What To Expect From Gold In 2019?

by: Katchum

Dire U.S. fiscal situation is positive for gold and bad for the U.S. dollar.

Smart money has been leaving the stock market and pouring into gold and U.S. bonds.

Flattening yield curve, worsening PMI, rising TED spreads, rising delinquencies suggest Federal Reserve will need to reverse its policies.

Chinese New Year gold boost comes early in February.

"Gold Forecaster Index" in neutral territory, going positive soon.

Going into 2019, let's have a look at the status of the precious metals market. I believe that the gold price is mainly influenced by the policies of the Federal Reserve and there are several points I'd like to discuss here.

First of all, the U.S. fiscal situation is headed off a cliff in the coming 3 years. Total public debt has now hit $22 trillion and what's even worse is that $1.5 trillion of this debt will have to be refinanced each year until 2022 at higher interest rates (see chart below from Fitch Solutions). On top of that, the Federal Reserve is selling bonds into this market via balance sheet tapering ($30 billion in bonds per month). So even though there is a lot of demand coming into bonds from stock investors (due to the crash in stocks last month), bond yields are likely to stay high. Interest payments will skyrocket in 2019 (currently $523 billion in fiscal 2018).

You need to ask yourself, who is going to buy these huge amount of bonds? The Chinese, Japanese and Russians aren't buying as is shown in the latest Treasury filing. The Federal Reserve is not buying. So the only ones that are buying are stock investors, bond funds and pension funds. But this demand is not nearly enough to soak up all the upcoming supply.

Second, we have the rising deficits that need to be financed as well. In 2019, The U.S. federal budget deficit is projected to come in at $985 billion, while the trade deficit will likely hit $700 billion not accounting for a possible recession. Believe me, that recession is coming. The latest Markit and ISM manufacturing PMI numbers both point to a crash and suggests that U.S. GDP growth will be going negative soon. Lower GDP growth will lead to lower tax revenue and higher deficits. This higher deficit will need to be financed via the sale of government bonds at higher interest rates. It's needless to say that the U.S. Treasury is running into some problems here. The Federal Reserve might want to reconsider its quantitative tightening policy and this would be bad for the U.S. dollar and good for gold.

Third, the yield curve has officially inverted, so volatility will be on the rise in the coming years (see chart below from FRED). That means stocks will go down and gold will rise due to the inverse correlation between stocks and gold.

Fourth, liquidity risk is rising (see chart below from FRED illustrating rising TED spread) and delinquencies are rising. The obvious reason for this is the Federal Reserve, which is pulling liquidity out of the system. While the Federal Reserve unwinds its balance sheet, reserves from commercial banks are falling. Considering all these negative factors, the Federal Reserve might want to start pausing on its rate hikes. Again, this is bullish for precious metals.

Moreover, Chinese New Year comes early this year (February 5, 2019), so we can expect a boost in the gold price in the month of January 2019.

And last but not least, let's take a look at the "Gold Forecaster Index", which is an index I created last year to predict the U.S. dollar gold price based on key leading economic indicators that affect gold (see chart below).

  • Capacity utilization is approaching 80%, which is bullish for gold.
  • Producer price index has come down year over year, which is negative for gold but is still in positive territory. Consumer price index is still in a rising trend.
  • 10 year yield has come down dramatically from 3.24% to 2.58% which should support gold.
  • Trade deficits have risen to a 10 year high, which is bullish for gold.
  • Money supply growth is slowing down due to tapering, which is negative for gold, but I expect the Federal Reserve to reverse its policies and start another round of Quantitative Easing.

The Gold Forecaster Index is currently in neutral territory, but I expect this index to go into positive territory soon. That would be a buy signal for precious metals investors. Lately, fund managers have been selling stocks (smart money has been leaving the stock market before the stock market crash happened) and buying precious metals (as can be seen in the rising GLD stock levels). I suggest you start accumulating now as well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.