Gold Is Next Year's Diversifier As Equity Volatility To Rattle Markets

With increased equity volatility next year, gold will play an important role as a portfolio diversifier, according to the Australian bank ANZ.

Gold is set up well going into 2019, with support coming from a number of factors, including Federal Reserve pausing its interest rate hikes, Brexit, and slowing global economic growth, ANZ senior commodity strategist Daniel Hynes and commodity strategist Soni Kumari said in the 2019 commodities outlook.

ANZ sees gold prices edging up to $1,255 an ounce in Q1, then rising to $1,275 in Q2, $1,285 in Q3, and reaching $1,300 in Q4. The bank’s outlook continues to be positive for gold in 2020 as well, with prices rising to as high as $1,425 an ounce by December 2020.

“We see equity market volatility as a feature in 2019. The Fed [will also likely] pause for a soft landing in 2019, unlike the previous tightening,” the strategists wrote. “We expect the rate of hikes to pause in H2 2019, which may halt the USDs recent strength and support gold prices.”

Demand for gold is also looking good in 2019, added ANZ, pointing to increased ETF inflows and rising physical demand.

“Demand in Q4 is likely to get softer before it improves early next year. Gold ETF inflows are recovering and we expect to see a net inflow in 2019,” Hynes and Kumari said. “Bar [and] coin demand recovered strongly in Q3 2018, amid currency weakness and equity market correction. We see lower prices incentivizing jewelry and central bank purchase.”

The macro environment remains a challenging one for the precious metals, ANZ pointed out.

“The truce achieved between China and the U.S. removes some uncertainty in the short term. A renewed focus on infrastructure spending in China should support commodity demand. But continued USD strength (particularly in H1 2019) could see investors stay cautious,” the bank said.

If tensions escalate and the equity market suffers, we could see “investors turning to gold to diversify portfolios,” Hynes and Kumari wrote.