Here Is Why A More Aggressive Fed Could Be Good News For Gold In 2018 - Analyst
Editor's Note:View Kitco News' full 2018 outlook coverage
(Kitco News) - A more aggressive Federal Reserve in 2018 might not mean lower gold prices, according to one Melbourne-based strategist.
Three or even four Fed rate hikes next year could lead to increased volatility and encourage investors to hedge against it by buying gold, Chris Weston, chief market strategist at IG, told Kitco News in a recent interview.
“While we could see inflation picking up in 2018 — a gold negative — at the same time, markets could suddenly realize that 2018 will see rampant tightening of financial conditions, which would stir up a lot of volatility, especially when people start focusing on the U.S. deficit that will increase under the new tax regime,” Weston said.
“This is when we might see gold move higher on the idea that the Fed is making a policy mistake. So, even though the Fed might raise rates more aggressively, which is bad for gold, people will want to hedge against this sort of volatility [by buying the yellow metal],” he explained.
But, Weston cautions that if the Fed is not viewed as making a wrong decision next year, then gold prices could see additional declines. “If we do see price pressures kicking up in Q2, we might end up with three of four rate hikes next year, in which case, gold has probably got some downside,” he said.
“We have to debate what higher inflation expectations relative to market pricing mean. Does it mean we get four rate hikes? In which case, gold will probably struggle. Or do we get four rate hikes and then volatility picks up and people invest in gold as a hedge against that? There are two clear schools of thought,” Weston added.
Overall, Weston looks at gold as part of a broader theme, focusing on what’s happening in real yields.
Weston’s 2018 upside target for the yellow metal is $1,357 - $1,375, while the downside level is set at $1,150-$1,100.
“The market faded around $1,300 in November, which makes it a significant high. We need to close through there and then start making a move between $1,357 - $1,375,” he said. “If we do get a big risk aversion move, we could see gold push through there. But, if we get more of the same — low volatility and upbeat feel — it is difficult to see gold prices trade near $1300.”
The main excitement for 2018 is likely to start only after the second quarter, Weston pointed out.
“The macro view of the world for 2018 is that we will see low volatility and global growth in Q1 and Q2,” he said. “The big ticket is what happens if we do see inflation coming through. We might see some price pressures, likely driven by China exporting its inflation to the rest of the world, specifically the U.S.”