Gold Q1 Fundamental Forecast: Price Likely To Continue 2018 Downtrend

Gold is likely to continue its broad downtrend we saw in 2018 into the first quarter of 2019. At the end of the year, there were times in October and November when Gold rallied amid rapid selloffs in equities; however, these were only minor recoveries. Behind the selloff has largely been a hawkish Fed that raised rates four times, with the most recent 25-bps hike on December 19.

RISING RATES POSE RISK TO GOLD

At its final policy meeting of 2018, the Fed has also made it clear that it will continue with rate hikes unless major economic indicators signal a slowdown in growth or a notable decline in inflation. Fed Chair Jerome Powell wants to take advantage of the US’s economic momentum after a decade of anemic growth to raise interest rates back to the neutral level.

Accordingly, the US Dollar may gain in this environment with potential limited downside movement; a dovish Fed is already priced-in from this perspective. However, if the Fed follows through and raises rates, financial market participants will be taken by surprise and investors will possibly flock to the Greenback. Rising rates, in turn, would be bad for Gold.

SAFE HAVEN DEMAND

Ultimately, the outlook for Gold will be difficult to forecast given the unusual circumstances financial markets find themselves in today. On the one hand, when risk aversion permeates the market, investors generally flock to the US Dollar for its liquidity and stability. This may cause Gold to decline as investors question the utility behind holding an anti-fiat asset when the US Dollar is soaring. Conversely, US Treasuries generally rise during times of risk-aversion, causing yields to decline. This makes Gold more appealing as the cost of holding a non-interest bearing asset becomes lower.

As a result, Gold is stuck in a tug-of-war between the movements of US Treasuries and the US Dollar, making the yellow metal elusive in its exact behavior. However, broadly speaking, Gold looks set to continue its broad downtrend.

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Disclosure: See the complete Q1'19 Gold forecast as well as forecasts for major currencies, equities, and ...

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