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Gold Will Continue To Shine In the Face Of Growing Systemic Risks - WGC

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Editor's Note: Kitco News has officially launched Outlook 2019 - Rush To Safety - the definitive reference for precious metals investors for the new year. We chose this year's theme as financial markets face growing uncertainty. With volatility on the rise, how do you protect yourself? Click here daily to see updated content.

(Kitco News) - Geopolitical risks that weighed on global economic growth in the second half of 2018 will carry through to 2019 and that uncertainty will be a boon for gold prices, according to the latest research from the World Gold Council (WGC).

Although the WGC didn’t provide a price forecast for the yellow metal, the analysts said in their 2019 Outlook report that they see potential for higher prices as investors look for safe alternative assets. The comments come as gold prices hold near six-month highs and are in striking distance of $1,300 an ounce. February gold futures last traded at $1,287.50 an ounce, down 0.35% on the day.

“We believe that in 2019 global investors will continue to favor gold as an effective diversifier and hedge against systemic risk. And we see higher levels of risk and uncertainty on multiple global metrics,” the analysts said.

Some of the risks investors face in the new year include: elevated market valuation, the rising threat of a global recession, and higher inflation pressures as nations implement more protectionist policies.

Although markets saw a major correction in the last quarter of 2018, the WGC said that the U.S. equity market remains overvalued. They added that gold will be an attractive asset for investors looking to diversify.

“In the U.S. the 10-year Treasury yield is 1.5% below its 2008 pre-Lehman crisis level, providing investors less cushion in case of further market volatility,” the analysts said.

Looking further at the bond market, the analysts noted that the market is signaling a growing risk of a recession as the yield curve flattens, meaning the spread between short-dated and long-dated bonds narrows.

“The 2s/10s curve currently stands at 13bps, a level of curve flattening last seen before the 2008 financial crisis, with some economists predicting its inversion in the first half of 2019. While an inverted yield curve does not cause recessions, it has generally preceded them – albeit with a long lead,” the analysts said.

The WGC also sees potential for gold to rally this year as an inflation hedge, withglobal protectionist policies expected to raise consumers prices around the world.

“Protectionist policies are inherently inflationary – either as a result of higher labour and manufacturing costs, or as a result of higher tariffs imposed to promote local producers over foreign ones,” the analysts said. “They are also expected to have a negative effect on long-term growth.”

Although the WGC is bullish on gold in 2019, they noted that the market is not without risks as the U.S. dollar will remain a headwind for gold. However they see less of an impact from the U.S. dollar as the Federal Reserve appears to be in no hurry to tighten interest rates any time soon.

At an event in Washington Thursday, Federal Reserve Chair Jerome Powell, reiterated his earlier stance that because of tame inflation pressures, the central bank can afford to be patient in determining the path of monetary policy.

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