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|08 January, 2019

Will gold shine brightly in 2019?

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

If U.S.-China talks prove constructive, market sentiment could turn positive, which is bad news for safe-haven assets

Gold appears to be one of the few bright spots shining amid clouds of gloom and volatility looming over the global markets in early 2019.

In the first few days of January the precious metal extended on gains seen in December and pushed upwards towards the psychological $1300 level on the back of safe-haven demand.

Concerns over plateauing global growth, explosively volatile equity markets and chaos in Washington accelerated the flight to safety – ultimately supporting gold prices.

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The first announcement of the year from technology giant Apple was to trim its Q1 sales revenue outlook due to a slowdown in sales in China. This bombshell development triggered a rapid sell-off of US, EU and Asian stocks and set the risk-off mood early in the trading year.

Weaker economic data from China re-affirms negative investor sentiment and boosts attraction towards safe-haven assets.

The rapid sell-offs and overall caution appear to show that investors are still pricing in China’s slowdown, which has an impact not only on Asia but across the world.

A potential reduction in demand for physical gold from China has not impressed investors, who appear to prefer to hold derivatives based on the non-yielding precious metal rather than risk-taking on stocks and bonds.

Speaking of the bond markets, US Treasuries may be losing their appeal after the Federal Reserve signaled fewer rate hikes in 2019. This indicates lower yields on bonds which are based on benchmark rates set by the Fed.

It also points to a weaker US Dollar this year, which could be another support for gold if their inverse correlation holds true. In the back of everyone’s minds is the fear over a possible drop in US GDP growth, contributing towards investor caution and safe-haven asset attraction.

To re-cap, China’s slowdown, fears over a global recession, a weaker USD and volatility in global stocks appear to be boosting gold’s chances of shining well into the year.

On the downside for the precious metal, investors may bear in mind that trade talks between China and the US have restarted ahead of the March deadline, when the three-month trade truce comes to an end. If talks prove constructive and relations are normalised, sentiment could turn positive and support global stocks while decreasing attraction towards safe-haven assets.

Local and international trade policies which serve to increase consumer and investor sentiment would be positive for underlying GDP growth in China, easing investor fears.

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© Opinion 2019

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