Gold Q1 Recap, and What to Watch Ahead

19 Apr 2019

By Jeff Clark, Senior Analyst, GoldSilver:

We occasionally prepare reports for institutional clients, and this is an example of one Jeff recently wrote for investors who have expressed an interest in gold. It targets advisors at the institutional level and is designed to show them why they should add gold to their portfolio. We thought we’d share it with you.

Alexander Trigaux, Editor, GoldSilver

This report briefly examines the performance of major asset classes during the first quarter of 2019, along with the conditions to watch in the near future that could impact the gold market.

Q1 2019: Gold Steady Despite Surge in Equities

The gold price ended 2018 at $1,279 per ounce, after surging 5.3% the last two months of the year. Gold was flat the first three weeks of 2019, then jumped to $1,343.75 by February 20, a 5% increase. It gave most of the gains back in response to the rise in equity prices and progress on trade talks with China, ending the quarter up 1%.

Here is the performance of gold and other major assets classes in Q1.

Gold is typically inversely correlated to the equity markets; that it ended the quarter up in the face of higher stock markets is viewed as a sign of strength.

Potential Catalysts and Barriers

A number of potential factors could impact the gold price in the near term.

Equity Performance: Gold would be attractive if stocks weaken. The beginning stages of a bear market would further push an increasing number of investors into the gold market. Continued strength in equities would likely leave gold flat.

Market Volatility: Investors looking for stability would likely turn to gold on any spike in the VIX. Markets have arguably been less predictable of late.

Interest Rates:Our 2018 year-end report speculated that long-term bonds signaled the Fed was likely done raising short-term rates – and sure enough they paused. A rate reversal would serve as a strong catalyst for gold, since the cost of holding it would diminish.

Central Bank Buying: We also reported that central banks could continue to stock up on gold. Turns out they bought more gold in Q4 than since Nixon was president. Central bank gold purchases have remained a steady source of demand.

Brexit Struggles: Headlines continue to report on the conflicts with the UK leaving the EU. The British government arguably remains in crisis, as the departure date looms without a plan in place. The process and solutions remain messy, and gold would likely hedge a negative market reaction to any no-confidence vote.

Recession Watch: The yield curve teases going flat, and an inversion would serve as a potential signal of a recession. Gold is typically sought as a safe haven during periods of negative economic growth, and is flat or weak in when the economy is growing.

US Dollar: The dollar shows signs of wanting to roll over, and any weakness would be positive for the gold price. Strength would leave gold flat. The US dollar and gold tend to react inversely.

Geopolitical: Trade talks continue to make headlines, and the Trump White House remains unpredictable. Markets react fondly to President Trump’s certainties like tax cuts, and unfavorable to his surprises.

Debt event: While the Treasury has enough cash on hand to operate the government until sometime in the fall, debt issues garner increasing attention in the headlines, both domestic and abroad. Any unexpected surprises here could ignite gold.

The Hard Asset Hedge

Gold is about more than quarterly fluctuations, though. Gold…

  • Has outperformed stocks over the last 20 years
  • Can hedge against systemic risk, stock market pullbacks, and inflation
  • Is a store of wealth
  • Improves the risk-adjusted returns of portfolios, while reducing losses
  • Can provide liquidity to meet liabilities in times of market stress

An appropriate balance of gold in a portfolio can serve as a useful hedge, particularly as we face ongoing risks in markets, interest rates, geopolitics, debt, and currencies.

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