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Monetary Policy Key For Gold Prices In 2018; Most Analysts Bullish

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(Kitco News) - Federal Reserve monetary policy is likely to be the overriding factor determining the direction of gold prices in 2018, with most analysts seemingly upbeat on the yellow metal on a view that policymakers may not hike interest rates as much as currently forecast and that other central banks will also tighten, meaning the U.S. dollar cannot gain traction.

They also cite potential for a correction in the stock market that translates into safe-haven demand for gold. Bears, meanwhile, say the U.S. economy will remain strong enough that Fed policymakers will in fact hike as much or possibly even more than they’ve hinted.

As of late morning, spot gold was trading at $1,255.20 an ounce, up 9% for 2017 so far even though prices were down nearly $70 from the early-September peak.

“We’re expecting a really good year for gold in the new year,” said Phil Flynn, senior analyst with Price Futures Group.

Bart Melek, head of commodity strategy with TD Securities, told Kitco News that gold should benefit from a Federal Reserve that will take a “very gentle” approach to monetary tightening. Lower U.S. rates help gold – and vice-versa -- by reducing the so-called “opportunity cost,” or lost income from holding the non-yielding asset, as well as undercutting the U.S. dollar. Gold tends to move inversely to the greenback.

TDS, in its 2018 outlook, called for the U.S. dollar to weaken and thus boost precious metals. “The expectations the Fed will start approaching the end of its tightening cycle just as other central banks consider unwinding their uber-easy policy should be the key catalyst responsible for the greenback's weakness next year,” TDS said. TDS looks for gold to average around $1,313 an ounce in 2018, with an average of $1,300 in each of the first two quarters of the year and $1,325 in the last two.

Commerzbank looks for gold to average $1,325 an ounce in 2018, while Bank of America Merrill Lynch forecasts $1,326 although describing its outlook as cautious since it sees the Fed hiking three more times.

“The main contributory factors here remain the extremely loose monetary policy pursued by nearly all key central banks, resulting in ongoing very low to negative interest rates,” Commerzbank said. “Political uncertainty is also likely to be a constant feature throughout the year.”

Others are even more bullish. Flynn looks for gold to average somewhere around $1,400 an ounce and perhaps hit $1,500.  Macquarie last month said it envisions gold hitting $1,400 in 2018 for the first time in five years on “the end of U.S. economic outperformance,” meaning a headwind for the U.S. dollar.

Flynn and BAML see potential buying of the yellow metal as an inflation hedge.

“We expect there is more upside risk in gold next year because we think we’re going to start seeing inflation start to creep back into the equation,” Flynn said. “There is an expectation that we will see the Fed maybe get behind the curve [fighting inflation]. We are looking for higher commodity prices across the board, and that will get us [the gold market] to the next level.”

Added BAML: “An inflation surprise would in all likelihood bring buyers into the market, partially because gold is usually held as protection against rises in general price levels. We advocate investors who are underweight gold to increase their allocation.”

Meanwhile, Robin Bhar, metals analyst with Societe Generale, is among the analysts who have expressed a “slightly bearish” outlook on gold in recent weeks. He was looking for a pullback to a $1,175 average in 2018 on a view that the Fed will retain some hawkishness.

“We do expect gold to trade lower over the course of 2018, which is predicated on U.S. monetary policy continuing to tighten,” Bhar said. “We think that provides a headwind to gold at a time when there are better performance in industrial metals because of synchronized [economic] growth and lack of supplies going forward.”

Capital Economics called for gold to fall to around $1,200 by the fourth quarter of 2018, suggesting the Fed could be more aggressive tightening monetary policy, especially if U.S. tax reform passes and supports economic growth. “Fed tightening will prove too strong a headwind, particularly for gold and silver,” Capital Economics said.

Stocks, Cryptocurrencies, Geopolitics In Focus

Stocks and cryptocurrencies could end up as supportive influences for gold, particularly if they give back some of their sharp gains from 2017.

“There are going to be increasing concerns about a potential correction in the stock market and potential correction in some of the cyber currencies that are on fire,” Flynn said. “So you might see some more safe-haven buying in the precious metals…as diversification from the traditional assets like stocks.”

Melek commented that the soaring equity market has been “pricing in perfection,” but stocks might not get a “perfect environment” to keep climbing indefinitely.

Sean Lusk, director of commercial hedging with Walsh Trading, is also upbeat on gold during the early part of 2018, at least, but with a wait-and-see view for the latter part of the year.

“I think we’re going to see some profit-taking or attrition in there [in stocks] and maybe a rise in the fear [VIX] index,” Lusk said, suggesting this will work to gold’s advantage.

Melek looks for improved demand out of India and China as their economies recover. Goldman Sachs has said demand in emerging-market nations does best when incomes are rising and the populace can afford gold, whereas the metal tends to be bought by people in developed economies more as a safe haven during times of stress.

Traders often buy gold as a hedge when there are worrisome geopolitical flare-ups, and analysts say more are likely in the year ahead, although of course only time will tell what they are. Still, geopolitical factors “come and go” and do not necessarily offer a lasting support for gold, Bhar pointed out.

Bhar looks for central banks to remain net buyers of gold, although he said this may offer more of a “cushioning effect” for prices rather than a strong boost. He suspects that official-sector demand will be less than during most of the past decade.

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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