Why Gold Will Shine In 2019

|
Includes: AAAU, BAR, GLD, GLDM, GTU, IAU, NEM, OUNZ, PHYS, QGLDX, SGOL
by: Disruptive Investor
Summary

Economic indicators point to slowdown in the Eurozone, China and India. With key economies witnessing sluggish growth, risk-off trade will boost gold price.

I expect the Fed to pause on contractionary monetary policies and a global economic downturn is likely to impact the US economy as well.

Demand for gold from central bankers remains robust and demand for gold bars and coins is picking up as investors increase exposure to relatively risk-free assets.

Article Overview

Before talking about my bullish view on gold for 2019, I must humbly admit that I was wrong on a potential rally for the precious metal in 2018. Gold was sideways to lower for most part of 2018 and the precious metal started trending higher only towards the last quarter of 2018.

While bullish or bearish calls on asset classes can go wrong, there are some critical factors that support my view on gold for 2019. At the same time, I generally advise 10% to 15% of portfolio exposure to gold. This investment is a double benefit investment in the precious metal and an exposure to an honest currency. Therefore, even if gold remains sideways, I don’t see concerns from a portfolio perspective.

Coming to the price trend for gold in the last few years, gold currently trades at $1,290 an ounce. Way back in June 2013, gold was trading around the same levels. Therefore, it has been more than 5.5 years of sideways movement for the precious metal. While there have been trading opportunities during this period, the precious metal has failed to clock sustained upside.

I believe that this trend is likely to change in 2019 and I am of the view that gold can possibly surge higher during the year. This article will elaborate on some key factors that support my bullish view on the precious metal.

Global Economic Concerns

It is worth noting that gold traded at 2018-lows of $1,178 an ounce on August 17, 2018. In less than 5 months, gold has trended higher by 9.5%. One of the key reasons for the rally is global economic concerns, which has translated into gradually increasing risk-off trade and higher exposure to the precious metal.

My point on GDP growth related concerns is backed by the following economic data –

  1. For 2019, the IMF had earlier projected GDP growth of 3.9%. This was revised downwards to 3.7% when the IMF “World Economic Outlook” report was released in October 2018. The global economy has been negatively impacted due to ongoing trade wars and the IMF data backs my view that investors are increasingly concerned about the global economic health.
  2. China’s manufacturing PMI for December 2018 was 49.4. A reading below 50 indicates contraction in the manufacturing sector. Clearly, the world’s largest consumer of industrial commodities is slowing down and this is likely to impact GDP growth for all major commodity producing countries.
  3. The IHS Markit Eurozone Composite PMI data that was released on January 4, 2019, came at 51.1. This is the lowest reading for the Eurozone in over 48 months. Therefore, in addition to China, Eurozone is also facing weak growth into 2019.
  4. In addition to China and the Eurozone, I would also like to mention that new investments in India have plunged to a 14-year low. India has been in the race for the fastest growing economy in the world, but the Indian economy is witnessing considerable slowdown as indicated by the data.

Overall, these data clearly indicate that the global economy is in a downturn and explains the reason why gold has been trending higher in the last 3 months.

Policy Stance Reversal

The Federal Reserve has been pursuing contractionary monetary policy and that has translated into relative liquidity tightening and a strong dollar, which is negative for gold. However, I believe that the Fed is likely to pause in terms of contractionary monetary policy and there could be a potential reversal in policy stance in 2019 towards renewed expansionary monetary policy. The first sign of pause in contractionary monetary policy is already evident as Jerome H. Powell has indicated that low inflation allows the Fed to be “patient” in deciding on any further rate hike.

Besides the view of the Fed, the following economic factors are pointing towards pause in contractionary monetary policy stance –

  1. I don’t see any recession in the United States in 2019. However, the probability of recession indicator as predicted by the Treasury spread shows that recession probability is at its highest level since the great recession of 2008-09. This Treasury spread is an indication of the fact that investors are turning more cautious and diversifying into relatively risk-free asset classes.
  2. The US manufacturing PMI has slipped to a 15-month low. While the services sector PMI still remains strong, I believe that a slowdown in composite PMI is likely in 2019 as other major economies witness sluggish growth. This is likely to keep the Fed away from pursuing further contractionary monetary policy.
  3. The US consumer confidence index declined sharply in December 2018 with the index falling by 8.3 points to 136.4. This is the largest one-month decline in the index since July 2015 and is a clear indication that US consumption spending can potentially be impacted due to global slowdown fears.

Considering these factors coupled with the global economic scenario, I believe that the Fed is likely to pause in terms of contractionary monetary policy in 2019. Further, if global factors remain unfavourable for a sustained period, I expect reversal in policy stance and that can translate into a weaker dollar, which would take gold higher.

Positive Trend In Gold Investment Demand

My view that the trend might finally be turning bullish for gold is underscored by the following facts from “Gold Demand Trends 3Q18” report from the World Gold Council. The following points are worth noting from the report –

  1. The demand for gold from central banks in 3Q18 was at the highest level since 4Q15. This surge in demand is likely to sustain as trade wars translate into diversification of reserve holdings. This props up demand for gold.
  2. The investment demand for bar and coin for 3Q18 has surged by 28% on a year-on-year basis. While ETF demand still remains weak, the demand for bar and coin is a clear indication that investors are mopping up physical gold as global economic risk escalates.

Conclusion

Gold has been in a sustained period of sideways movement and I believe that 2019 is likely to be a year when the bullish momentum is back for gold.

With global economic downturn, trade wars and recent dovish comments by Powell, I expect positive inflows to sustain in gold and this is likely to take the precious metal higher.

I would therefore recommend fresh exposure to physical gold. Investors can also consider gold mining stocks. Among gold miners, Newmont Mining (NEM) is interesting with a low all-in-sustaining-cost and a robust cash buffer for growth projects.

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.