positive long-term effects of Trump’s economic policies. The tax cuts, increased government spending, and economic nationalism may provide some stimulus in the short-term, but at the expense of higher fiscal deficits and with no effect on the labor productivity.
On the other hand, there are also some arguments that the greenback will rebound this year. First of all, the Fed will hike its interest rates even further. Higher interest rates should make U.S. dollar-denominated assets more attractive than their foreign peers. We know that the Fed’s hikes have not strengthened the greenback so far, but investors should remember that during the previous Fed’s tightening cycle the USD didn’t rally until the 4th rate hike. If history repeats, the greenback may catch its breath, which will be negative for the gold market.
To conclude, our fundamental gold outlook for 2018 is rather bearish than bullish, although the fact that the business cycle is more advanced in the United States than in the Eurozone could be an important tailwind for the yellow metal. And if black swans arrive this year, the gold prices will be additionally supported. Last but not least, a lot depends on the market sentiment.
In 2016 and 2017, the shiny metal rallied in January and February. In 2018, gold has already jumped above $1,300 per ounce, so there might be a replay from previous years, although later in the year gold may struggle. Anyway, the persistence of low volatility in the gold market for another year is rather unlikely. Stay tuned and be prepared for the investment opportunities in the gold market in 2018!
Also, check out Four things we learned aboout gold in 2017.