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LAWRIE WILLIAMS: 2018 gold price predictions – where are we now?

We have just passed the year’s halfway mark and what do we see for the gold price in the second half?  Currently the gold bears seem to be well in control with gold, after a promising first three and a half months of the year, plummeting to levels last seen at the beginning of 2017 despite many pundits’ predictions, including our own, that the yellow metal would end the year at $1,400 plus.  Is that no longer realistic?

Up until the middle of April those $1,400 plus predictions even looked conservative with peaks of around the $1,350 level being seen on several occasions.  But that the price was always immediately brought back down from these peaks should perhaps have been a warning sign of the gold price carnage yet to come when the dollar turned stronger.

When the dollar is weak gold, in dollar terms tends to strengthen, but the reverse is also the case with gold tending to react inversely to the dollar index.  It may not be weakening in other currencies though, but it is against the dollar it is primarily measured in the international media even though it may still be doing its job of maintaining wealth in other currencies.  But as it is against the dollar which is seen as the principal measure of gold price strength it is gold’s performance against the greenback which we will address in this article.

At the moment the dollar is in what appears to be a strong upwards trajectory.  Contrary to what many expected before the event, President Trump’s planned tariff impositions against imports from China and elsewhere have been seen as positive for the dollar and the U.S. economy.  No matter that these tariffs are potentially inflationary in the domestic marketplace and that tit-for-tat measures being imposed on American exports could be very damaging to certain targeted U.S. exporters.

Currently the dollar index has reached just short of 95.5 - its highest level since September 2017 - after hitting a low point of around 88.5 early in the current year.  That represented an increase of close on 8%, while the gold price has dipped a over 9% from its peak.  The correlation is significant.  But how much is dollar strength engineered by the U.S. Administration?  According to a recent article by Jim Rickards the dollar is being used as perhaps the most effective weapon of war against those nations the U.S. sees as adversaries, but enemies and allies alike can be caught in the crossfire.  Notably among those most likely to be targeted, Russia has, as a protectionary measure  managed to run down its holdings of U.S. Treasuries to near zero - from around $100 billion at the beginning of the year - and China is also reported to be drastically reducing its U.S. denominated exposure.  Both nations are also working to implement a rival to the U.S. controlled SWIFT system which as Wikipedia puts it ‘provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment’.  It is the de facto global standard for controlling the movement of money between countries and banks worldwide and is effectively totally controlled by the U.S.  To be cut off from SWIFT (as the U.S. has threatened other nations from time to time) would be a major blow to any global economy, while the system, at the same time, is also seen as vulnerable to U.S. intelligence gathering, which is another reason for a move to provide an alternative.

Gold may well be one of the mechanisms being used to help reduce reliance on U.S. denominated reserve assets – certainly by Russia and probably by China which shrouds its central bank gold holdings in secrecy.  But even so this seems to be having little or no impact on the gold price at the moment – but it could have implications in the longer term.

But all that is something of an aside in relation to gold’s likely price progress in the current year, but is a factor that has to be taken into account in the likely progress of gold’s importance, and price, over the next decade or two.  It is one of the many indicators that over the long term gold is likely to increase in importance and price.  Why else would so many major economies be reluctant to reduce the size of their gold holdings?

This year, though there are plenty of factors which could lead to a medium-term gold price reset which could put that $1,400 price target back in its sights.  At the moment this is looking as being an over-optimistic level, but then only three months ago it was seen as pretty conservative.  A lot can change in 3 months, particularly with a U.S. President with a bit of a bull-in-a-china-shop approach to international diplomacy regardless of opinion at home and abroad.

Another factor to be taken into consideration is that we are at, or very close to, peak gold with global newly-mined gold output about to turn downwards at an increasing rate given that there are virtually no major commercially exploitable deposits awaiting development.  This may not be that significant a factor in the supply/demand balance for a couple of years, except in terms of sentiment. But, with overall demand  likely to increase as more and more people in the countries which traditionally have viewed gold as a hugely positive store of wealth move into the class brackets with higher disposable incomes – notably in Asia -0 the supply/demand balance for gold could become more precarious.

Geopolitical factors could also come into play.  There are a number of potential flashpoints out there, many of which have the potential for drawing the superpowers in on opposing sides.  With President Trump’s penchant for going in with all guns blazing – figuratively so far - some of these have the potential for escalation into something more serious which then could provide additional fuel for the gold price.

The President Trump initiated trade tariff wars also have the potential for a backlash and could precipitate a sharp equities downturn on Wall Street if they end up denting the U.S. economy, which seems increasingly likely.  The cost of imported goods affected will rise while there may be little or no stimulus for the production of better-priced domestic alternatives.  The counter tariffs being put in place could also see a downturn in export-oriented company stock prices, which could lead to a drift downwards in other equities and a drift down could spread to become a rout given the seemingly overbought state of the markets.  The long equities bull market, which does seem as though it may have come to an end this year, is seen as at least partly responsible for the lack of interest in precious metals investment.  A serious downturn in equities could thus drive investors back in the perceived safe havens of gold and silver. 

But be warned, an equities collapse, which many commentators have been predicting, could initially bring precious metals down with it with investors and funds struggling for liquidity and needing to sell good assets to stay afloat.  We saw this in the big market downturn in 2008, but gold, in particular, recovered any losses quickly and was rising when equities were still turning down.  This is a pattern which could well be repeated.

So what do we see happening to gold over the remainder of the year.  Perhaps a small recovery over the rest of the northern hemisphere summer, but watch out for an impact from the U.S. Labor Day holiday on September 3rd.  Post Labor Day can see a total market change as financiers and fund managers return to work refreshed after their Summer break.  If that proves to be the trigger for an equities markets reversal then, as pointed out above, gold could come off a bit more before reversing back upwards.  But by the year end we see it at perhaps somewhere between $1,300 and $1,375 – a little lower than our projection of $1,425 made at the end of last year – See:  Precious metals price predictions for 2018 – gold, silver, pgms.

However, a lot can happen in the markets in five and a half months.  We would expect the dollar to start to fall back as the true impact of the Trump tariffs begins to be felt.  U.S. Fed Chair Jerome Powell’s latest fairly optimistic statement to Congress, seen as responsible, at least in part, for the latest gold price dip, in reality only confirmed what had been said before.  While gold has dipped further overnight and this morning and is currently below the $1,220 level, it has been fairly volatile in the $1.220s but has dipped below chart resistance levels which has contributed to the latest downturn.

The question is therefore how much lower can the price go before it turns up again?  We don’t think very much although the summer months can be pretty negative for the yellow metal.  Markets can be pretty thin through the northern hemisphere summer holiday season so relatively small amounts of money flowing in or out of the futures markets can have an undue effect.  Speculators and predators can thus be quick to take advantage – although this can work both ways.  Thus we probably won’t know for sure which way the markets will move overall until after Labor Day. 

In the long term we do feel that gold has a good future with falling supply and rising demand.  The big question is when will the price turn back upwards again?  We think there’s a good chance that this will happen sometime in the final four months of the year and although we do not, at the moment, see the gold price reaching our previously forecasted level we do think it could be on its way there by the year end.

19 Jul 2018 | Categories: Gold, Dollar

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