Gold prices have been volatile but range-bound so far this year. Prices of the metal are up more than 2% in 2018 after racking up a healthy 12% gain last year. Spot gold touched 2018 high of $1,366 an ounce on Jan 25 and the yellow metal is currently trending above the psychological level of $1,300 an ounce.
Prices of gold hit a 5-week high in March 2018 as a “less hawkish” Fed stance and threat of a fierce trade war between the United States and China weighed on the dollar and equities.
Moreover, gold prices reached their highest level since Jan 25 yesterday as concerns over a possible U.S. military action against Syria sparked demand for the safe-haven asset. The increasing geopolitical tensions add to the investors uncertainty while gold is sought as a store of value in these times. This provides a boost to gold prices.
Factors that Aid Gold’s Cause
The U.S. Federal Reserve raised the benchmark interest rate by 25 basis points to 1.50%-1.75% in its March meeting citing a brighter economic outlook. The Fed also maintained the number of expected rate hikes for 2018 at three, sticking to a gradual path of increases. The speculation of four hikes this year led to a plunge in dollar and provided a lift to gold prices. A slower pace of increases to interest rates augur well for gold prices.
Moreover, fears of an intense trade war between Washington and Beijing have gripped the equity market, weakened the dollar and worked in favor of gold in the process. Stock markets have been skittish in recent weeks over the prospects of a full-blown U. S.-China trade war.
China, earlier this month, declared plans of imposing tariffs of 25% on more than 100 American products with shipment values worth as much as $50 billion. The Trump administration responded with a proposed $100 billion in additional tariffs on China, further intensifying the trade tussle between the two countries. The U.S. had earlier announced sweeping tariffs on $50 billion of imports from China.
Nevertheless, Chinese President Xi Jinping recently said that Beijing would lower tariffs on imported cars, thereby easing trade tensions for now. However, the Chinese commerce ministry has reportedly said that China will not hesitate to fight back should the United States takes any action to escalate the situation.
Gold prices are also finding support of late from geopolitical tensions. President Donald Trump, yesterday, warned Russia of an imminent military action in Syria following a suspected chemical attack by the Assad Regime in the rebel-held suburb of Douma, east of Damascus, that claimed several lives. Concerns over escalating tensions in Syria lead to a spurt in gold prices.
What’s in the Cards for Bullion?
Uncertainties in the markets triggered by the developments over the past month are expected to continue to be supportive for gold prices as investors will shun risk assets such as equities and instead turn to gold.
The developments over the past month have led to a spike in shares of several gold miner including NovaGold Resources Inc. NG, Goldcorp Inc. GG, Barrick Gold Corporation ABXand Newmont Mining Corporation NEMthat saw roughly 16%, 8%, 8% and 7% gains, respectively, over a month.
There are a number of reasons to be optimistic about gold’s performance in 2018. A number of new mines entered production in fourth-quarter 2017, which might support mine production till 2018. On the demand side, major markets, India and its neighbor China will continue to be growth drivers.
Last year, the Indian market had suffered a setback due to the impact of imposition of Good and Service Tax (“GST”) and anti-money laundering legislation (“AML”) around jewelry retail transactions. We expect it to bounce back as the market adapts to GST. Moreover, government measures like mandatory hallmarking in 2018, will be a positive move for the industry.
Further, the United States continues to be a strong market driven by economic growth, improving employment levels and growth in consumer confidence. Demand from central banks is also expected to remain strong.
Market-Beating Returns, Attractive Valuation
The Zacks Gold Mining industryhas advanced roughly 5.5% compared with the S&P 500’s dip of 4.7% in a month’s time.