2018 proved considerably eventful as the stock markets experienced several pullbacks during the first quarter. While Quarter 2 was generally more favourable, as NASDAQ, S&P 500 and oil markets captured most of the growth. Naturally, as the markets go up, Gold moved in the opposite direction. The price rose by 4% in the first three months of the year, only to finish in June by -4%.
Three factors stand out that affect Gold’s performance:
- A strengthening US dollar;
- Higher investor threshold for headline risk;
- Soft physical gold demand.
In the long-term gold’s has a positive relationship to economic
growth but in the short-term, its performance is sensitive to risk and uncertainty. The dual nature of gold could benefit from key macroeconomic trends developing in the second half of the year.
Investors should position for:
- positive but uneven global economic growth;
- trade wars and their impact on currency;
- rising inflation and an inverted yield curve.
Also, gold’s recent pullback is supportive of consumer demand, as low prices tend to spur buying; at the same, it may provide attractive entry levels for investors.
Drivers of the gold price are grouped into four categories:
- Wealth and economic expansion;
- Market risk and uncertainty;
- Opportunity cost;
- Momentum and positioning.
The dollar has strengthened over the past few months, making its most significant appreciation since the last quarter of 2016. It would be easy to apportion this trend to higher US interest rates, but rates have been increasing consistently since the end of 2016 – a period during which
the US dollar generally depreciated.
Instead, the dollar strength is due to a combination of two factors:
- continued easy monetary policy in other parts of the world;
- an understanding that the US may be better placed to benefit from trade wars.
In the face of continuing stock price rises, US bond markets seem to be placing a greater probability on higher inflation and lower growth. While it’s impossible to time the market, investors have generally profited from holding gold during periods of economic deceleration.
Current key trends support gold demand and while the summer period tends to be a quiet period for gold trading, the price has tended to increase in September-November as consumers prepare for a traditional buying period and investors re-balance their portfolios before the end of the year.
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