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Why Gold? Why Now?

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Gold will have an increasingly relevant role to play in investors’ portfolios in 2019.

This was the conclusion of the World Gold Council’s Outlook 2019 Report.

In the report, the WGC highlights three key trends it thinks will influence gold demand and price performance in the coming year. 

  • Financial market instability
  • Monetary policy and the US dollar
  • Structural economic reforms in emerging markets.

2018 was an up and down year for gold. The price of the yellow metal ended up down 1.1% on the year after dipping much lower in the third quarter. As the WGC put it, gold was a “shining as a safe haven in the fourth quarter, while markets like the S&P 500 fell 14% over the same period.”

Even though the price was down slightly on the year, it still outperformed most global assets.

The WGC report projects that many of the global dynamics seeded over the past two years and the risks that became apparent later in 2018 will carry over into the coming year. In summation:

  • Increased market uncertainty and the expansion of protectionist economic policies will make gold increasingly attractive as a hedge.
  • While gold may face headwinds from higher interest rates and US dollar strength, these effects are expected to be limited as the Fed has signaled a more neutral stance.
  • Structural economic reforms in key markets will continue to support demand for gold in jewelry, technology and a means of savings.

The WGC sees significant financial market instability in 2019.

We believe that in 2019 global investors will continue to favor gold as an effective diversifier and hedge against systemic risk. And we see higher levels of risk and uncertainty on multiple global metrics.”

  • Expensive valuations and higher market volatility
  • Political and economic instability in Europe
  • Potential higher inflation from protectionist policies
  • Increased likelihood of a global recession.

Peter Schiff says the problems run deeper than a little bit of market uncertainty and volatility. He’s been saying that the stock market bubble has popped and we have entered into a bear market. And it’s not just the stock market. He says we’re on the verge of an even bigger crisis than the one we went through in 2008.

It’s not a volatile economy, it’s a bubble economy. Thanks to the Federal Reserve, they inflated an even bigger bubble, on purpose, than the one they inflated by accident that popped in 2008. And so the economy is in much worse shape structurally today then it was before it fell apart the last time. So, this is the beginning of a much greater crisis, of a much greater recession than the one that we experienced back in 2008.”

The WGC also anticipates the Federal Reserve will slow its pace of monetary policy tightening this year. This will put a damper on dollar strength which will ultimately be good for gold.

But if Peter is right and the US economy tanks in 2019, the Fed will likely reverse course completely and return to monetary stimulus. This would mean dropping interest rates back to zero and launching another round of QE. Peter said this will actually make things worse.

When the Fed does come back with QE and zero percent rates, initially it will be heralded as good news …  No! Because this time it isn’t going to work. As soon as they do that, the dollar’s decline is going to turn into a rout. Gold’s rally is going to turn into a rocket ship up. And the economy is not going to recover. It’s going to sink. We’ll go from recession to stagflation.”

Finally, the WGC sees economic growth in emerging markets such as China and India as a long-term positive for the gold market. After all, these two countries rank one-two in gold consumption.

So, why gold? Why now? Here’s how the WGC summed it up.

Gold’s performance in the near term is heavily influenced by perceptions of risk, the direction of the dollar, and the impact of structural economic reforms. As it stands, we believe that these factors likely will continue to make gold attractive. In the longer term, gold will be supported by the development of the middle class in emerging markets, its role as an asset of last resort, and the ever-expanding use of gold in technological applications. In addition, central banks continue to buy gold to diversify their foreign reserves and counterbalance fiat currency risk, particularly as emerging market central banks tend to have high allocations of US treasuries. Central bank demand for gold in 2018 alone was the highest since 2015, as a wider set of countries added gold to their foreign reserves for diversification and safety.”

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