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This year is all about market uncertainty, which will drive risk-off investments and greatly benefit gold, GFMS metals research analysts at Thomson Reuters said in the2018 Gold Survey.

Gold prices will average $1,360 an ounce in 2018, with the potential to hit up to $1,500 an ounce on geopolitical risks, Cameron Alexander, director of metals demand at Thomson Reuters’ GFMS, told Kitco News in an interview this week. On the downside, GFMS doesn’t see prices falling below $1,270.

“There is still a lot of uncertainty around President Trump’s politics, ongoing tensions in the Middle East and Brexit negotiations. Those things will be the main drivers for gold this year,” Alexander said.

If any of the risks materialize, gold will see its best annual price action in five years, according to GFMS survey. This is very significant for gold investors, who have not seen gold prices trade near $1,500 levels since 2013.

Geopolitical risks are also likely to boost gold-backed ETFs demand as well as retail investment.

“We expect ETF demand to rebound this year to 350 tonnes, after a modest net increase of 177 tonnes over 2017. Retail investment is forecast to rise in 2018, following four consecutive years of declines, thanks to a pick-up in bar demand, supported by improving sentiment towards gold and rising price expectations,” GFMS said.

But, the survey’s outlook is not all rosy for gold, as a significant drag on the yellow metal will continue to be weak bar and coin demand, according to Alexander.

“Coin demand hasn’t done great the last couple of years. Also, jewelry demand — after seeing a solid increase last year will probably pull back a bit this year,” he said.

The reason for a significant drop in coin demand is the product’s price sensitivity, Alexander explained.

“When prices start to move higher, [coins] get priced out of the market. The last couple of years, part of the problem has been the success of the equity market. With such strong growth in equities, it has been hurting the precious metals, especially the bar and coin demand,” he noted.

2018’s Biggest Surprise Is …

Correction in equities could be one of the biggest stories in 2018, Alexander added, while describing the equity space as anxious at the moment.

“We are seeing such strong returns in the equity market over a number of years now and we have seen a correction a few months ago and I think the market while enjoying very high levels, is also very apprehensive and could come off very quickly,” he said. “If there was political uncertainty in the U.S., we could see a correction in the equity market, which in our view would lead to a relocation of assets into risk-off investments such as gold.”

Gold bulls have been disappointed with the precious metal’s lack of rally during the equity correction back in February, which is understandable argued Alexander, but not necessarily warranted.

“If you look historically, that kind of correction has moved gold more in the past. But, the market probably needed a couple more days of that kind of equity reaction. People were sitting on very healthy profit and so even though the market moved against them, they weren’t probably losing money and that’s the difference. People simply accepted that they lost a bit of profit,” he stated.

More On Geopolitics

The biggest hurdle on the horizon is the Iran issue. More uncertainty in the marketplace is likely to lead to higher gold prices, Alexander explained.

Regarding Brexit, Alexander said that so far it has been a relatively clean separation. But, any problems in the next six months could boost the yellow metal higher.

GFMS projects to see at least another three rate hikes in the U.S. this year. “You can argue that’s on the downside for gold. But, there is enough uncertainty going on in the market globally to see prices supported and arguably move slightly higher,” Alexander said.

Important to highlight that GFMS views gold falling below $1,300 an ounce this year as unlikely, noting that physical demand is coming back, especially in Asia.

The Chinese central bank is the big bullish unknown for gold prices this year, as it is expected to resume gold purchases and push the official sector’s demand to more than 400 tonnes, according to GFMS.

“If China were to come out and say that they are aggressively buying gold like Russia, it will be positive for gold,” said Alexander.

 

Last Year’s Highlights

Physical demand increased by 10% last year, which was mainly led by 13% recovery in jewelry fabrication and a 4% rise in industrial fabrication. This was a major turnaround for the market, marking first annual gain in four years, said GFMS.

There was also a jump of 36% in central banks gold buying in 2017. Meanwhile, ETF demand was at 177 tonnes.

Mine production edged down for the first time since 2008 in 2017, dropping just by 5 tonnes to 3,247 tonnes. This year, mine production is looking to hit a record of3,265 tonnes.

Overall, GFMS reported that it saw a physical surplus of 427 tonnes last year with a net balance of 250 tonnes.

 

Reference: Kitco