With low volatility and a more benign geopolitical environment than had been anticipated heading into 2017, gold prices have performed well over the past 12 months.
As represented by the S&P GSCI Gold Spot index, the price of gold – in US dollars– has risen by 56.97 per cent over 10 years but has gained 9.77 per cent in the year to 19 December.
Performance of gold over 10yrs
Source: FE Analytics
“Investor attention may have been focused on US equity markets, technology stocks and cryptocurrencies this year, but gold has still had a decent 2017, delivering double-digit growth in the first 11 months alone,” said John Reade, chief market strategist at the World Gold Council.
“The strong performance is particularly noteworthy in a year when the US has been hiking rates and equities have remained in favour.”
Indeed, it had been thought that interest rate tightening by the Federal Reserve would have a negative impact on gold prices during 2017.
However, the most recent rate hike did not have the expected effect on the prices.
Simona Gambarini, commodities economist at consultancy Capital Economics, said the gold price had been falling on expectations that the Fed would hike rates more aggressively in 2018 in light of support for US president Donald Trump’s tax cut proposals.
“Somewhat counterintuitively, the price of gold gained 1.6 per cent following the Fed’s decision to hike US interest rates for the third time this year and the fifth time in this tightening cycle,” she noted.
“The lack of revisions to the Fed’s inflation and interest rate outlook was the main reason behind the rise.”
However, Gambarini said the consultancy believes the Fed will tighten at a quicker rate than the market currently anticipates.
As such, it believes gold prices will decline to around $1,200 per ounce by the end of 2018 down from the current $1,250 level.
However, the World Gold Council’s Reade said there were a number of drivers of gold price movement for investors to consider next year.
He said from a financial markets perspective, while policymakers would be significant drivers of gold price direction in 2018, particularly given the move away from loose monetary policy.
Aside from monetary policy, Reade said other factors such as the US equity market bull run and the strength of the dollar would be important factors for the direction of gold price movement.
“We believe that the bull market in US equities has reduced gold’s appeal in 2017: an end to that trend could reignite demand for gold,” he said.
“The direction of the US dollar could also be important: if 2017 marks the end of a multi-year period of US dollar strength, gold could benefit from that tailwind, unlike the headwind that it has experienced since 2001.”
However, income growth – the rise in personal income – is likely to be one of the biggest driver of prices during 2018, said Reade.
“Income growth is probably the most significant because, over the long run, it has been the most important driver of gold demand,” he said. “And we believe the outlook here is encouraging.”
He highlighted the continued strength of the Chinese economy and faster growth in India next year after the destabilising impact to the economy of the introduction of the goods & services tax.
"Solid income growth in the world’s largest gold markets would undoubtedly be viewed as good news,” he noted. “But other countries are making progress too.”
Structural changes in the gold market are also worth noting, said Reade, despite not having a direct impact in 2018.
“Potential changes to the VAT rate currently applied to gold bars in Russia is a case in point. A punitive 18 per cent has stifled market growth, so a reduction could open up an exciting new market,” he said.
“Elsewhere, banks and mints are continuing to develop Shariah-compliant gold products and we may see this part of the market gain traction.
“And in India, the move to develop a spot exchange could result in greater transparency, boosting India’s gold trade.”
Indeed, fund managers have been less bearish about the price of gold for some time. According to the latest Bank of America Merrill Lynch Global Fund Manager Survey, the net percentage of fund managers saying gold is overvalued has been negative for the past 11 months.
Source: BofA Merrill Lynch Global Fund Manager Survey
Yet for holders of gold equity funds the past year has been a challenging one. While gold prices have remained stable this year, gold equity strategies have not seen the benefit.
Having featured among the top performers of 2016, gold and precious metals equity funds have sunk to the bottom of performance tables during 2017.
Indeed, the metal remains out of favour with ETF ownership also down, according to Schroders’ managers James Luke and Mark Lacey, but investors might be missing out on some of the benefits of holding the yellow metal if the market cycle begins to turn.
“Gold has been a very good portfolio hedge against equity bear markets and periods of high inflation,” they said.
“Should global equity euphoria weaken in 2018, gold stands to benefit significantly and thus firmly supports the argument for holding a minimum weighting in gold or gold equities in a portfolio.”
The pair added: “The current weighting of North American gold equities in the S&P 500 and TSX has fallen to just 0.6 per cent after reaching a peak of over 2 per cent in 2012.
“In fact, all North American – US and Canadian – gold producers have a combined market cap of less than $150bn. This highlights the scarcity value of gold equities if a bull market in gold gets going.”