Low Inflation Will Cap Real Interest Rates, Boosting Gold – ICBC Standard Bank
Editor's Note: View Kitco News' full 2018 outlook coverage
(Kitco News) - Low inflation will ultimately keep real interest rates low in 2018, providing the biggest support for the gold market, according to the world’s biggest bank.
In a recent report, Marcus Garvey, analyst at ICBC Standard Bank, wrote that the bank is optimistic on gold in 2018 as analysts see good reasons to include gold in a diversified portfolio.
“We think that U.S. inflation will continue to undershoot the Fed’s forecasts and that the vulnerability of U.S. consumers to higher debt-servicing costs will give the Fed reason to pause on the path of rate normalization,” he said.
In its 2018 forecast, the bank sees the yellow metal averaging $1,312.50 an ounce. Garvey added that while he remains bullish on the yellow metal, he doesn’t see a significant break to the upside unless the rally in equity markets halts.
With steady gains expected in 2018, Garvey said the key for gold investors will be to watch real interest rates. Because gold is a non-yielding asset, higher interest rates make the metal less attractive to investors.
While there is a risk that the Federal Reserve raises rates three times next year to get ahead of the inflation curve, Garvey said that this is unlikely as it would put pressure on an economy that is not as strong as it appears.
“We think that current cyclical strength in the U.S. economy masks underlying issues which may also curtail the Fed’s ability to meaningfully lift real interest rates,” he said. “Looking at the sub-components of U.S. GDP growth since the financial crisis, the past three years have seen overall growth propped up by consumer spending at a time of lagging business investment. Were rate rises to curtail U.S. consumers’ spending appetite, the Fed would either be faced with slower growth or need another part of the economy to offset this slowdown.”
Garvey added that ICBC economists are skeptical that the new tax legislation signed into law just before Christmas will be a significant driver of economic growth next year.
“In light of the weak private investment experienced in countries which already have a low headline corporate tax rate – most prominently the U.K. – and the repeatedly revealed preference of corporates to buy back shares or issue special dividends rather than invest, we doubt that 2018 will mark a sea change in U.S. companies’ behavior,” he said.