As the global economic outlook turns hazy for 2019, gold may find favour with investors as portfolio diversifier.
As we conclude the last quarter of a rather volatile and confounding year, Gold after quite a while seems to be finding favour with investors. The kind of attention gold is getting from Gold Funds to Central Banks has not been witnessed since 2015. Whether the trend will continue in 2019 or not, may depend on how the various factors that affect the prices play out next year.
Gold’s amazing 12-year bull run from 2001 to 2012, when gold prices appreciated by over six times, was interrupted by variety of factors. Sustained period of higher prices led to higher investments into gold mining projects and subsequently higher mine production. This coincided with flattening of Indian and Chinese demands and modest offtakes by Gold ETFs across the globe since 2013. The ascent of dollar post 2013 was perhaps the last straw that broke gold’s stellar journey. Since then gold has been stuck in a multiyear phase of correction and consolidation.
Meanwhile the mine supply continues to be robust thanks to top five producers China, Australia, US, Russia and Peru. However, both China and Russia like to keep what they produce, and major producer South Africa is facing consequences of years of depressed prices and depleting ores. Moreover, notwithstanding the environmental challenges of mining gold, the capex may remain constrained if the prices remain below 1300 $/oz.
Gold ETFs have been key drivers of gold prices in the past decade. As the global economic outlook turns hazy for 2019, gold may find favour with investors as portfolio diversifier. The omens are good as flow of money into gold ETFs has picked up in last quarter of 2018.
Central bank buying augurs well for the yellow metal
Central bank buying was a big positive for gold in 2018. US-led trade sanctions and tensions prompted its old adversary Russia to lead the Central bank buying this year, adding over 250 tons to its reserves. The Reserve Bank of India is also reported to have added over 20 tons to its gold reserves this year. In a volatile environment gold offers good value for Central Banks. In the face of economic uncertainties, it may appear for now that Central Banks may continue adding to their gold reserves in 2019.
After nine interest rate hikes in past three years, the US Federal Reserve may be close to the so called “neutral range” considered to be not too accommodative nor too restrictive for the US economy. This along with widening US budgetary and current account deficits may rein in the US Dollar. A weaker dollar is usually supportive of gold prices.
The upcoming general elections in mid of next year may boost the rural and semi-urban economy, major consumers of physical gold and silver in India. India is the second largest consumer of gold after China and together they account for over a third of global demand.
While it’s not been a great year for gold in US Dollar terms, however year to date in rupee terms gold is up around 7%. In distressed economies of Venezuela, Argentina and Turkey, gold returns year to date in local currencies are around 95%, 45% and 25%, respectively. While Brazil, Russia and South Africa the gold returns in local currencies are around 12% year to date. A great example of gold’s crises alpha.
For now, 2019 looks rosy for gold. The global economy must spring an upside surprise in 2019 for investors to ignore gold. But after years of disappointing returns can gold shake off the underperformer tag and regain its luster remains to be seen. Perhaps 2019 may be the year when gold may respond to the question.
(The author is Head Commodities, Reliance Nippon Life Asset Management)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.