Three macro trends to influence gold this year

After investors enjoyed the strong performance of gold in the first quarter of 2018, gold prices fell in the second quarter due to soft demand for physical gold, a higher investor threshold for headline risk, and a strengthening US dollar. As part of their recent Mid-year Outlook 2018, the World Gold Council identified three global economic trends that might inspire gold demand in the coming months.

Accelerating if uneven global economic growth

China is expanding its leading role in Asia thanks to increasing independence from foreign investment, and a strong second half of 2018 can be expected which will very likely have a positive impact on national gold demand. Not likely but certainly, gold demand in India will increase, thanks to harvest and wedding seasons during autumn 2018. In addition, the US economy is further expanding national income, usually causing increased demand for jewelry, while fears of crisis continue to dominate European economies.

So far, the US dollar has benefited from the impending respectively ongoing trade wars, contributing to the weakening of the gold price. Along with the realization that trade wars can only bring short-term benefits to the US economy, but might have a negative impact on economic growth in the long term, a future depreciation of the US dollar is quite possible. Empirically, in times of a weakening US currency, the gold price rises twice as much as it falls in strong US dollar times.

Rising inflation and the risk of an inverted yield curve

Inflation has been slowly but steadily increasing worldwide, which tends to have a positive effect on gold demand should this trend continue. In the USA, there is also the threat of an inverted yield curve, which has been shown to be a precursor to recessions in the USA in the past.

Gold demand in the second half of 2018 could also benefit from the relatively low entry level at present, which will make it easier for investors to make an investment decision.