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Gold Faces Headwinds For Now, But To Rise In 2019 - Metals Focus

Kitco News

(Kitco News) - Gold may have a hard time making much forward traction in the months ahead but at some point should gain upward momentum in 2019 as the U.S. dollar loses some of its strength, said Metals Focus Wednesday.

The consultancy provided a summary from its report titled “Precious Metals Investment Focus 2018/2019,” which covers gold, silver, platinum and palladium. The report is being launched at a special event in London Wednesday night.

Professional investors have spent much of 2018 either shunning precious metals or establishing bearish, or short positions, Metals Focus said. This was the result of macroeconomic developments, with the U.S. dollar boosted by further U.S. monetary tightening and a growing consensus for a more hawkish Federal Reserve, as well as the U.S.-China trade war. Gold tends to move inversely to the greenback.

“Buoyed by the windfall of the tax reform, the U.S. economy has continued to strengthen,” said Neil Meader, research and consultancy manager at Metals Focus. “This fortified the already-bullish sentiment towards U.S. equities, discouraging interest in defensive assets like precious metals.”

Some of the headwinds for gold are likely to continue in the coming months, including a resilient dollar, elevated bond yields and subdued inflation in the industrialized world. Nevertheless, Metals Focus said conditions will slowly turn more positive for gold in 2019.

“There are doubts whether U.S. dollar strength can be sustained as the path for the Fed’s rate hikes is fairly clear and is already priced in,” Meader said.

U.S. tax reform has also led to faster-than-expected increases in U.S. government debt, which was already high. There are also concerns about debt elsewhere, including China. Meanwhile, a repeat of the European debt crisis was described as unlikely, while expectations for monetary tightening by the European Central Bank in 2010 should support the euro, Metals Focus said.
Metals Focus also looks for some gradual asset rotation from equities back into gold.

“Investors may believe that equities are overvalued but, in the absence of an obvious trigger and the fact the probability of each tail risk is seen as low, there is no rush to jump ship,” Meader said.

Otherwise, support from gold’s supply/demand fundamentals appears limited, Metals Focus said. Mine production is forecast to increase next year, although jewelry output is also seen rising. Metals Focus said the structural surplus in the gold market is likely to remain comparable to this year.

Meanwhile, Metals Focus looks for silver to benefit from a recovery in gold, with the gold/silver ratio expected to fall slightly next year. Nevertheless, cautious sentiment toward base metals and gold will impact silver. The silver market is likely to be in a structural surplus for the sixth straight year, Metals Focus added.

The platinum market also is likely to remain in a surplus in 2019, with “ample” above-ground stocks, Metals Focus said. There are few signs of large-scale cuts in mine production, while there are “serious questions” about sales of diesel-powered vehicles that require platinum for automotive catalysts. Nevertheless, Metals Focus said platinum could benefit from its correlation with gold, with potential for short covering.

By contrast, palladium is expected to have a growing deficit for the eighth straight year and may be the best-performing precious metal in 2019, Metals Focus said. Because the market is small, however, any rally may be accompanied by high volatility.

“Despite successive records in recent years, rising gasoline car sales and tighter emissions limits point to even higher palladium auto-catalyst offtake in the coming years,” Meader commented.

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.