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Three Macro Trends that Look Good for Gold in the Second Half of 2018

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Gold got off to a roaring start in 2018, with the price rising more than 4% during the first quarter. But the yellow metal finished June down the same amount and has continued to fall during July. Despite the weakness in gold over the last couple of months, the World Gold Council says several factors provide some optimism for the rest of the year. In its mid-year outlook report, the WGC pinpointed three primary macro trends that will likely boost gold in the coming months 

  • Positive but uneven global economic growth
  • Trade wars and their impact on currency
  • Rising inflation and an inverted yield curve.

Combined with attractive entry levels, we believe that these trends will increase gold’s relevance for investors in the months ahead.”

According to the WGC, a combination of factors has pushed the price of gold lower over the last several months, including a strengthening dollar, a higher investor appetite for risk and soft physical demand for the metal in the first quarter of this year.

Peter Schiff has said recent dollar strength is actually a bear market rally and won’t last long term. Peter has also said this prevalent notion that the trade war will benefit the dollar is misguided at best. The WGC takes a similar view, specifically pointing out that increasing tariffs could eventually have a negative effect economic growth and by extension on the greenback.

In contrast, the WGC sees a positive economic growth trend in China and India, the world’s leading consumers of gold. It projects growth in China accelerating as it becomes less dependent on foreign investment and solidifies its role as the economic leader in Asia.

China’s economic expansion will likely be more robust. This confidence, combined with the size of the Chinese local market, is likely to prove positive for gold.”

The WGC is also bullish on India for the second half of 2018.

In India, the second half of the year is usually positive for gold as the harvest and wedding seasons during the autumn provide seasonal support for the market. In addition, the economic policies rolled out by the government to draw the informal, cash-based economy into the formal sector are starting to translate into stronger economic growth: India’s Q1 GDP growth rate was close to 7.7% – making it one of the fastest growing economies in the world.”

The WGC report also focuses on rising inflation, something the mainstream seems to be downplaying. According to the report, protectionist policies could fuel broad-based price increases as tariffs are passed along to consumers. Of course, inflation is good for gold.

Historically, investors have used gold as an inflation hedge, with the result that its price has increased substantially when inflation rises above 3%.”

The report also notes that the nominal yield curve has flattened significantly and is close to becoming inverted. An inverted yield curve has been shown to be a precursor to recessions in the US.

The World Gold Council concludes that momentum may be turning and this may be a good time to buy gold.

We believe that the confluence of key trends, as highlighted for the second half of 2018, could be supportive of gold demand. In addition, gold’s recent pullback will likely support consumer demand as lower prices have historically increased jewelry buying. For investors, gold’s current price range may offer an attractive entry level, especially since net longs5 linked to COMEX gold futures are at their lowest level since mid-2017. And money manager net longs, a subset of the broader metric, are close to zero – a level not seen since 2015 when gold hit a multi-year low. Historically, such a scenario has coincided with a rebound in the price of gold, as even a small catalyst for investment demand may catch speculative investors with a large exposure to short positions.”

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