Gold has rallied significantly since the end of November 2018 to see it trading at around US$1,285 per ounce, which is slightly lower than the six-month high of US$1,291.80 reached last week. Despite some poor fundamental indicators for gold, including a stronger U.S. dollar and higher interest rates, there is increasing speculation that the yellow metal has entered a new bull market. Higher gold and its steadily improving outlook bode well for gold miners as well as precious metals streamers.
Key drivers of higher gold
The key driver of the latest gold rally was a flight to safety by investors, as growing uncertainty and fears of an economic slowdown engulfed markets. Poor economic data out of China, including weaker manufacturing activity as well as growing apprehension of a trade war between the U.S. and China fanned those fears, causing stocks to pull back and gold to surge.
A firmer U.S. dollar, which has gained 4% over the last year, won’t be enough to prevent gold from firming further. Typically, a strong dollar is bad news for the yellow metal, because it makes it more expensive to buy gold using other currencies, thereby causing demand to wane. Even the Fed mulling over two more interest rate hikes, which are also believed to bode poorly for gold, in 2019 as it moves to normalize rates won’t hold the yellow metal back.
Growing market volatility, fears of a global economic slowdown, and rising uncertainty sparked by Trump’s erratic policies are fueling a flight to safety among investors, as they move to hedge against economic and political crisis. This is creating considerable upside momentum for gold.
There are some analysts who believe that gold will appreciate to above US$1,500 an ounce during 2019; while this does appear overly optimistic, it is highly probable that the precious metal will firm to above US$1,300 an ounce. That will give the shares of gold miners a healthy lift.
Can gold rise further?
There are signs that the dollar is poised to appreciate further. The Fed increased the headline rate to 2.5% in late December 2018 and announced that it plans two more hikes in 2019, which will likely cause the dollar to appreciate further, placing greater pressure on commodity prices and gold.
You see, higher interest rates drive up the value of the dollar, because they attract greater foreign investment, as investors flock to U.S. government securities, increasing demand for the currency. They also decrease the attractiveness of gold as an investment, because higher rates increase the opportunity cost of holding a non-income-producing investment like gold, while boosting the attractiveness of bonds and other fixed-income investments.
For as long as growing volatility and uncertainty exist, demand for gold will remain firm as investors seek to hedge against a financial calamity triggered by emerging economic and geopolitical risks.
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