Will The Gold Price Rebound In 2019?

London (Jan13)  Summary •Gold faced three main headwinds in 2018: rising (real) interest rates; a strong U.S. dollar; and, until recently, relatively low levels of equity market volatility.

•There are sound reasons to believe that these factors are evolving into tailwinds.

•Any bull market needs a catalyst; for gold it is likely to be portfolio flows.

Frankincense and myrrh may no longer be traditional Christmas gifts, but the appeal of gold endures. For investors, however, the yellow metal lost a little of its luster in 2018.

In late December, the gold price was down 4.5 percent ($1,255 per ounce). It had also suffered the indignity of being surpassed by palladium as the most valuable precious metal, something that last happened in 2002 when gold languished at levels around $450/oz.

Gold and Real Yields

Gold faced three main headwinds in 2018: rising (real) interest rates; a strong U.S. dollar; and, until recently, relatively low levels of equity market volatility. There are sound reasons to believe that these factors are evolving into tailwinds.

Real yields are the difference between cash yields on bonds and the (forward) inflation rate. Real yields have been rising for most of the year, and in October, the U.S. 10-year real yield rose above 1 percent (10-year Treasury 3.2 percent, 10-year inflation break-evens 2.17 percent). This may not sound very exciting, but it was the first time since early 2011 real yields breached 1 percent.

This matters for gold because unlike other assets it does not have a yield and is often bought as an inflation hedge. If investors can be paid 1 percent above inflation for holding a risk-free asset, gold seems like an unnecessary luxury. The assets held by the world's biggest gold-backed exchange-traded fund (ETF) GLD fell in 2018 by $2.7 billion to $31 billion.

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