Are We Going to $1,120 or $1,510? No Matter What, Own Some Gold!

Who will win: bulls or bears? The LBMA published its annual forecast survey for precious metals prices in 2018. Gold prices range from $1,120 to $1,510. Where is the price of the yellow metal headed?

Summary of the Survey

The views of about 30 analysts in the 2018 forecasts are strongly divergent. The average price of gold is projected to be $1,318, so it is expected to be around the current level, but almost 5 percent higher than the last year’s average of $1,257.12. However, the average gold prices range from $1,215 to $1,381, while the trading range is even broader: $1,120-$1,510.

When it comes to silver, it is forecasted to be the best performing of the precious metals. The prices range from $14 to $23, or $16 to $20, if we limit ourselves to average prices. Generally, the price of silver is expected to increase to $17.81, or 4.5 percent from the 2017 average level.

Bullish Case

The analysts formulated many bullish arguments justifying their price forecasts. The most popular are as follows:

• Geopolitical uncertainty, particularly the conflict about the Korean Peninsula, and tensions between Saudi Arabia and Iran, as well as political uncertainty about the EU (think about Italy, Germany, Brexit) and about the U.S. mid-term election.

• Synchronized global growth ultimately generating inflation.

• The end of quantitative easing in the Eurozone, which would boost the euro.

• Deterioration of the quality of the U.S. fiscal policy.

• A struggling U.S. dollar.

• Weak U.S. retail demand and the generally late stage of the business cycle.

• Very slow unwinding of monetary accommodation by the major central banks.

• The fears of overvalued financial markets.

Bearish Case

Similarly, the experts provided several bearish points:

• The Fed’s tightening cycle, rising interest rates and possibly firming greenback.

• Subdued inflation, which – when combined with rising rates – will increase the opportunity costs of holding bullion, weakening the appeal of gold, a non-interest-bearing asset.

• Synchronized global growth increasing the appetites for risk and lowering safe-haven demand for gold.

Our Take

As you see, there are many arguments for both being bullish and bearish. Some are contradictory (stronger vs. weaker U.S. dollar, or the rise of inflation vs. still subdued inflation). Some points make sense (e.g., the fears about the fiscal deficit), but some are less convincing (geopolitical threats proved to be weak drivers of gold prices – and the uncertainty about North Korea has been actually diminishing recently).

Where do we stand? Well, our forecast is skewed to the upside in terms of the fundamentals behind the moves. Surely, in the short term, gold may struggle. The Fed hike in March puts gold under some downward pressure, especially that there are next hikes on the horizon. And inflation should remain subdued for a while. However, the Fed’s rate hike pace will slow down in 2019. Combined with the likely end of the ECB’s quantitative easing, it should be a tailwind both for the EUR/USD exchange rate and gold. The U.S. economy may accelerate in the short-term due to the fiscal stimulus, but it is generally in the late part of the cycle and worries about a recession or a stock market correction (not to mention fears of a twin deficit) will probably accumulate.

So there might be some downs on the way, especially if we see a return of a somewhat stronger dollar, but we expect that the fundamental factors will ultimately be positive for gold in 2018. Still, based on technical reasons, it seems quite likely that gold will overreact in both ways: during the initial decline and during the follow-up rebound later this year.

And the final remark: prices fluctuate, but not the reason to own gold as insurance – with massive global debt and the Fed’s tightening, the tail risks are greater than last year. Please remember this.