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WGC’s Gold Outlook for H2 2018

Commentaries & Views

The World Gold Council has apparently speeded up its publishing. They have issued a few interesting pieces recently. In this edition of the Gold News Monitor, we discuss them.

First of all, the WGC published a new edition of its quarterly report on gold demand. What does Gold Demand Trends Q2 2018 say about the demand for gold in the second quarter of the year? According to the WGC data, the gold demand decreased 4 percent to 964.3 tons in the second quarter of 2018. During the whole half of the year, the demand for the yellow metal amounted to 1,959.9 tons, the lowest level since 2009.

The main driver of the decline were lower ETF inflows. Investors allocated only 33.8 tons of bullion to gold ETFs, 46 percent lower than in Q2 2017, due to the strengthening U.S. economy and its currency. Investors also became more tolerant of headline risks. In consequence, the total investments in gold dropped 9 percent on an annual basis. Technology demand rose 2 percent, while central bank purchases were 7 percent lower. Total supply was up 3 percent, while jewelry demand was down 2 percent.

As always, we remind investors to take the WGC report with a pinch of salt. Their data is not adequate. For example, the demand decreased 4 percent, the supply increased 3 percent. So the alleged ‘surplus’ got bigger, but the price did not decline. Instead, it moved up 4 percent!

Past is past, future is more interesting. So let’s move on to how the WGC presented its mid-year outlook for 2018. The organization identifies three key macro trends that will shape the price of gold in the second half of the year: positive but uneven global economic growth, trade wars, rising inflation and an inverted yield curve. In short, the WGC believes that strong economic growth in Asia will support the demand for gold, while trade wars will weaken the U.S. dollar and increase inflation, strengthening the yellow metal.

We agree that trade wars create risks for the economy and could support inflation. However, we have not seen trade wars so far. Trade disputes – yes, but not fully-blown wars. Lucky we! And the U.S. actually seems to be close to make a deal with Canada and Mexico. The risks should be closely monitored, but investors should not follow perma-bullish WGC forecasts without reflection.

Moreover, last month, the WGC released a new edition of its Gold Investor. What can we learn from the report? Not so much, as it focuses on technology. What we mean here is that although the growing role of gold in technology – in particular in electronics, chemistry and healthcare – is fascinating, it does not explain the price discovery of the shiny metal.

Besides technology, Andrew Sheng analyzes the role of gold in a multicurrency reserve system. He notes that gold is a systemic and significant diversifier of global risk. So his conclusion is that the only viable alternative asset for official reserves is gold, as it alone has the requisite liquidity, correlation characteristics, and trust. Brunello Rosa argues that in the context of political developments in Italy gold will remain a crucial component of diversified portfolios, as a hedge against potential corrections across asset classes. Matthew Turner examines the very intriguing issue of low gold volatility, noting that in 2018 there wasn’t a single trading day when gold ended more than 2.5% higher or lower than it had ended the previous day, a feat not seen since 1996. Unfortunately, although the author provides some explanations for that development (central bank policy, legacy of the global financial crisis, shift in gold’s internal fundamentals), he does not draw any investment conclusions. So, we invite you to read our Gold Trading Alerts, where you can find a lot of trading signals!

Last but not least, the gold industry organization provides its recommendations for the further development of China’s gold market. Although China is the world’s largest consumer and producer – the country China accounts for 13% of global output and around 30% of global consumer demand – it faces some challenges. In particular, better regulation and monitoring processes are needed if China’s gold market is to be trusted. The investor base is narrow, with retail investors still dominating the trading. Thus, a new regulatory approach is needed, and institutional investors should be allowed to invest in gold. More details can be found in the publication.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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